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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7815
TRANS WORLD AIRLINES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1145889
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE CITY CENTRE
515 NORTH 6TH STREET
ST. LOUIS, MISSOURI 63101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(314) 589-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NANE OF EACH EXCHANGE ON WHICH
Common Stock, par value $.01 per share REGISTERED
12% Senior Secured Reset Notes Due American Stock Exchange
1998 American Stock Exchange
Warants (expiring August 23, 2002) American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
8% CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, PAR VALUE $.01 PER
SHARE
8% SECURED NOTES DUE 2001
11% SENIOR SECURED NOTES DUE 1997
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 26, 1997, was $295,679,181.
As of March 26 1997, 44,083,266 shares of registrant's Common Stock, par
value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS ON MAY 29,
1997--PART III
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PART I
ITEM 1. BUSINESS
TransWorld Airlines, Inc. ("TWA" or the "Company") is a Delaware corporation
organized in 1978 and is the successor to the business of its predecessor
corporation, Transcontinental & Western Air, Inc., originally formed in 1934.
The Company's principal executive offices are located at One City Centre, 515
N. Sixth Street, St. Louis, Missouri 63101 and its telephone number is (314)
589-3000.
TWA is the seventh largest U.S. air carrier (based on 1996 revenue passenger
miles ("RPMs"), whose primary business is transporting passengers, cargo and
mail. During 1996, the Company carried more than 23.3 million passengers and
flew approximately 27.3 billion RPMs. As of December 31, 1996, TWA provided
regularly scheduled jet service to 77 cities in the United States, Mexico,
Europe, the Middle East, Canada and the Caribbean. As of December 31, 1996,
the Company's fleet consisted of 192 jet aircraft.
TWA's passenger airline business is the Company's chief source of revenue.
TWA also carries cargo (mail and freight) on its North American and
international systems.
In addition to TWA's passenger and cargo services, the Company operates
Getaway Vacations, a tour packager offering leisure travel products and
services. In addition, TWA earns revenue by providing contract maintenance
services for a number of third parties. In 1997, the Company began reducing
such contract maintenance service and expects this reduction to continue
through 1997.
NORTH AMERICAN ROUTE STRUCTURE
TWA's North American operations have a hub-and-spoke structure, with a
primarily domestic hub at St. Louis and a domestic-international hub at JFK.
The North American system serves 37 states, the District of Columbia, Puerto
Rico, Mexico, Canada and the Caribbean. The JFK and St. Louis hub systems are
designed to allow TWA to support both its North American and transatlantic
connecting flights. In 1996, TWA's North American revenues accounted for
approximately 80% of its total revenues.
St. Louis
TWA is the predominant carrier at St. Louis, with approximately 355
scheduled daily departures serving 77 cities as of March 1997. In 1996, TWA
had approximately a 72% share of airline passenger enplanements in St. Louis,
while the next largest competitor enplaned approximately 15%. Since 1995, TWA
has added service from its St. Louis hub to Jackson, Mississippi, Reno,
Nevada, Knoxville, Tennessee, Shreveport, Louisiana and Toronto, Canada, and
the Mexican resort cities of Cancun, Puerto Vallarta and Ixtapa/Zihuatenejo.
JFK
TWA serves 28 domestic and international cities from its JFK hub, with
approximately 41 daily departures. JFK is both the Company's and the
industry's largest international gateway from North America. The Company
offers non-stop flights from JFK to 8 cities in Europe and the Middle East as
well as 16 destinations in the U.S. and the Caribbean.
Commuter Feed
TWA coordinates operation of its commuter feed into the Company's hubs at
St. Louis and JFK with Trans States Airlines, Inc. ("Trans States"). Trans
States, an independently owned regional commuter carrier, currently operates
approximately 168 daily flights into St. Louis and 53 flights into JFK. Trans
States' operations are coordinated to feed TWA's North American and
international flights. Management believes that these commuter operations are
an important source of traffic into the Company's domestic and international
route networks.
INTERNATIONAL ROUTE STRUCTURE
TWA's international operations consist of both nonstop and through service
from JFK and St. Louis to destinations in Europe and the Middle East. TWA's
international operations are concentrated at JFK, where TWA has built a hub
system designed to provide domestic traffic feed for its transatlantic
service. International
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cities served include, Barcelona, Cairo, Lisbon, Madrid, Milan, Riyadh, Rome,
Tel Aviv and, until April 18, 1997, Athens from JFK; Paris from JFK and St.
Louis; London--Gatwick from St. Louis. On January 13, 1997, as part of its
plans to improve the profitability of its international operations, the
Company discontinued service on certain European routes, including JFK to
Frankfurt and Boston to Paris, as well as non-stop feed service to JFK from
several domestic cities. In addition, service to Athens will be discontinued
on April 18, 1997. In 1996, TWA's international revenues accounted for
approximately 20% of total revenues.
RECENT DEVELOPMENTS
In March 1997, the Company offered 50,000 Units ("Units"), with each Unit
consisting of (i) one 12% Senior Secured Note due 2002 (a "Note"), in the
principal amount of $1,000, and (ii) one Redeemable Warrant (a "Warrant") to
purchase 126.26 shares of Common Stock at an exercise price of approximately
$7.92 per share (the "Offering"). The Notes are secured by a lien on certain
assets of the Company, including 1) the Company's beneficial interest in its
FAA designated take-off and landing slots at three high-density, capacity-
controlled airports 2) currently-owned and hereafter-acquired defined ground
equipment of the Company used at certain domestic airports, and 3) all of the
issued and outstanding stock of (a) a wholly-owned subsidiary of TWA holding
the leasehold interest in a hangar at Los Angeles International Airport and
(b) three wholly-owned subsidiaries of TWA holding leasehold interests in
gates and related support space at certain domestic airports served by the
Company. The Company realized $47.175 million (net of discounts and
commissions and estimated expenses) in proceeds from the Offering. The Company
intends to use a portion of the proceeds from the Offering (not to exceed
approximately $5 million) to release certain of the collateral to be used to
secure the Notes from a prior existing lien and the remainder of the proceeds
for general corporate purposes.
The Offering was made pursuant to Rule 144A of the Securities Act of 1933,
as amended (the "Securities Act"), and, accordingly, the Units, Notes and
Warrants and underlying shares of Common Stock issuable upon exercise of the
Warrants are not registered under the federal and state securities laws. The
Company has agreed to use its best efforts to file and, if declared effective,
to effect, the registration of the Notes and the Warrants under the Securities
Act under certain circumstances.
The report of the Company's auditors, KPMG Peat Marwick LLP, with respect to
the Company's audited financial statements for the fiscal year ended December
31, 1996, includes an explanatory paragraph that states substantial doubt
exists regarding TWA's ability to continue as a going concern due to the
Company's recurring losses from operations and limited sources of additional
liquidity. The opinion is included herein on page F-2.
CHANGES TO MANAGEMENT TEAM
Commencing in June 1996, the Company experienced a substantial number of
changes in its executive management team. In June 1996, Messrs. Robert A.
Peiser and Mark J. Coleman, Chief Financial Officer and Senior Vice President-
Marketing, respectively, resigned from the Company. On August 21, 1996, Edward
Soule was elected to the position of Executive Vice President and Chief
Financial Officer. On September 3, 1996, Roden A. Brandt was elected to the
position of Senior Vice President--Planning. On October 24, 1996, Jeffery H.
Erickson, President and Chief Executive Officer announced his intention to
leave the Company. On December 16, 1996, the Board appointed Gerald L. Gitner,
a member of the Board, to serve as Vice Chairman and Acting Chief Executive
Officer; David M. Kennedy, a member of the Board, to serve as Acting Executive
Vice President and Chief Operating Officer; and William F. Compton, also a
member of the Board, to serve as Acting Executive Vice President--Operations.
On December 20, 1996, Michael J. Palumbo was appointed as Senior Vice
President and Chief Financial Officer, succeeding Mr. Soule, who had resigned
from such positions on December 19, 1996. On February 12, 1997, the Board of
Directors elected Mr. Gitner to serve as Chairman and Chief Executive Officer.
On February 14, 1997, Don Monteath, who had served as the Company's Senior
Vice President--Operations, left the Company. On March 13, 1997, Mr. Compton
was appointed Executive Vice President--Operations, subject to Board approval.
On March 27, 1997, the Board confirmed Mr. Compton's appointment and Stephen
M. Tumblin was elected to fill the vacancy on the Board. The Company does not
believe that such changes have unduly affected its on going operations or
implementation of the Company's business strategy, although there can be no
assurance that such changes will not have a material adverse effect on future
operations.
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BUSINESS STRATEGY
In 1994, the Company began implementing a strategic repositioning which, in
combination with the financial restructuring, cost savings and operating
efficiencies achieved as a result of the '95 Reorganization, was designed to
improve TWA's overall operating and financial performance. While the Company
experienced improvements in its operating performance in 1995 and the first
half of 1996 as a result of implementing this strategy, the Company's operating
results and cash balances deteriorated significantly during the second half of
1996. Material factors contributing to this deterioration included: (i) an
overly aggressive expansion of TWA's capacity and planned flight schedule,
particularly during the summer season, which forced the Company to rely
disproportionately on lower-yielding feed traffic and bulk ticket sales to fill
the increased capacity of its system; (ii) the delayed delivery of four older
747s intended to increase capacity for incremental international summer
operations; and (iii) unexpected maintenance delays due to the capacity
increase, higher levels of scheduled narrow-body heavy maintenance and
increased contract maintenance performed for third parties. These factors
caused excessive levels of flight cancellations, poor on-time performance,
increased pilot training costs and higher maintenance expenditures. In
addition, the crash of TWA Flight 800 on July 17, 1996 distracted management's
attention from core operating issues and led to lost bookings and revenues.
Finally, the Company experienced a 27.6% increase in fuel costs in 1996, driven
primarily by a 22.3% increase in the average fuel price paid per gallon during
the year.
In late 1996, management began to implement a series of actions intended to
correct TWA's performance difficulties and refocus the Company's strategy.
Steps taken to improve operating integrity included reducing the near-term
flight schedule to more closely match available aircraft and terminating an
unprofitable aircraft maintenance contract with the U.S. government in order to
increase resources available to service TWA aircraft in maintenance backlog.
The Company has also begun to restructure its operations at the JFK hub by (i)
eliminating certain unprofitable international routes such as JFK to Frankfurt
and, as of April 18, 1997, Athens; (ii) eliminating certain low-yielding
domestic feed service into JFK; and (iii) consolidating for the near term most
of its JFK operations from two terminals into a single terminal in order to
reduce operating costs, increase facility utilization and improve passenger
service. The Company believes that operating and financial results at JFK will
be improved by the Company's recently announced plans to accelerate retirement
of its remaining 747 and L-1011 fleets to year-end 1997. Such aircraft will be
replaced by smaller, more efficient new or later-model used 757s, 767s and MD-
80s, which management believes will operate more reliably and be more
appropriately sized to the demands of cities served, resulting in higher load
factors and improved yields due to less dependence on low-yielding feed
traffic. In addition, these newer, twin-engine, two-pilot aircraft should
provide efficiencies in fuel, flight crew and maintenance expenses. Finally,
the Company believes that its focus on improving operational integrity and
product quality will allow TWA to further leverage its existing hub dominance
in St. Louis by attracting a greater share of higher yielding connecting
traffic. Management also believes that additional opportunities exist at St.
Louis to utilize existing capacity more efficiently and expand service
frequency to certain major domestic cities.
The key elements of the Company's ongoing business strategy are outlined
below.
Route Structure Optimization
The Company is optimizing its route structure by redeploying assets to
markets in which it believes it has a competitive advantage and limiting its
commitments in other markets.
Domestically, the Company believes the greatest opportunities for improved
operating results will come from focusing additional resources on its St. Louis
hub in order to leverage its strong market position. The Company already
dominates operations at St. Louis, with approximately 72% of total 1996
enplanements. In addition, the Company enjoys certain advantages in the Midwest
due to its established route system, strong brand identity and concentrated
presence in that market. Because St. Louis is located in the center of the
country, it is well-suited to function as an omni-directional hub for both
north-south and east-west transcontinental traffic. Therefore, TWA believes it
is better positioned to offer more frequencies and connecting opportunities to
many travelers in its key Midwestern markets than competing airlines. To
capitalize on these advantages, the Company increased its number of daily
departures at St. Louis from 229 in 1993 to 335 in 1996. In addition, beginning
in 1995, the Company has consolidated domestic routes in order to strengthen
its position further, and has increased
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service to the north and south with markets to Jackson, Mississippi, Knoxville,
Tennessee, Shreveport, Louisiana, and Toronto, Canada, and the Mexican resort
cities of Cancun, Ixtapa/Zihuatenejo and Puerto Vallarta.
Internationally, the Company's operations are concentrated at JFK. The
Company's strategy is to reduce and streamline international operations to
focus on business markets that it believes can support non-stop service and to
maximize utilization of the JFK facility. As a result, in 1994 and 1995, the
Company eliminated service to several European cities including Berlin, Zurich
and Vienna and reduced its service to and from Paris. In the summer of 1996,
the Company increased service to several European leisure destinations through
the planned addition of four 747 aircraft. In addition, during 1996 the Company
increased service from JFK to the Caribbean, Florida and certain other domestic
cities to increase utilization of the Company's JFK facility, particularly
during off-peak time periods, and to provide feed traffic for its international
operations.
Implementation of these plans resulted in significant load factor increases
and improvement in RASM during the early months of 1996. However, as TWA moved
into the peak summer months, delays occurred in the expected delivery of the
additional 747 aircraft, requiring daily rescheduling of aircraft and resulting
in considerable disruption in the domestic feed schedule. In addition, the
crash of TWA Flight 800 on July 17, 1996 diverted management's attention,
contributing to additional deterioration of schedule integrity and impacting
the public perception of TWA. Management believes that these factors
contributed to deterioration in load factor and yield on international and
domestic JFK feed flights. In addition, the Company relied disproportionately
on lower-yield feed traffic to fill additional wide-body seats. As a result,
after an extended series of evaluation sessions with union officials and
advisors, the Company embarked on a program in late 1996 to improve yields and
load factors, reduce costs and otherwise increase efficiencies by
(i) accelerating the replacement of all 747 and L-1011 aircraft with smaller
equipment, (ii) reducing low-yield domestic JFK feed service, (iii) limiting or
eliminating historically unprofitable international routes and
(iv) consolidating most JFK operations for the near term from two terminals
into a single terminal facility.
In addition to its own international operations, TWA is exploring the
possibility of entering into marketing and code-share alliances with foreign
carriers. These alliances, if consummated, would allow the Company to provide
its passengers with extended service to foreign destinations not served
directly by the Company, while feeding TWA's North American operations from
these foreign destinations.
Fleet Upgrade and Simplification
TWA's fleet modernization plans seek to realize operating cost savings by
replacing a number of older, less efficient aircraft with more modern,
technologically advanced, twin-engine, two-pilot aircraft. New flight equipment
acquisition plans initiated in 1996, are intended to achieve a decrease in
operating and maintenance costs as the older, heavier maintenance aircraft are
phased out and replaced by newer aircraft. The Company's plans contemplate a
phase out of two older aircraft types intended to simplify the Company's fleet
structure, thereby reducing the number of aircraft types to decrease overall
crew training and aircraft maintenance costs (although resulting in increased
short-term transition crew training costs). Additional efficiencies should be
realized through increased standardization of aircraft parts, supplies and
cabin equipment that must be inventoried throughout TWA's system. Despite the
higher capital costs associated with owning or leasing new and later model
aircraft, the Company believes that corresponding reductions in operating costs
should result in a lower overall cost per seat mile. Management believes this
initiative offers the potential for greater proportionate benefit to TWA than
perhaps any other major U.S. airline.
In early 1997, the Company announced plans to accelerate retirement of its 14
remaining 747s (four-engine, three-pilot wide-body jets with an average age of
approximately 25.6 years) and its 11 remaining L-1011s (three-engine, three-
pilot wide-body jets with an average age of approximately 22.6 years). These
aircraft will be replaced by more efficient twin-engine, two-pilot new or
later-model used 757, 767 and MD80 aircraft, which are more appropriately sized
to meet the needs of TWA's mid-continent St. Louis hub and smaller JFK
operation, thereby reducing the Company's dependence on low-yield feed traffic
and bulk ticket sales. Such aircraft should also permit TWA to more effectively
utilize its yield management system. In 1996, TWA entered into agreements with
a major operating lessor to lease 10 new 757s with deliveries in 1996 and 1997
and with the aircraft manufacturer to purchase an additional 10 new 757
aircraft, with deliveries that commenced in February 1997. The Company also
acquired the right, subject to certain conditions, to purchase up to 20
additional new 757
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aircraft from the manufacturer. TWA is also in discussions with certain other
lessors to lease other aircraft as part of TWA's fleet modernization program.
Also in 1996, the Company entered into an agreement with the manufacturer to
acquire 15 new MD-83s. The long-term leasing arrangement provides for delivery
of the aircraft between the second half of 1997 and 1999. Finally, the Company
outfitted thirty of its DC9-30 aircraft with "hush-kits" in order to bring
such aircraft into compliance with Stage 3 requirements of the Noise Act. The
Company intends to "hush-kit" additional DC9-30, DC9-40 and DC9-50 aircraft in
1997 as the FAA approves hush-kit installations for these aircraft. See "--
Regulatory Matters--Noise Abatement." While the Company is seeking financing
for certain of its planned capital expenditures, a substantial portion of such
expenditures is expected to utilize internally generated funds. The inability
to finance or otherwise fund such expenditures could materially adversely
affect the ability of the Company to implement its strategic plan.
Customer Service; Travel Agent Commissions
In recent years, the Company has focused on improving the quality of its air
travel product and the service provided to passengers by TWA personnel. TWA
has undertaken a number of service initiatives which it believes had begun
building brand loyalty and increasing among existing customers its market
share of value-conscious business travelers and price-conscious leisure
travelers. In 1996, however, the Company's operating difficulties described
elsewhere herein caused increased flight cancellations, poor on-time
performance and a general deterioration in product quality. The crash of TWA
Flight 800 also had a negative impact on the public perception of TWA. The
Company believes that the steps taken to restore operating integrity will
result in improvements in TWA's product quality and customer service. Ongoing
initiatives include:
Focus on Business Traveler. Based on customer research, the Company has
targeted value-conscious business travelers and is therefore tailoring its
marketing and advertising efforts to emphasize the Company's positioning as a
full-service, high-value airline providing service to popular business
destinations throughout the U.S. The Company believes that its convenient
flight schedules and connections, as well as its centrally located hub at St.
Louis, are important in providing service which is attractive to these
travelers. The Company also offers its Frequent Flight Bonus ("FFB"(R))
program in order to build customer loyalty among business travelers.
In March 1995, TWA began implementation of Trans World One SM ("Trans World
One") service in international and transcontinental non-stop markets. Trans
World One is aimed at attracting business travelers by providing improved
premium class service at fares comparable to its competitors' business class
service. To implement Trans World One, TWA converted its wide-body fleet
aircraft from a traditional three-class configuration to a two-class
configuration, with a special emphasis on improvements to the premium class
cabin, including new seats with increased recline capability and enhanced meal
service and wine selections.
Leisure Traveler. Within the leisure travel market, TWA has positioned
itself as a high-quality, low-fare carrier. Management believes that based
upon TWA's lower costs and its extensive off-peak flight schedule, the Company
is in a strong position to compete for price-conscious leisure travelers who
seek a full-service product at prices competitive with other carriers offering
"no-frills" service. To capitalize on its strengths in this area, the
Company's marketing and advertising efforts targeted at this segment will
continue to emphasize TWA's quality image and strong name recognition together
with the airline's broad route network serving popular leisure destinations.
The Company has recently commenced service to additional leisure destinations
in Mexico and the Caribbean, and has entered into marketing agreements with a
number of major international tour packagers.
Travel Agent Commissions. TWA pays the full traditional 10% commission on
tickets for domestic transportation on TWA sold by independent travel agents
and has removed the cap of $50 and $25 per domestic round-trip and one-way
tickets, respectively, which it and most other major airlines imposed in 1995.
Although the Company can not quantify the current or potential future impact
of this decision, the Company believes the payment of full commissions is a
positive factor in maintaining and improving its long-term relationships with
such travel agents. See "--Travel Agencies--Travel Agent Commissions."
Labor Relationship
Management believes TWA has a generally cooperative relationship with its
employees, including employees represented by trade unions. At various times,
the Company's employees have demonstrated significant loyalty and commitment
to TWA's future by, among other things, agreeing to various wage and work rule
concessions to improve productivity in connection with the '93 and '95
Reorganizations. As a result of these
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agreements (i) the Company's employees received approximately 30% of the
voting equity of TWA outstanding immediately following the '95 Reorganization
and (ii) certain corporate governance provisions were effected, including
provision of the right of employees represented by ALPA, the IAM and IFFA, who
then together constituted approximately 84% of TWA's total employees, to elect
four of the Company's 15 directors. On March 6, 1997, the IAM assumed
representation of the Company's flight attendants formerly represented by
IFFA, and IFFA was decertified. Union and non-union employees are also
eligible under the employee stock incentive plan ("ESIP") to increase their
level of stock ownership through grants and purchases of additional shares
over a five year period commencing in 1997. For information concerning the
ESIP, see "--Employees."
Each of the Company's union contracts becomes amendable in September 1997,
and negotiations have begun with respect to one of the contracts. While
management believes that the negotiation process for the new contracts will
result in extended contracts mutually satisfactory to the parties, there can
be no assurances as to the ultimate timing or terms of any such new contracts.
As the Company's financial resources are not as great as those of most of its
competitors, any substantial increase in its labor costs as a result of any
new labor agreements or any cessation or disruption of operations due to any
strike or work action could be particularly damaging to the Company. The
Company believes that the status of its employees as substantial stockholders
and participants in corporate governance and the Company's efforts to involve
employees in developing and achieving the Company's goals will result in
continued dedication to the efforts to improve the Company's financial and
operational performance. As part of the Company's efforts to foster employee
participative management concepts throughout the organization, several
employee-led initiatives were begun in 1994 and continue to be developed and
implemented. For example, the Productivity Task Force, is designed to focus
upon broader cost savings opportunities and is comprised of both labor and
management members. Such initiatives are supported by the Management/Labor
Advisory Task Force, consisting of union leaders, the Chairman and Chief
Executive Officer and other senior officers of the Company. This task force
meets monthly to discuss these and other initiatives to demonstrate joint
commitment to reengineering efforts.
Investment in Technology
Management believes significant opportunities exist for the Company to
increase revenues and reduce costs by investing in available technology that
provides the Company and its employees with the information necessary to
operate its business more effectively and to improve customer service. The
Company has recently taken a significant step forward in this area by
installing a new computerized yield management system. The need to build a
historic database for such yield management system has delayed full
realization of benefits expected from such system; however, later in 1997 when
such database is more complete, this system is expected to allow the Company
to improve significantly its ability to estimate demand flight-by-flight for
each class of fares and manage the allocation of seats accordingly. Given
TWA's prior lack of a computerized yield management system, the Company's
management believes that full implementation of this new system will offer
significant opportunities for revenue improvement. In 1996, the Company
implemented a "QIK-Res" system at its reservation center in Norfolk, Virginia.
QIK-Res is a front-end reservations software program designed to improve
customer service. Management believes the system has demonstrated its
effectiveness at Norfolk and intends to pursue the possibility of extending
the system to its reservation centers in Los Angeles and Chicago.
Cost and Efficiency Initiatives
Management believes that maintaining a low cost structure is crucial to the
Company's business strategy. TWA's airline operating cost per ASM (adjusted
for subsidiaries, restructuring and earned stock contributions) increased from
8.12c in 1995 to 8.76c in 1996. The primary contributors to this increase were
increases in fuel rates, maintenance costs and costs associated with flight
crew training. Despite this increase, management believes that TWA's operating
costs remain below the average of the six largest full service carriers. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Company intends to continue to pursue, among other
things, route optimization, increased labor efficiencies, fleet modernization
and rationalization, and investment in technological advances in order to
improve operating
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results. The Company has also increased to 12 the number of "banks" of flights
operating into its St. Louis hub to increase further the utilization of its
aircraft. TWA has installed a new ticketless system and will begin testing
automatic ticket machines in selected markets in the second quarter of 1997.
In mid-1996, the Company initiated programs allowing customers to book
reservations directly via on-line network systems, and during the second
quarter of 1997, TWA expects to begin to provide bookings via the Internet. It
is expected that distribution costs will be reduced as travelers use these on-
line booking vehicles and ticketless systems. In addition, TWA is implementing
a number of programs to reduce computer reservation systems booking fees, both
internally and from travel agents. TWA will continue to explore other
opportunities to reduce costs and improve efficiency in the areas of aircraft
maintenance, airport operations, purchasing, distribution, ticket delivery,
food service, cargo delivery operations and administrative functions.
TRAVEL AGENCIES
Travel Agent Commissions
Consistent with most other airlines, tickets sold for travel on TWA are sold
by travel agents as well as directly by the Company. During 1996,
approximately 78% of all tickets sold for travel on TWA were sold by travel
agents. In the domestic market, TWA generally pays travel agent commissions at
the rate of 10% on all domestic fares. In the international market, TWA pays
11% on international tickets issued in the U.S. and 9% for tickets issued
outside the U.S. Carriers (including TWA) may also pay additional commissions
to travel agents as incentive for increased volume or other business directed
to the carrier.
Travel Agency Automation
Greater than 90% of all travel agencies in the U.S. obtain their airline
travel information through access to Global Distribution Systems (also
referred to as Computer Reservation Systems or "CRS"). Such systems are used
by travel agents to make travel reservations including airline, hotel, train,
car and other bookings and allow travel agents to issue airline tickets and
boarding passes.
One such system is WORLDSPAN, which is owned 25%, 32%, 38% and 5% by
affiliates of TWA, Delta Air Lines, Northwest Airlines, and ABACUS
Distribution Systems Pte. Ltd, respectively. Management believes that the
distribution of its airline products through WORLDSPAN is a key factor to the
success of the Company's future operations. Systems such as WORLDSPAN have
expanded distribution to the consumer via the Internet, on-line booking
products, corporate and group booking products. TWA believes that its 25%
ownership of WORLDSPAN assures new distribution opportunities.
FREQUENT FLIGHT BONUS PROGRAM
TWA initiated its FFB Program in May 1981. Frequent flyer programs like
TWA's FFB Program have been adopted by most major air carriers and are
considered the number one marketing tool for developing brand loyalty among
travelers and accumulating demographic data pertaining to business flyers.
TWA's FFB Program rewards its members with mileage credit for travel on TWA
and for purchasing goods and services offered by various travel and non-travel
related businesses that participate in the FFB Program including other
airlines. Currently, FFB Program members receive mileage credit for airline
travel on Air India, Alaska Airlines, Ladeco Airlines, Philippines Airlines
and Trans States. FFB Program members may also receive mileage credit pursuant
to exchange agreements maintained by TWA with a variety of entities, including
hotels, car rental firms, credit card issuers and long distance telephone
service companies.
TWA accounts for its FFB Program under the incremental cost method, whereby
travel awards are valued at the incremental cost of carrying one additional
passenger. Such costs are accrued when FFB Program participants accumulate
sufficient miles to be entitled to claim award certificates. Incremental costs
include unit costs for passenger food, beverages and supplies, fuel,
reservations, communications, liability insurance and denied boarding
compensation expenses expected to be incurred on a per passenger basis. No
profit or overhead
7
<PAGE>
margin is included in the accrual for incremental costs. No liability is
recorded for airline, hotel or car rental award certificates that are to be
honored by other parties because there is no cost to TWA for these awards.
At December 31, 1995, FFB participants had accumulated mileage credits for
approximately 660,752 free awards, compared with accumulated mileage credits
for approximately 751,689 awards at December 31, 1996. Because TWA expects that
some award certificates will never be redeemed, the calculations of the accrued
liability for incremental costs at December 1995 and 1996 were based on
approximately 70% and 71.5%, respectively, of the accumulated credits. Mileage
for FFB participants who have accumulated less than the minimum number of
mileage credits necessary to claim an award is excluded from the calculation of
the accrual. The accrued liability at December 31, 1995 was approximately $19.0
million compared to approximately $20.4 million at December 31, 1996.
TWA's customers redeemed awards for free travel representing approximately
6.3%, 6.0% and 4.5% of TWA's RPMs in 1994, 1995 and 1996, respectively.
AIRCRAFT FUEL
TWA's worldwide aircraft fuel requirements are met by in excess of twenty
different suppliers. The Company has contracts with some of these suppliers,
the terms of which vary as to price, payment terms, quantities and duration.
The Company also makes incremental purchases of fuel based on price and
availability. To assure adequate supplies of jet fuel and to provide a measure
of control over price, the Company trades fuel, ships fuel and maintains fuel
storage facilities to support key locations. Petroleum product prices,
including jet fuel, are primarily driven by crude oil costs. The market's
alternate uses of crude oil to produce petroleum products other than jet fuel
(e.g., heating oil and gasoline) as well as the adequacy of refining capacity
and other supply constraints affect the price and availability of jet fuel.
Changes in the price or availability of fuel could materially affect the
financial results of the Company.
During 1996, aircraft fuel prices increased significantly. The following
table details TWA's fuel consumption and costs for the three years ended
December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Gallons consumed (in millions).................. 852.2 804.2 838.9
Total cost(1) (in millions)..................... $477.6 $458.6 585.2
Average cost per gallon (cents)................. 0.56 0.57 0.70
Percentage of operating expenses................ 13.0% 13.9% 15.6%
</TABLE>
- - --------
(1) Excludes into-plane fees.
COMPETITION
Since the passage of the Airline Deregulation Act of 1978, the airline
industry has been characterized by intense competition, consolidation of
existing carriers and the advent of numerous low-cost low-fare new entrants. A
number of airlines have filed for bankruptcy and/or ceased operations. In
addition, several carriers have introduced or announced plans to introduce low-
cost, short-haul service, which may result in increased competition to TWA.
Airlines offer discount fares, a wide range of schedules, frequent flyer
mileage programs and ground and in-flight services as competitive tools to
attract passengers and increase market share. Intense price competition has
accelerated the efforts of airline managements to reduce costs and improve
productivity in order to withstand greater levels of discounting. TWA's
services are subject to varying degrees of competition, depending in part on
whether such services are operated over domestic or international routes.
Because of the relative ease with which U.S. carriers can enter new markets,
TWA's domestic services are subject to increases or decreases in competition
from other air carriers. Changes in intensity of competition in the deregulated
domestic environment cannot be predicted.
8
<PAGE>
The level of competition in international markets is normally governed by the
terms of bilateral agreements between the U.S. and the foreign countries
involved. Many of the bilateral agreements permit an unlimited number of
carriers to operate between the U.S. and the foreign country. Competition in
some international markets is limited to a specified number of carriers and
flights on a given route by the terms of the air transport agreements between
the U.S. and the foreign country. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--General."
The airline industry is subject to substantial price competition as U.S.
airlines are free to determine domestic pricing policies without government
regulation. While the DOT retains authority over international fares, which are
also subject to the jurisdiction of the governments of the foreign countries
being served, the Company generally has substantial discretion with respect to
its international pricing policies.
While DOT authority is now required before any person may operate as an air
carrier within or to and from the U.S., the Airline Deregulation Act of 1978
and the International Air Transportation Competition Act of 1979 substantially
decreased previous governmental restrictions in this area. In the case of
domestic operations, any person who is found to be fit, willing and able may
operate as an air carrier between any two points in the U.S. Thus, TWA is able
to enter new routes or suspend existing routes within the U.S. without seeking
regulatory approval, and other airlines are similarly free to enter or leave
TWA's domestic markets.
EMPLOYEES
As of December 31, 1996 the Company had approximately 25,092 full-time
employees (based upon full-time equivalents which include part-time employees).
Of these, approximately 82% were represented by three principal unions: ALPA,
IAM and IFFA. On March 6, 1997, the IAM was certified to replace IFFA as the
bargaining representative of the Company's flight attendants.
During 1994, the Company entered into the '94 Labor Agreements with ALPA, IAM
and IFFA amending then existing labor agreements with each such union to, among
other things, (i) eliminate certain raises scheduled to take effect in 1994 and
1995, thereby continuing certain wage and benefit concessions granted to the
Company in the '92 Labor Agreements, (ii) modify existing work rules and
benefit packages, and (iii) eliminate contractual "snapback" provisions
contained therein which would have automatically restored wages to pre-
concessionary levels for purposes of future contract negotiations. The terms of
the IFFA contract remain in effect, although the flight attendants are now
represented by the IAM. In addition, the Company implemented a number of
similar savings initiatives with respect to domestic non-union and management
employees, primarily through reducing headcount, altering benefit packages, and
eliminating certain planned restorations of previous wage concessions.
In exchange for the substantial cost savings realizable by the Company as a
result of the foregoing, as described in more detail below, TWA (i) agreed to
certain wage increases and productivity payments to its employees, (ii) issued
certain equity securities of the Company to its employees, (iii) agreed to make
certain future grants of equity securities and to permit such employees an
opportunity to purchase certain additional securities at a discount, and (iv)
effected certain amendments to the Company's Certificate of Incorporation and
By-laws with respect to the election of certain directors and director voting
requirements in the event of certain specified corporate actions.
As part of the '94 Labor Agreements, TWA agreed with its unionized employees
to a series of semi-annual 1% wage increases commencing in May 1995 and
continuing through August 31, 1997 (the last such wage increase to equal 3% in
the case of employees represented by ALPA and IFFA; the IAM will receive a 1%
wage increase and a 2% contribution to its retirement plan on August 31, 1997).
In addition to such scheduled wage increases, TWA agreed to make certain annual
productivity payments to its unionized employees in the event the Company
achieves certain operating profit goals set forth in the agreement. If the
Company achieves such goals (established at various levels between $50 million
and $200 million annually), employees will receive productivity payments in an
amount to be determined based upon a sliding scale from 1% to 4% of employees'
W-2 wages. Any productivity payments resulting from 1996 operations are
required to be converted
9
<PAGE>
into wage increases. Similarly, the Company implemented comparable wage
increases and productivity incentives to its non-union (including management)
employees.
On the '95 Effective Date, TWA issued to certain trusts established for the
benefit of its unionized employees shares of Employee Preferred Stock; such
stock being issued in three separate series designated the ALPA Preferred
Stock, the IAM Preferred Stock and the IFFA Preferred Stock. Except for
certain rights with respect to the election of directors, the Employee
Preferred Stock has rights substantially identical to the Common Stock. TWA
also issued an aggregate of 1,026,694 shares of Common Stock to a trust
established for the benefit of TWA's non-unionized employees. The value of
shares issued to the Company's non-union employees was intended to reflect the
estimated value to the Company of the concessions granted by employees. The
equity securities issued on the '95 Effective Date resulted in the employees
of the Company initially owning approximately 30% of the then outstanding
Common Stock and Common equivalents of the Company.
In recognition of the fact that as a result of the '95 Reorganization, the
percentage of the Company's stock owned by the Company's employees was
substantially reduced, the Company adopted as of the '95 Effective Date the
ESIP pursuant to which the Company would commencing in 1997 grant to certain
trusts established for the benefit of its union and non-union employees
certain additional shares of Common Stock and Employee Preferred Stock. Under
the ESIP, in any year in which the market price of the Common Stock exceeds
certain target prices, the Company has agreed to issue shares in amounts
sufficient to increase the aggregate percentage ownership of the employees by
the following percentages of the then outstanding shares of Common Stock and
Common Stock equivalents: 2.0% (1997), 1.5% (1998), 1.5% (1999), 1.0% (2000),
1.0% (2001) and 1.0% (2002). The ESIP also grants to the employee trusts a
right to purchase, on a quarterly basis, additional shares ("Stock Purchase
Shares") in amounts of up to an aggregate of 2% of the then outstanding Common
Stock and Employee Preferred Stock. Stock Purchase Shares may be purchased at
80% of the then market value of the Common Stock. In the event of a merger,
consolidation or sale of all or substantially all of the assets of the
Company, the ESIP provides for certain limited acceleration rights with
respect to the stock grants and employee stock purchase arrangements. In
addition to the scheduled grants and purchase rights described above, the ESIP
provides for the Company to accelerate grants to be made in 2001 and 2002, if
the Company issues additional Common Stock at a price equal to or in excess of
$11 per share which results in aggregate proceeds to the Company in excess of
$20 million.
The ESIP also provides that if additional shares are distributed following
the '95 Effective Date in respect of the '95 Reorganization, employees will be
entitled to receive an additional number of shares of Common Stock and
Employee Preferred Stock such that the employees will retain the same level of
ownership. Union representatives and the Company have tentatively agreed that
the number of shares of Employee Preferred Stock and Common Stock to be issued
pursuant to the ESIP is 525,856. In addition, if the additional ESIP shares
are not issued to the employees in July 1997, an additional 405,750 shares of
Employee Preferred Stock and Common Stock will be issued, subject to a future
credit, in that amount in the event additional shares are granted pursuant to
the ESIP. The issuance of the additional shares is subject to approval by the
Company's Board of Directors. The number of shares of Employee Preferred Stock
outstanding at December 31, 1996 does not reflect any such additional shares.
In addition to certain amendments required to effect the recapitalization of
the Company, on the '95 Effective Date, TWA further amended its Certificate of
Incorporation and By-laws to (i) permit certain employees represented by ALPA,
the IAM and IFFA to elect four of the Company's 15 directors (the "Employee
Directors"), and (ii) provide that certain extraordinary corporate actions,
including mergers, sales of all or substantially all of the Company's assets
or certain routes or any filing seeking protection under the bankruptcy laws,
must be approved by at least six directors, including each of the Employee
Directors.
The "94 Labor Agreements were three year agreements but become amendable
after August 31, 1997. Negotiations on a new collective bargaining agreement
with the IAM covering approximately 70% of the Company's employees, including
its flight attendants, commenced in February 1997 and are currently ongoing.
Negotiations with ALPA are expected to begin in the second quarter of 1997.
Under the RLA workers whose
10
<PAGE>
contracts have become amendable are required to continue to work under the
"status quo" (i.e., under the terms of employment antedating the amendable
date) until the RLA's procedures are exhausted. Under the RLA, the Company and
its unions are obligated to continue to bargain until agreement is reached or
until a mediator is appointed and concludes that negotiations are deadlocked
and mediation efforts have failed. The mediator must then further attempt to
induce the parties to agree to arbitrate the dispute. If either party refuses
to arbitrate, then the mediator must notify the parties that his efforts have
failed and, after a 30-day cooling-off period, a strike or other direct action
may be taken by the parties. In the opinion of management, the Company's
financial resources are not as great as those of most of its competitors, and,
therefore, any substantial increase in its labor costs as a result of any new
labor agreements or any cessation or disruption of operations due to any
strike or work action could by particularly damaging to the Company. See "--
Employees."
REGULATORY MATTERS
Slot Restrictions
The Company's ability to increase its level of operations at certain
domestic cities currently served is affected by the number of slots available
for takeoffs and landings. At JFK, LaGuardia, Chicago O'Hare and Washington
National, which have been designated "High Density Airports" by the FAA, there
are restrictions on the number of aircraft that may land and take off during
peak hours. In the future, these take-off and landing time slot restrictions
and other restrictions on the use of various airports and their facilities may
result in further curtailment of services by, and increased operating costs
for, individual airlines, including TWA, particularly in light of the increase
in the number of airlines operating at such airports. On April 1, 1986, the
FAA implemented a final rule relating to allocated slots at the High Density
Airports. This rule, as since amended, contains provisions requiring the
relinquishment of slots for nonuse and permits carriers, under certain
circumstances, to sell, lease or trade their slots to other carriers. TWA does
not anticipate losing any slots as a result of these new rules. The higher use
rates required by these rules, however, increase the risk that TWA may lose
slots in the future because of nonuse and decrease TWA's ability to adjust its
flight schedules at the High Density Airports.
Most international points served by TWA also are slot-controlled.
Control over International Routes
TWA's international certificates are granted by the DOT for indefinite or
fixed-term periods, depending on the route. TWA is authorized to provide
transatlantic service from major cities in the U.S. to points in Europe, North
Africa, the Middle East and Asia. Some of these authorized routes are not
currently served by TWA. Many of the European markets served by TWA are
"limited entry" markets in which, as a result of agreements between the United
States and foreign governments, TWA has traditionally competed with a limited
number of other carriers. During the past several years, however, the U.S.
government has encouraged competition in international markets and entered
into bilateral agreements with various foreign governments that provide for
expanded exchanges of routes and traffic rights, reduction of governmental
controls over fares and avoidance of limits on capacity and charter services.
Competition in international markets has increased dramatically over the past
several years as major U.S. carriers have initiated and/or continued to expand
their international operations. Foreign flag carriers have continued to expand
service and the DOT has indicated its support for further expansion of
opportunities of foreign carriers to serve new points in the U.S. No assurance
can be given that TWA will continue to have the advantage of all the "limited
entry" markets in which it currently operates or that additional carriers will
not be permitted to operate in one or more of these markets or that TWA in
general will not face substantial unexpected competition. Competition in the
international market is further complicated by the fact that pricing levels on
some transatlantic routes are influenced by subsidies that certain foreign
carriers receive from their governments and by the presence of smaller, low-
cost carriers.
Certain portions of TWA's transatlantic route authority have been granted on
a fixed-term basis. TWA's right to carry local traffic between London and
Frankfurt expired in April 1994. In addition, on May 4, 1993, the bilateral
air transport agreement between the U.S. and France lapsed. Absent a bilateral
agreement, the U.S. and
11
<PAGE>
France are operating on a system of comity and reciprocity. Under this regime,
carriers are permitted to maintain historical levels of service, but few or no
new services are permitted. Cessation of service to any authorized markets
from France may cause such underlying authority to terminate. Any reduction in
U.S. carrier access to France could have an adverse impact on TWA's
transatlantic operations. TWA's route authority between St. Louis and London-
Gatwick has expired. TWA has applied for renewal of its St. Louis-Gatwick
authority and continues to operate such route pending a determination of its
application. While no assurance can be given, TWA believes that the St. Louis-
Gatwick authority will be renewed.
The operations of TWA's international system will require continued approval
by the U.S. government as well as permission or authorization from the
governments of the respective countries served and compliance with the laws
and regulations of those countries. These authorizations, permits and rights
vary considerably in their terms, particularly as to the imposition of
restrictive conditions on U.S. airlines.
Other DOT/FAA Regulations
The DOT has the authority to regulate competitive practices, advertising and
other consumer protection matters such as on-time performance, smoking
policies, denied boarding, baggage liability and CRSs provided to travel
agents. With respect to foreign air transportation, the DOT may approve
agreements between air carriers and grant antitrust immunity to those
agreements. The DOT must also approve the transfer between U.S. carriers of
international route certificates. The Department of Justice has the authority
to approve mergers and interlocking relationships.
Noise Abatement
The Noise Act provides for a reduction in aircraft noise levels by
commercial aircraft. Under the Noise Act, air carriers were permitted to elect
to comply with the transitional requirements of the Noise Act at December 31,
1994, either by (i) phasing out, or retrofitting with noise abatement
equipment, certain older aircraft known as Stage 2, or (ii) phasing in quieter
aircraft, known as Stage 3. Air carriers who elected to comply by phasing out
or retrofitting Stage 2 aircraft were required to phase out or retrofit at
least 25% of a specified 1990 base level of such aircraft by December 31, 1994
and by at least 50% by December 31, 1996. TWA elected to comply with the final
Noise Act requirements by adopting the Stage 2 aircraft phase out/retrofit
option, and had reduced its specified base level of Stage 2 aircraft by 25% at
December 31, 1994 and by 50% at December 31, 1996. The Company will be
required to reduce its specified base level of Stage 2 aircraft by at least
75% by December 31, 1998 and 100% by December 31, 1999 or alternatively, that
75% of its total fleet meet Stage 3 requirements by December 31, 1998 and 100%
on December 31, 1999.
As of December 31, 1996, 122, approximately 64% of TWA's active fleet, met
the Stage 3 standards. TWA's ability to comply with the federal requirements
within the time specified, or with more restrictive local noise restrictions,
by acquiring newer aircraft and by phasing out or retrofitting older aircraft
that are not in compliance with the Stage 3 standards, will depend upon its
ongoing financial condition, its ability to renegotiate existing leases for
such aircraft and its ability to obtain financing to acquire the requisite
number of Stage 3 aircraft or retrofit kits. Although TWA has a plan to meet
the federal requirements, and has already acquired a number of Stage 3
aircraft while phasing out several Stage 2 aircraft, there can be no assurance
that TWA will be able to satisfy all applicable noise level requirements.
Numerous airports have imposed restrictions such as curfews, airplane noise
levels, mandatory flight paths and runway restrictions, which limit the
ability of TWA and other carriers to increase services at such airports. Other
jurisdictions are considering similar measures. While the Company has
historically had the flexibility to schedule around these restrictions, there
can be no assurance that the Company will continue to be able to work around
these restrictions. The Port Authority of New York and New Jersey is
considering a phaseout of Stage 2 aircraft on a more accelerated basis than
that of the FAA requirement, a prohibition on additional Stage 2 flights and
an expanded nighttime curfew. The FAA and air carriers, including TWA, have
stated their opposition to these proposals. At this time, TWA cannot predict
whether the proposals will be implemented or, if so, the timing or effect on
TWA of any such implementation, which would depend on the extent to which
TWA's aircraft then being used in the affected airports meet the Stage 3
requirements as well as the timing of TWA's flights.
12
<PAGE>
Labor
The RLA governs the labor relations of employers and employees engaged in
the airline industry. Comprehensive provisions are set forth in the RLA
establishing the right of airline employees to organize and bargain
collectively along craft or class lines and imposing a duty on air carriers
and their employees to exert every reasonable effort to make and maintain
collective bargaining agreements. See "--Employees." The RLA contains detailed
procedures which must be exhausted before a lawful work stoppage can occur.
Pursuant to the RLA, TWA has collective bargaining agreements with four
domestic unions representing four separate employee groups.
Aging Aircraft Maintenance
The FAA issued several ADs in 1990 mandating changes to maintenance programs
for older aircraft to ensure that the oldest portion of the nation's fleet
remains airworthy. The FAA required that these older aircraft
undergo extensive structural modifications prior to the later of the
accumulation of a designated number of flight cycles or 1994 deadlines
established by the various ADs. Most of the Company's aircraft are currently
affected by these aging aircraft ADs. The Company monitors its fleet of
aircraft to ensure safety levels which meet or exceed those mandated by the
FAA.
In 1995 and 1996, TWA spent approximately $2.6 million and $3.4 million,
respectively, to comply with aging aircraft maintenance requirements. Based on
information currently available to TWA and its current fleet plan, TWA
estimates that costs associated with complying with these aging aircraft
maintenance requirements will aggregate approximately $18.7 million through
2000. These cost estimates assume, among other things, that newer aircraft
will replace certain of TWA's existing aircraft and as a result, the average
age of TWA's fleet will be significantly reduced. There can be no assurance
that TWA will be able to implement fully its fleet plan.
Safety
TWA is subject to FAA jurisdiction with respect to aircraft maintenance and
operations, including equipment, dispatch, communications, training, flight
personnel and other matters affecting air safety. The FAA has the authority to
issue new or additional regulations. To ensure compliance with its
regulations, the FAA requires the Company to obtain operating, airworthiness
and other certificates which are subject to suspensions or revocation for
cause. In addition, a combination of FAA and Occupational Safety and Health
Administrative regulations on both federal and state levels apply to all of
TWA's ground-based operations.
Passenger Facilities Charges
During 1990, Congress enacted legislation to permit airport authorities,
with prior approval from the FAA, to impose passenger facility charges
("PFCs") as a means of funding local airport projects. These charges, which
are intended to be collected by the airlines from their passengers and
remitted to the airports, are limited to $3.00 per enplanement and to no more
than $12.00 per round trip. As a result of competitive pressure, the Company
and other airlines have been limited in their abilities to pass on the cost of
the PFCs to passengers through fare increases.
Environmental
The Company is subject to regulation under major environmental laws
administered by state and federal agencies, including the Clean Air Act, the
Clean Water Act, the Comprehensive Environmental Response Compensation and
Liability Act of 1980 and the Resource Conservation and Recovery Act. In some
locations there are also county and sanitary sewer district agencies which
regulate the Company. The Company believes that it is in substantial
compliance with applicable environmental regulations. See, however, "Item 3.
Legal Proceedings--Other Actions."
Foreign Ownership of Shares
The Federal Aviation Act of 1958 generally prohibits non-U.S. citizens from
owning more than 25% of the voting interest in U.S. air carriers, including
the Company.
13
<PAGE>
CORPORATE REORGANIZATIONS
During the early 1990s, the U.S. airline industry, including the Company,
experienced unprecedented losses, which were largely attributable to, among
other things, the Persian Gulf War (which caused a substantial increase in
fuel costs and reduction in travel demand due to concerns over terrorism),
recessions in the United States and Europe, and significant industry-wide fare
discounting resulting from another U.S. airline's attempt to introduce a new
pricing structure into the domestic airline business. In addition, TWA had
incurred significant debt as a result of the leveraged acquisition in 1986 of
a controlling interest in the Company by Mr. Icahn. The substantial losses
sustained by the Company during this period, coupled with the Company's
excessive debt obligations, made it necessary for TWA to restructure its debt
obligations and equity, lower its labor costs and severely reduce its capital
outlays.
'93 Reorganization
On November 3, 1993 (the " '93 Effective Date"), TWA emerged from the
protection of Chapter 11 of the United States Bankruptcy Code pursuant to a
bankruptcy case filed on January 31, 1992. During the pendency of the '93
Reorganization, the Company (i) negotiated, effective September 1, 1992, a
series of three-year concession agreements with its unions providing for,
among other things, a 15% reduction in wages and benefits and certain work-
rule concessions designed to reduce costs substantially (the " '92 Labor
Agreements"), (ii) obtained confirmation of a reorganization plan which
eliminated more than $1 billion of debt and lease obligations, and (iii)
reached a settlement with the Pension Benefit Guaranty Corporation (the
"PBGC") with respect to the Company's underfunded pension plan obligations.
During the pendency of the '93 Reorganization, the Icahn Entities released
their claims against and interests in TWA and Mr. Icahn resigned as Chairman
of the Board of Directors and as an officer of TWA. The Icahn Entities (as
defined) also agreed to provide up to $200 million of financing pursuant to
the Icahn Loans (as defined) (see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Item 3. Legal
Proceedings--Icahn Litigation").
'95 Reorganization
Notwithstanding the reduction in levels of debt and obligations achieved
through the '93 Reorganization, the Company emerged from the '93
Reorganization in a too highly leveraged position and, despite progress in
increasing revenues and reducing costs, continued to experience significant
operating losses. With the hiring of a new management team in 1994, the
assumptions underlying the Company's operating plans, upon which its ability
to service its post '93 Reorganization obligations depended, were recognized
as unrealistic and unachievable. As a consequence, the Company was forced to
seek a second financial restructuring.
In the second quarter of 1995, the Company solicited and received sufficient
acceptances to effect the proposed "prepackaged" plan of bankruptcy.
Therefore, on June 30, 1995, the Company filed a prepackaged Chapter 11 plan
of reorganization, which with certain modifications was confirmed by the
United States Bankruptcy Court in St. Louis (the "Bankruptcy Court") on August
4, 1995. On August 23, 1995, approximately eight weeks after filing the
prepackaged Chapter 11 plan, the '95 Reorganization became effective and the
Company emerged from the protection of this second Chapter 11 proceeding. In
connection with the '95 Reorganization, the Company (i) exchanged certain of
its then outstanding debt securities for a combination of newly issued 12%
Preferred Stock, Common Stock, warrants and rights to purchase Common Stock,
and debt securities, (ii) converted its then outstanding preferred stock to
shares of Common Stock, warrants and rights to purchase Common Stock, (iii)
obtained certain short-term lease payment and conditional sale indebtedness
deferrals amounting to approximately $91 million and other modifications to
certain aircraft leases; and (iv) obtained an extension of the term of the
approximately $190 million principal amount of the Icahn Loans. The Company
also (i) effected a reverse stock split of its then outstanding common stock
and exchanged such shares for Common Stock; (ii) raised approximately $52
million through an equity rights offering; (iii) distributed certain warrants
to its then current equity holders; and (iv) implemented certain amendments to
the Certificate of Incorporation relating to the recapitalization and various
corporate governance matters.
14
<PAGE>
In connection with and as a precondition to the '95 Reorganization, in
August and September of 1994, the Company entered into the '94 Labor
Agreements, amending existing collective bargaining agreements, with the IAM,
ALPA and IFFA, the three labor unions who then represented approximately 84%
of the Company's employees. The '94 Labor Agreements provided for an extension
of certain previously agreed wage concessions, modifications to work rules and
the deletion of certain provisions of the then existing labor agreements,
including elimination of so-called snapbacks, i.e., the automatic restoration
of wage reductions granted in such agreements at the end of their term to
levels that prevailed prior to the concessionary agreement. During 1994 and
1995, the Company also implemented a number of similar cost savings
initiatives with respect to domestic non-union and management employees,
primarily through reducing head count, altering benefit packages, and
continuing wage reductions which had been scheduled to expire. See "--
Employees."
ITEM 2. PROPERTIES
Substantially all of TWA's assets are subject to various liens and security
interests. See also "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FLIGHT EQUIPMENT
As of December 31, 1996, TWA's operating fleet consisted of 192 aircraft, of
which 47 were owned by TWA and 145 were leased. All aircraft in use are
maintained in airworthy condition in accordance with procedures approved by
the FAA. The operating aircraft owned by and leased to TWA as of December 31,
1996 are listed below.
<TABLE>
<CAPTION>
AVERAGE AGE
OF AIRCRAFT SEATS IN STANDARD
TYPE OWNED(2) LEASED TOTAL(3) (IN YEARS) TWA CONFIGURATION
- - ---- -------- ------ -------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Douglas DC-9-10......... -- 7 7 30.0 68
Douglas DC-9-30......... -- 36 36 27.0 98
Douglas DC-9-40......... -- 3 3 22.2 98
Douglas DC-9-50......... -- 12 12 19.9 107
Douglas MD-80/83........ -- 53 53 9.4 142
Boeing 727-200(1)....... 28 11 39 22.6 146
Boeing 747(1)........... 6 8 14 25.6 434
Boeing 757.............. -- 3 3 0.2 180
Boeing 767.............. 5 9 14 12.3 190
Lockheed L-1011(1)...... 8 3 11 22.6 254
--- --- --- ----
Total............... 47 145 192 19.0
=== === === ====
</TABLE>
- - --------
(1) Excludes the following aircraft which are not in the active fleet; eight
Boeing 727-100s, one Boeing 727-200, one Boeing 747-100 and three L-1011s.
(2) Substantially all TWA's owned flight equipment is pledged to secure its
indebtedness.
(3) For information concerning compliance of the above-referenced aircraft
with the Noise Act, see "Item 1. Regulatory Matters--Noise Abatement."
In 1997, the Company intends to replace its 11 remaining L-1011 aircraft
with newer and more efficient 757s. Also in 1997, TWA plans to retire all of
its 747 aircraft, some of which are to be replaced by 767 aircraft, and 10 of
its older 727 aircraft, to be replaced with MD-80s. In 1996, TWA entered into
agreements providing for the lease of up to 10 new 757 aircraft from a major
operating lessor to be delivered in 1996 and 1997, the purchase of 10 new 757
aircraft from the manufacturer with deliveries scheduled from February 1997 to
May 1999, the lease of 15 new MD-83s with deliveries scheduled from 1997 to
1999, and the lease of 9 used MD-82s with deliveries scheduled in 1997. The
Company also acquired the right, subject to certain conditions, to purchase up
to 20 additional 757 aircraft from the manufacturer.
15
<PAGE>
REAL PROPERTY
TWA utilizes or has rights to utilize airport and terminal facilities
located in or near the cities it serves under lease agreements or other
arrangements with the governmental authorities exercising control over such
facilities.
At St. Louis, TWA has preferential use rights to 57 gates and 40 ticket
counter positions, and ramp, baggage and other supporting ground facility
space. TWA's domestic-international hub at JFK operates out of two passenger
terminal facilities (Terminals 5 and 6). TWA is the lessee at JFK of a total
of 27 gates, 102 ticket counter positions, and ramp, baggage and other
supporting ground facility space. TWA occupies both Terminal 5 and Terminal 6
as a holdover tenant pursuant to expired agreements of lease with the Port
Authority of New York and New Jersey (the "Port Authority"). Such holdover
tenancies are with the consent of the Port Authority pursuant to a Term Sheet
dated August 12, 1993 (the "Term Sheet"), which extended TWA's right to occupy
Terminals 5 and 6, provided TWA paid the rent set forth in the Term Sheet,
made certain specified financed improvements to Terminals 5 and 6, and was
otherwise in compliance with the expired leases. On February 8, 1996, the Port
Authority's Board of Commissioners adopted a resolution authorizing the Port
Authority to enter into a new five year lease with TWA for both Terminals 5
and 6 for a term expiring on March 31, 2001; however, the lease has not yet
been signed. The Company has recently consolidated for the near term most JFK
operations into Terminal 5, using only limited facilities in Terminal 6. TWA
is attempting to sublease the remainder of Terminal 6.
TWA's overhaul base is located on approximately 250 acres of leased property
at the Kansas City International Airport, Kansas City, Missouri. The overhaul
base is TWA's principal maintenance base where TWA performs major maintenance
and repair services for its aircraft fleet. The overhaul base is owned by the
City of Kansas City, Missouri and leased to TWA along with other facilities
until May 31, 2000. TWA leases office space and other facilities in a number
of locations in the U.S. and abroad. In December 1993, pursuant to a
sale/leaseback with the City of St. Louis, TWA leased a two-story ground
operations building near the St. Louis Airport and an adjacent 165,000 square
foot, five-story flight training facility. The lease of these properties is
covered under a month-to-month agreement subject to automatic renewal so long
as TWA is not in default thereunder, such agreement having a term otherwise
expiring December 31, 2005. Such term is subject to early termination in the
event of certain events of default, including non-payment of rents, cessation
of service, failure to maintain corporate headquarters within the City or
County of St. Louis or failure to maintain a reservations office within the
City of St. Louis. For a description of certain environmental corrective
actions that TWA anticipates will be required at the overhaul base, see "Item
3. Legal Proceedings."
TWA's corporate headquarters are located at One City Centre, 515 N. Sixth
Street, St. Louis, Missouri where TWA has subleased approximately 56,700
square feet through February 28, 2000. TWA's St. Louis area reservation
facility and customer relations department is located in approximately 48,000
square feet in the City of St. Louis, Missouri. In June 1996, TWA opened a new
reservation facility in Norfolk, Virginia, comprised of approximately 40,000
square feet and having 455 work stations. The facility is leased for a twenty-
five year term.
ITEM 3. LEGAL PROCEEDINGS
Icahn Litigation
Tickets sold by the Company to Karabu pursuant to the Ticket Agreement are
priced at levels intended to approximate current competitive discount fares
available in the airline industry. TWA believes that applicable provisions of
the Ticket Agreement do not allow Karabu to market or sell such tickets
through travel agents to the general public. Karabu, however, has been
marketing tickets through travel agents. TWA has demanded that Karabu cease
doing so, and Karabu has stated that it disagrees with the Company's
interpretation concerning sales through travel agents. In December 1995, the
Company filed a lawsuit against Karabu, Mr. Icahn, and certain affiliated
companies seeking damages and to enjoin further violations of the Ticket
Agreement. Mr. Icahn countered by threatening to file his own lawsuit and to
declare a default on the financing of up to $200 million provided to TWA by
Karabu in connection with the '93 Reorganization (the "Icahn Loans"), which
financing is
16
<PAGE>
secured by receivables and certain flight equipment pledged under a security
agreement (the "Karabu Security Agreement") with State Street Bank and Trust
Company of Connecticut N.A., as security trustee (the "Security Trustee"). Mr.
Icahn's position was based upon a variety of claims related to his
interpretations of the Karabu Security Agreement as well as certain alleged
violations of the Ticket Agreement by the Company. A violation of the Ticket
Agreement by the Company could result in a cross-default under the Icahn
Loans. An event of Default (as defined in the Icahn Loans), if resulting in an
acceleration of the indebtedness due thereunder, would constitute a default
under the instruments governing substantially all of the Company's other
indebtedness and leases and would have a material adverse effect on the
Company. Mr. Icahn has also alleged independent violations of the Icahn Loans,
including, among other things, that the Company has not been maintaining, in
accordance with the terms of the Karabu Security Agreement, certain aircraft
which TWA has retired from service and stored and which are pledged as
security for the Icahn Loans. To endeavor to eliminate this issue from the
various disputes with Mr. Icahn and his affiliates, the Company has deposited
an amount equal to the appraised fair market value of such aircraft with the
Security Trustee and requested the release of the liens on such aircraft. To
date, the Security Trustee has not released such liens. In addition, Mr. Icahn
has asserted that the approval of the Security Trustee is required for any
modification to the FAA-approved maintenance program affecting aircraft
pledged as security under the Karabu Security Agreement. The parties
negotiated a series of standstill agreements, pursuant to which TWA's original
lawsuit was withdrawn, while the Company and Mr. Icahn endeavored to negotiate
a settlement of their differences and respective claims. The final extension
of such standstill agreement expired on March 20, 1996.
On March 20, 1996, the Company filed a Petition (the "TWA Petition")
commencing a lawsuit against Mr. Icahn, Karabu and certain other entities
affiliated with Icahn (collectively, the "Icahn Defendants"). The TWA
Petition, which is pending in the Circuit Court for St. Louis County,
Missouri, alleges that the Icahn Defendants are violating the Ticket Agreement
and otherwise tortiously interfering with the Company's business expectancy
and contractual relationships, by among other things, marketing and selling
tickets purchased under the Ticket Agreement to the general public through
travel agents. The TWA Petition seeks a declaratory judgment finding that the
Icahn Defendants have violated the Ticket Agreement, and also seeks
liquidated, compensatory and punitive damages, in addition to the Company's
costs and attorney's fees. The Company believes the allegations contained in
the TWA Petition are meritorious.
Also on March 20, 1996, TWA was named as a defendant in a complaint (the
"Icahn Complaint") filed by Karabu and certain other affiliates of Mr. Icahn
(the "Icahn Entities"). The Icahn Complaint alleges, among other things, that
the Company has violated certain federal antitrust laws, breached the Ticket
Agreement and interfered with certain existing and prospective commercial
relations of the Icahn Entities. The Icahn Complaint is based upon an
interpretation by Mr. Icahn and the Icahn Entities that the Ticket Agreement
permits sales of tickets to the general public through travel agents. The
Icahn Complaint seeks injunctive relief and actual and punitive monetary
damages, as well as the Icahn Entities' costs of litigation. On June 13, 1996,
following TWA's filing of a motion to dismiss the Icahn Complaint, the Icahn
Entities amended the Icahn Complaint to delete the federal antitrust claims
and to add new allegations and theories with respect to claimed violations of
the federal antitrust laws and the Lanham Act (the "Amended Icahn Complaint").
On March 24, 1997, on the Company's motion, the Amended Icahn Complaint was
dismissed in its entirety.
On June 6, 1996, Karabu forwarded a letter to TWA advising the Company of
Karabu's possible intention to instruct the PBGC to require the Security
Trustee to give a 30 day default notice to TWA in respect of certain alleged
instances of non-compliance by TWA with the provisions of the Karabu Security
Agreement relating to, among other things, four Boeing 727-100 aircraft which
are no longer being flown by TWA in active service and changes by TWA to the
FAA-approved scheduled maintenance of such aircraft and other aircraft pledged
under the Karabu Security Agreement without obtaining approval of the Security
Trustee. Karabu also forwarded with such letter a draft of a proposed
complaint which it threatened to file a declaratory judgment that Karabu would
be entitled to instruct the PBGC to require the Security Trustee to give TWA
such notice of default. The complaint was filed in a New York state court and
was served on TWA on June 28, 1996.
17
<PAGE>
On June 26, 1996, Karabu formally requested the PBGC to instruct the
Security Trustee to give TWA a notice of default under the Karabu Security
Agreement. On June 27, 1996, the PBGC declined to so instruct the Security
Trustee, advising Karabu that the PBGC did not believe TWA was in default and,
even if a default were determined to exist, any such default would be
technical only and Karabu would not be harmed by such default.
On June 28, 1996, Karabu brought an action against the PBGC in the United
States District Court for the Southern District of New York, seeking a
declaratory judgment for the purpose of determining Karabu's rights with
respect to the Karabu Security Agreement. TWA then sought to intervene in such
lawsuit and was granted the right to do so whereupon the Company filed a
motion to dismiss Karabu's complaint and for summary judgment. Karabu then
withdrew its separate suit in New York state court for a declaratory judgment
previously filed on June 28, 1996.
Although the Company intends to press its claims vigorously and believes its
defenses to Mr. Icahn's claim are meritorious, it is possible that Karabu's
interpretation of the Ticket Agreement regarding discount ticket sales by the
Icahn Defendants to the general public through travel agents could be
determined, either by a court or otherwise, to be correct. In such event,
unless the Company took appropriate action to mitigate the effect of such
sales, the Company could suffer significant loss of revenue that could reduce
overall passenger yields on a continuing basis during the term of the Ticket
Agreement. In addition, although the Company believes that no material default
exists under the Karabu Security Agreement, any default by the Company under
the Ticket Agreement or directly on the Icahn Loans which resulted in an
acceleration of the Icahn Loans would result in a cross-default under
substantially all of the Company's other indebtedness and leases and otherwise
have a material adverse effect on the Company. As of December 31, 1996, an
aggregate principal amount of $125.1 million was outstanding under the Icahn
Loans.
Other Actions
On July 17, 1996, TWA Flight 800 crashed shortly after departure from JFK en
route to Paris, France. There were no survivors among the 230 passengers and
crew members aboard the Boeing 747 aircraft. While TWA is currently a
defendant in a number of lawsuits relating to the crash, it is unable to
predict the amount of claims which may ultimately be made against the Company
or how those claims might be resolved. TWA maintains substantial insurance
coverage, and at this time management has no reason to believe that such
insurance coverage will not be sufficient to cover the claims arising from the
crash. Therefore, TWA believes that the resolution of such claims will not
have a material adverse effect on its financial condition or results of
operations.
On May 31, 1988, the U.S. Environmental Protection Agency ("EPA") filed an
administrative complaint seeking civil penalties as well as other relief
requiring TWA to take remedial procedures at TWA's maintenance base in Kansas
City, Missouri, alleging violations resulting from TWA's past hazardous waste
disposal and related environmental practices. Simultaneously, TWA became a
party to a consent agreement and a consent order with the EPA pursuant to
which TWA paid a civil penalty of $100,000 and agreed to implement a schedule
of remedial and corrective actions and to perform environmental audits at
TWA's major maintenance facilities. In September 1989, TWA and the EPA signed
an administrative order of consent, which required TWA to conduct extensive
investigations at or near the overhaul base and to recommend remedial action
alternatives. TWA completed its investigations and on February 17, 1996,
submitted a Corrective Measures Study ("CMS") to the Missouri Department of
Natural Resources ("MDNR") and the EPA. It is anticipated that review and
approval of the CMS by the MDNR and EPA will be completed by late 1997. Upon
approval of the CMS, an additional order will be issued and the required
corrective actions implemented. TWA presently estimates the cost of the
corrective action activities under the existing and anticipated orders to be
approximately $7 million, a majority of which represents costs associated with
long-term groundwater monitoring and maintenance of the remedial systems.
Although the Company believes adequate reserves have been provided for all
known environmental contingencies, it is possible that additional reserves
might be required in the future which could have a material adverse effect on
the results of operations or financial condition of the Company. However, the
Company believes that the ultimate resolution of known environmental
contingencies should not have a material adverse effect on the financial
position or results of operations based on the Company's knowledge of similar
environmental sites.
18
<PAGE>
On October 22, 1991, judgment in the amount of $12,336,127 was entered
against TWA in an action in the United States District Court for the Southern
District of New York by Travellers International A.G. and its parent company,
Windsor, Inc. (collectively, "Travellers"). The action commenced in 1987, as
subsequently amended, sought damages from TWA in excess of $60 million as a
result of TWA's alleged breach of its contract with Travellers for the
planning and operation of Getaway Vacations. In order to obtain a stay of
judgment pending appeal, TWA posted a cash undertaking of $13,693,101. In
connection with the '93 Reorganization, TWA sought to have the matter
ultimately determined by the Bankruptcy Court. Following prolonged litigation
with respect to jurisdiction, the United States Supreme Court determined that
the matter should be addressed by the bankruptcy court, and in February 1994,
the bankruptcy court determined the matter in a manner favorable to TWA. Upon
appeal, the District Court affirmed in part and reversed in part the
bankruptcy court's decision. Both parties have appealed the matter to the
United States Court of Appeals for the Third Circuit. The Company believes
that in the event that the District Court's decision is affirmed, the ultimate
result will not be materially different than the decision of the bankruptcy
court. Pursuant to the Icahn Loans, amounts received by TWA in connection with
the Travellers litigation would be used to repay, in part, certain of the
Company's obligations to the Icahn Entities.
In February 1995, a number of actions were commenced in various federal
district courts against TWA and six other major airlines, alleging that such
companies conspired and agreed to fix, lower and maintain travel agent
commissions on the sale of tickets for domestic air travel in violation of the
United States and, in certain instances, state, antitrust laws. On May 9,
1995, TWA announced settlement, subject to court approval, of the referenced
actions and reinstated the traditional 10% commission on domestic air fares. A
final order has not yet been entered; however, an interim order approving the
settlement has been entered. The Company believes the settlement of this case
will have a favorable effect on revenues.
On November 9, 1995, ValuJet Air Lines, Inc. ("ValuJet") instituted a
lawsuit against TWA and Delta Air Lines ("Delta") in the United States
District Court for the Northern District of Georgia, alleging breach of
contract and violations of certain antitrust laws with respect to the
Company's lease of certain takeoff and landing slots at LaGuardia
International Airport in New York. On November 17, 1995, the court denied
ValuJet's motion to temporarily enjoin the lease transaction and the Company
and Delta consummated the lease of the slots. On July 12, 1996, the Federal
Court in Atlanta granted summary judgment in TWA's favor in the ValuJet
litigation on all claims and counts raised in the ValuJet amended complaint.
The order granting summary judgment to TWA was not a final order and was not
directly appealable due to an outstanding claim against Delta. While ValuJet's
counsel has stated that an appeal will be filed at a later date, the Company
intends to defend itself vigorously in any future action and believes that all
of the allegations that have been made to date are without merit.
In addition, based on certain written grievances or complaints filed by
ValuJet, the Company was informed that the United States Department of Justice
("DOJ"), Antitrust Division, was investigating the circumstances of the slot
lease of certain takeoff and landing slots to Delta at LaGuardia to determine
whether an antitrust violation has occurred. During the course of its
investigation, the DOT was informed of the summary judgment described above.
Since the date of the judgment, TWA is unaware of whether the DOJ has
undertaken further investigative efforts, the status of the investigation or
any future plans of the DOJ or other regulatory bodies with respect to the
ValuJet allegations. While TWA believes the summary judgment should be
persuasive to the various regulatory bodies petitioned by ValuJet, it will
cooperate with any further investigations and strongly believes that the slot
lease transaction was not in violation of antitrust laws.
The Company is also defending a number of other actions which have either
arisen in the ordinary course of business or are insured or the cumulative
effect of which management of the Company does not believe may reasonably be
expected to be materially adverse.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No meeting of Security Holders was held during the fourth quarter of 1996.
19
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND DIVIDEND POLICY
GENERAL
On August 23, 1995, all of the Company's previously outstanding equity
securities were canceled and certificates with respect thereto thereafter
evidenced only the right to receive Common Stock and the other consideration
specified in the '95 Reorganization. Also pursuant to the '95 Reorganization,
holders of certain debt securities of the Company received shares of Common
Stock. Information regarding the trading price range of pre-'95 Reorganization
common stock is not comparable with data provided for the Common Stock and is
not included herein. For information concerning the '95 Reorganization, see
"Item 1. Business--Corporate Reorganizations."
The Common Stock is listed for trading on the American Stock Exchange. The
following table sets forth the range of high and low prices for shares of the
Common Stock (as reported in The Wall Street Journal) for the periods
indicated:
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------- ------
<S> <C> <C>
1995
Third Quarter (August 23 through September 30).............. $ 8.000 $5.313
Fourth Quarter (October 1 through December 31).............. 14.625 6.500
1996
First Quarter............................................... 20.500 9.125
Second Quarter.............................................. 23.625 14.125
Third Quarter............................................... 15.125 8.125
Fourth Quarter.............................................. 9.688 6.500
1997
First Quarter (through March 26, 1997)...................... 8.125 5.750
</TABLE>
Since 1978, the Company has not paid any cash dividends on any of its common
stock. The Company currently plans to retain all earnings to finance its
business and to reduce its leverage rather than paying cash dividends on the
Common Stock. Payments of any cash dividends in the future will depend on the
financial condition, results of operations and capital requirements of TWA as
well as other factors deemed relevant by its Board of Directors, including
applicable restrictions in various agreements relating to indebtedness.
As of March 20, 1997, there were (i) 44,083,266 shares of the Company's
Common Stock outstanding and 18,227 holders of record of the Common Stock, and
(ii) 6,233,334 shares of Employee Preferred Stock issued and outstanding and 5
holders of record of the Employee Preferred Stock.
SALES OF UNREGISTERED SECURITIES
In March, 1996, the Company issued and sold 3,869,000 shares of its 8%
Cumulative Convertible Exchangeable Preferred Stock (the "8% Preferred Stock")
in transactions exempt from the registration requirements of the Securities
Act. The Company filed a shelf registration statement pursuant to Rule 415 of
the Securities Act, No. 333-04977, which was declared effective August 16,
1996, to afford the holders of the 8% Preferred Stock the opportunity to sell
such stock in a public transaction.
Pursuant to certain Exchange Agreements with Elliott Associates L.P. and
Westgate International L.P. reported on a Form 8-K filed on September 20,
1996, the Company exchanged 4,455,820 shares of Common Stock for $45.25
million principal amount of its 12% Senior Secured Reset Notes (the "Notes")
plus approximately $1.5 million in accrued interest thereon in a series of
transactions between July and December, 1996. An additional 1,661,060 shares
of Common Stock have been exchanged for an additional $10.25 million principal
amount of Notes in the first quarter of 1997. The Common Stock was issued
pursuant to the exemption granted by Section 3(a)(9) of the Securities Act.
The Notes were registered and issued pursuant to the Company's registration
statement on Form S-4 filed with the Commission on May 12, 1995.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below relate to periods in the year
ended December 31, 1992, the ten months ended October 31, 1993, the two months
ended December 31, 1993, the year ended December 31, 1994, the eight months
ended August 31, 1995, the four months ended December 31, 1995 and the year
ended December 31, 1996. This data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements. The consolidated
financial data for the above periods was derived from the audited consolidated
financial statements of the Company. Certain amounts have been reclassified to
conform with presentations adopted in 1996.
During the period from 1992 through 1995, TWA underwent two separate Chapter
11 reorganizations, the first in 1992-93 and the second in 1995. In connection
with the '95 Reorganization, TWA has applied fresh start reporting in
accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"), which has resulted in the creation of
a new reporting entity for accounting purposes and the Company's assets and
liabilities being adjusted to reflect fair values on the '95 Effective Date. A
description of the adjustments to the financial statements arising from the
consummation of the '95 Reorganization and the application of fresh start
reporting is contained in Note 19 to the Consolidated Financial Statements.
For accounting purposes, the '95 Effective Date is deemed to be September 1,
1995. Because of the application of fresh start reporting, the financial
statements for periods after the '95 Reorganization are not comparable in all
respects to the financial statements for periods prior to the reorganization.
Similarly, the Consolidated Financial Statements for the periods prior to the
'93 Reorganization are not consistent with periods subsequent to the '93
Reorganization. Accordingly, a vertical black line separates these periods.
Preferred stock dividend requirements and earnings per share of the
predecessor companies have not been presented as these amounts are not
meaningful.
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR PRIOR PREDECESSOR
COMPANY COMPANY COMPANY
------------------------- -------------------------------------- ------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER DECEMBER 31,
1996 1995 1995 1994 1993 31, 1993 1992
------------ ------------ ------------ ------------ ------------ ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating revenues...... $3,554,407 $1,098,474 $2,218,355 $3,407,702 $520,821 $2,633,937 $3,618,661
Operating income
(loss)(1).............. (198,527) 10,446 14,642 (279,494) (58,251) (225,729) (420,432)
Loss before income taxes
and extraordinary
items(2)............... (274,577) (32,268) (338,309) (432,869) (88,140) (362,620) (314,292)
Provision (credit) for
income taxes........... 450 1,370 (96) 960 (248) 1,312 3,361
Loss before
extraordinary items.... (275,027) (33,638) (338,213) (433,829) (87,892) (363,932) (317,653)
Extraordinary items(3).. (9,788) 3,500 140,898 (2,005) -- 1,075,581 --
Net income (loss)....... (284,815) (30,138) (197,315) (435,834) (87,892) 711,649 (317,653)
Per share amounts(4):
Loss before
extraordinary items
and special dividend
requirement........... $(6.60) $(1.15)
Net loss............... (7.27) (1.05)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
PRIOR
PREDECESSOR
REORGANIZED COMPANY PREDECESSOR COMPANY COMPANY
---------------------- ----------------------- -----------
DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET
DATA:
Cash and cash
equivalents............ $ 181,586 $ 304,340 $ 138,531 $ 187,717 $ 67,885
Current assets.......... 586,442 715,647 577,735 706,462 602,007
Net working capital
(deficiency)........... (404,150) (124,446) (1,286,487) (150,744) (316,165)
Flight equipment, net... 472,495 455,434 508,625 660,797 827,747
Total property and
equipment, net......... 614,207 600,066 693,045 886,116 1,114,345
Intangible assets, net.. 1,184,786 1,275,995 921,659 1,024,846 --
Total assets............ 2,681,939 2,868,211 2,512,435 2,958,862 2,158,143
Current maturities of
long-term debt and
capital leases(5)...... 134,948 110,401 1,149,739 108,345 327,251
Liabilities subject to
Chapter 11
reorganization
proceedings(6)......... -- -- -- -- 2,026,895
Long-term debt, less
current maturities(5).. 608,485 764,031 -- 1,053,644 --
Long-term obligations
under capital leases,
less current
maturities............. 220,790 259,630 339,895 376,646 --
Shareholders' equity
(deficiency)(7)........ 238,105 302,855 (417,476) 18,358 (1,149,733)
</TABLE>
- - --------
(1) Includes special charges of $85.9 million in 1996, $1.7 million in the
eight months ended August 31, 1995 and $138.8 million in 1994. For a
discussion of these and other non-recurring items, see Note 16 to the
Consolidated Financial Statements.
(2) The eight months ended August 31, 1995 includes charges of $242.2 million
related to reorganization items. The ten months ended October 31, 1993
includes a charge of $342.4 million related to the settlement of pension
obligations and income of $268.1 million related to reorganization items.
The 1992 results include non-recurring gains of $254.6 million from the
disposition of assets.
(3) The extraordinary item in 1996 results from the early extinguishment of
certain debt. The extraordinary item in the four months ended December 31,
1995 was the result of the settlement of a debt of a subsidiary, while the
extraordinary item in the eight months ended August 31, 1995 represents
the gain on the discharge of indebtedness pursuant to the consummation of
the '95 Reorganization. The extraordinary item in 1994 represents the
charge for a prepayment premium related to the sale and lease back of four
McDonnell Douglas MD-80 aircraft. The extraordinary item in 1993
represents the gain on discharge of indebtedness pursuant to the
consummation of the '93 Reorganization.
(4) No effect has been given to stock options, warrants or potential issuances
of additional Employee Preferred Stock as the impact would have been anti-
dilutive.
(5) Long-term debt in 1994 was reclassified to current maturities as a result
of certain alleged defaults and payment defaults.
(6) For periods after January 31, 1992 and before the '93 Effective Date,
certain prepetition liabilities, which were subject to compromise pursuant
to the '93 Reorganization, were classified as liabilities subject to
Chapter 11 reorganization proceedings, and the accrual of interest was
discontinued on prepetition debt that was unsecured or estimated to be
undersecured.
(7) No dividends were paid on the Company's outstanding common stock during
the periods presented above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the period from 1992 through 1995, TWA underwent two separate Chapter
11 reorganizations, the first in 1992-93 and the second in 1995. In connection
with the '95 Reorganization, TWA has applied fresh start reporting in
accordance with SOP 90-7 which has resulted in the creation of a new reporting
entity for accounting purposes and the Company's assets and liabilities being
adjusted to reflect fair values on the '95 Effective Date.
A description of the adjustments to the financial statements arising from the
consummation of the '95 Reorganization and the application of fresh start
reporting is contained in Note 19 to Consolidated Financial Statements. For
accounting purposes, the '95 Effective Date is deemed to be September 1, 1995.
Because of the application of fresh start reporting, the financial statements
for periods after the '95 Reorganization are not comparable in all respects to
the financial statements for periods prior to the reorganization. Similarly,
the
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<PAGE>
Consolidated Financial Statements for the periods prior to the '93
Reorganization are not consistent with periods subsequent to the '93
Reorganization.
As discussed below under "--Liquidity and Capital Resources," pursuant to
the '95 Reorganization, the Company initially improved its financial condition
and operating performance by, among other things, reducing labor and other
operating and financing costs, rescheduling debt payments, recapitalizing the
Company's equity securities and certain of its debt, revising the Company's
route structure to capitalize further on its strength in St. Louis, and
developing enhanced marketing systems. Pursuant to the '95 Reorganization, the
Company eliminated approximately $500 million in face amount (approximately
$300 million book value) of debt from its balance sheet. In addition, the
final maturity of the Icahn Loans was extended from January 8, 1995 to January
8, 2001, and the Company negotiated an aggregate of $91 million of aircraft
lease and conditional sale agreement deferrals for various periods of time,
with a weighted average life of approximately two years.
Through the second quarter of 1996 the Company experienced improvements in
its operating performance as operating income increased to $7.8 million in the
six months ended June 30, 1996, as compared to an operating loss of $21.9
million in the same period of 1995. However, beginning in the third quarter of
1996, the Company's operating performance substantially deteriorated as the
Company's operating profit for the third quarter, typically the strongest
period of the year, declined to $26.0 million in the three months ended
September 30, 1996, as compared to a combined operating profit (excluding
special charges and earned stock compensation charges aggregating $57.9
million) of $103.7 million in the comparable period of the prior year. The
results for the fourth quarter of 1996 evidenced a further acceleration of
this deterioration as the Company reported an operating loss (excluding
special charges aggregating $85.9 million) of $146.5 million, as compared to
operating income of $1.1 million in the same period of 1995. In the second
half of 1996, the Company's revenues increased only 2.4%, while capacity,
measured in ASMs, increased by 6.9%, as compared to the second half of 1995.
Operating costs, excluding earned stock compensation and special charges,
increased 16.0% over this same period. The most significant increases were:
salaries, wages and benefits ($82.4 million), which reflected the increased
number of employees, wage rate increases and additional overtime costs; fuel
($69.4 million), reflecting significantly higher units costs and increased
usage; and maintenance costs. Notwithstanding the actions taken and planned by
management to improve the Company's future operating results as described
below, management expects a large first quarter 1997 operating loss, which
will significantly exceed that reported in the first quarter of 1996.
In light of deterioration in the Company's operating results, management has
over the last several months refocused and accelerated certain aspects of its
business strategy, including its fleet modernization and consolidation plan,
route structure and facility improvements and efficiencies. Management
believes that its recent operating results have been adversely affected by an
overly aggressive increase in capacity, which when combined with unexpected
maintenance delays and related costs, have negatively impacted schedule
reliability resulting in excessive levels of flight cancellations and
deterioration in its on-time performance. The Company believes that this has
adversely affected its unit revenues (principally yields) and costs. In
response to these issues, management has taken action to accelerate the phase
out of all B-747 and L-1011 aircraft, reduce low yield domestic JFK feed
service, curtail and/or eliminate historically unprofitable international
routes and consolidate for the near term most of its JFK operations into a
single terminal. The above actions are designed to improve its operational
performance and make its product more competitive to the business segment
which offers higher yields. The Company has also curtailed the amount of
contract maintenance services provided to third parties and redeployed those
resources to TWA's aircraft. In connection with the above described plans,
management has announced a comparable reduction in employee headcount.
Management may undertake further actions to reduce costs which may result in
additional reductions of the number of employees.
GENERAL
The airline industry operates in an intensely competitive environment. The
industry is also cyclical due to, among other things, a close relationship of
yields and traffic to general U.S. and worldwide economic conditions. Small
fluctuations in revenue per available seat mile ("RASM") and cost per
available seat mile ("CASM")
23
<PAGE>
can have a significant impact on the Company's financial results. The Company
has experienced significant losses (excluding extraordinary items) on an
annual basis since the early 1990s, except in 1995 when the Company's combined
operating profit was $25.1 million. Factors contributing to these losses
included, among other things, excess financial leverage; adverse publicity
associated with the Company's financial difficulties; excessive labor costs;
the periods of a relatively weak economy, which resulted in weak air travel
demand; poor operating performance; domestic pricing policies of other
airlines, which decreased industry revenue yields and generated intense
competition; and volatility in jet fuel costs.
The Company's ability to improve its financial position and meet its
financial obligations will depend upon a variety of factors, including;
significantly improved operating results, favorable domestic and international
airfare pricing environments, absence of adverse general economic conditions,
more effective operating cost controls and efficiencies, and the Company's
ability to attract new capital and maintain adequate liquidity. No assurance
can be given that the Company will be successful in generating the operating
results or attracting new capital required for future viability.
The '94 Labor Agreements become amendable after August 31, 1997. While the
Company cannot predict the precise wage rates that will be in effect at such
time (since such rates will be determined by subsequent events), the wage
rates then in effect will likely increase. However, management believes that
it is essential that the Company's labor costs remain favorable in comparison
to its largest competitors. See "Item 1. Business--Business Strategy." The
Company will seek to continue to improve employee productivity as an offset to
any wage increases and will continue to explore other ways to control and/or
reduce operating expenses. There can be no assurance that the Company will be
successful in obtaining such productivity improvements or unit cost
reductions. In the opinion of management, the Company's financial resources
are not as great as those of most of its competitors, and therefore, any
substantial increase in its labor cost as a result of any new labor agreements
or any cessation or disruption of operation due to any strike or work action
could be particularly damaging to the Company.
As a result of the application of fresh start reporting as of the '95
Effective Date, substantial values were assigned to routes, gates and slots
($458.4 million) and reorganization value in excess of amounts allocable to
identifiable assets ($839.1 million). The Company has evaluated its future
cash flows and, notwithstanding the operating loss experienced since the '95
Effective Date, expects that the carrying value of the intangibles at December
31, 1996 will be recovered. However, the achievement of such improved future
operating results and cash flows are subject to considerable uncertainties. In
future periods these intangibles will be evaluated for recoverability based
upon estimated future cash flows. If expectations are not substantially
achieved, charges to future operations for impairment of those assets may be
required and such charges could be material.
There are a number of uncertainties relating to agreements with employees,
the resolution of which could result in charges to future operating results of
the Company. Shares granted or purchased at a discount under the employee
stock incentive program ("ESIP") will generally result in a charge equal to
the fair value of shares granted and the discount for shares purchased at the
time when such shares are earned. If the ESIP's target prices for the Common
Stock are realized, the minimum aggregate charge for the years 1997 to 2002
would be approximately $58 million based upon such target prices and the
number of shares of Common Stock and Employee Preferred Stock outstanding at
December 31, 1996. The charge for any year, however, could be substantially
higher if the market price of the Common Stock exceeds the target price for
such year ($11.00, $12.10, $13.31, $14.64, $16.11 and $17.72 for the
respective years 1997 to 2002). The allocation of approximately 570,000 shares
of Employee Preferred Stock issued to a trust for employees represented by
ALPA pursuant to the '95 Reorganization will also, when allocated to
individual employees so represented in August 1997, result in a charge of
equal to the fair market value of the shares on the dates allocated.
Pursuant to the '92 Labor Agreements, the Company agreed to pay to employees
represented by the IAM a cash "bonus' for the amount by which overtime
incurred by the IAM from September 1992 through August 1995 was reduced below
specified thresholds. This amount was to be offset by the amount by which
medical savings during the period for the same employees did not meet certain
specified levels of savings. The obligation is
24
<PAGE>
payable in three equal annual installments beginning in 1998. The Company has
estimated the net overtime bonus owed to the IAM to be approximately $26.3
million and has reflected this amount as a noncurrent liability on the
accompanying balance sheets. Such amount reflects a reduction of approximately
$10.0 million pursuant to an agreement to reduce proportionately the
obligation based upon the size of the reduction of indebtedness achieved by
the '95 Reorganization. The IAM, while not providing a calculation of its own,
has disputed the method by which management has computed the net overtime
bonus and has indicated that they believe the amount due to the IAM is much
greater than the amount which has been estimated by management.
In addition, in connection with certain wage increases afforded to non-
contract employees, employees represented by the IFFA have asserted and won an
arbitration ruling that, if sustained, would require that the Company provide
additional compensation to IFFA represented employees. The Company estimates
that at December 31, 1996 such additional compensation would aggregate
approximately $6 million. The Company denies any such obligation and intends
to pursue an appeal of the arbitration ruling. As such, no liability has been
recorded by the Company at December 31, 1996.
In connection with the '95 Reorganization, the Company entered into a letter
agreement with employees represented by the ALPA whereby if the Company's
flight schedule, as measured by block hours, does not exceed certain
thresholds a defined cash payment would be made to the ALPA. The defined
thresholds were exceeded during the measurement periods through December 31,
1996 and no amount was therefore owed to the ALPA as of that date. The
Company, however, anticipates that a liability will be incurred during 1997 as
a result of the Company's planned reductions in capacity. The amount of the
liability, if any, will be dependent on the amount by which the targeted block
hours flown during the year exceed the actual block hours flown. Based upon
current plans, management believes that its obligation under this agreement in
1997 will not exceed $12 million. See Notes 7 and 12 to the Consolidated
Financial Statements.
Significant variations in annual operating revenues and operating expenses
have been experienced historically by TWA and are expected to continue in the
future. Numerous uncertainties concerning the level of revenues and expenses
always exist and it is not possible to predict the potential impact of such
uncertainties upon TWA's results of operations. Among the uncertainties that
might adversely impact TWA's future results of operations are: (i) competitive
pricing and scheduling initiatives; (ii) the availability and cost of capital;
(iii) increases in fuel and other operating costs; (iv) insufficient levels of
air passenger traffic resulting from, among other things, war, threat of war,
terrorism or changes in the economy; (v) governmental limitations on the
ability of TWA to service certain airports and/or foreign markets; (vi)
regulatory requirements requiring additional capital expenditures; (vii) the
outcome of certain upcoming labor negotiations; (viii) the possible reduction
in yield due to a discount ticket program entered into by the Company with
Karabu in connection with the '95 Reorganization; and (ix) the impact of the
public's perception of the crash of TWA Flight 800. See "--Liquidity and
Capital Resources."
The Company's operating results for any interim period are not necessarily
indicative of those for the entire year due to seasonal fluctuations. The
second and third quarter results have historically been more favorable for the
Company due to increased leisure travel on both domestic and international
routes during the spring and summer months.
On July 17, 1996, TWA Flight 800 crashed shortly after departure from JFK en
route to Paris, France. There were no survivors among the 230 passengers and
crew members aboard the B-747 aircraft. The Company is cooperating fully with
all federal, state and local regulatory and investigatory agencies to
ascertain the cause of the crash, which to date has not been determined. While
TWA is currently a defendant in a number of lawsuits relating to the crash, it
is unable to predict the amount of claims which may ultimately be made against
the Company or how those claims might be resolved. TWA maintains substantial
insurance coverage and, at this time, management has no reason to believe that
such insurance coverage will not be sufficient to cover the claims arising
from the crash. Therefore, TWA believes that the resolution of such claims
will not have a material
25
<PAGE>
adverse effect on its financial condition or results of operations. The
Company is unable to identify or predict the extent of any adverse effect on
its revenues, yields or results of operations which has resulted or may result
from the public perception of the crash.
On May 4, 1993, the bilateral air transport agreement between the U.S. and
France lapsed. Any reduction in U.S. carrier access could have an adverse
impact on TWA's transatlantic operations. Absent a bilateral agreement, the
U.S. and France are operating on a system of comity and reciprocity. Under
this regime, carriers are permitted to maintain historical levels of service,
but few or no new services are permitted. Cessation of service to any
authorized markets from France may cause such underlying authority to
terminate.
In March 1997, the President signed legislation reinstating the 10% tax on
domestic tickets, the 6.25% air cargo tax and the $6.00 international
departure tax, effective March 7, 1997. These taxes had expired on December
31, 1995, were reinstated on August 27, 1996 and thereafter expired again on
December 31, 1996. The Company is not able to determine the extent to which
operating results in 1996 and in early 1997 benefited from the absence of
these taxes, although it does believe that such had a positive impact on its
operating results. Similarly, the Company believes that the reimposition of
the tax in March 1997 will likely have an adverse impact on its operating
results in subsequent periods.
In October 1996 Congress enacted the Federal Aviation Reauthorization Act of
1996 (the FAA Reauthorization Act). The FAA Reauthorization Act established a
national commission which, together with the DOT, is to conduct an independent
study of FAA funding requirements and recommend alternative methods for
apportioning the costs of the system to its users, including commercial
airlines. The results of the study are to be presented to the Secretary of
Transportation in August 1997 and the Secretary is to make recommendations to
Congress in October 1997. The Company believes that the current system of a
10% ticket tax imposed on domestic fares unfairly subsidizes certain low-fare
competitors. The Company and a group of other major airlines have proposed
that the ticket tax be replaced by a system of user fees including an element
based upon a charge per originating passenger and an element based upon a
mileage charge. The Company is unable to predict the outcome of these studies
or any Congressional actions related thereto.
Following the crash of TWA Flight 800 in July 1996, the FAA implemented new
security measures primarily impacting international operations. The Company
does not believe that these measures have had any material effect on its
revenues or operating costs to date. Additionally, a special committee
appointed by the President to review aviation safety and airport security
issued its final report on February 12, 1997. The report contains several
recommendations. However, the Company is unable to predict which
recommendations will be adopted or their impact on the Company's future
operating results. Additional government mandated security measures could have
a direct adverse impact on the Company's operating costs to the extent any
such costs are directly assessed to commercial airlines or, if funded through
new taxes or user fees, could indirectly have an adverse impact on the
Company's future operating results in the event that the Company is not able
to fully pass on those charges in the form of ticket price increases.
The Company's auditors have included in their report dated March 24, 1997 on
the Consolidated Financial Statements an explanatory paragraph to the effect
that substantial doubt exists regarding the Company's ability to continue as a
going concern due to the Company's recurring losses from operations and
limited sources of additional liquidity. See the Consolidated Financial
Statements.
TWA's passenger traffic data, for scheduled passengers only and excluding
TWE, are shown in the table below for the indicated periods(1):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
NORTH AMERICA
Passenger revenues ($ millions)..................... $ 2,515 $ 2,292 $ 2,221
Revenue passenger miles (millions)(2)............... 19,513 17,902 17,543
Available seat miles (millions)(3).................. 30,201 28,194 27,963
Passenger load factor (4)........................... 64.6% 63.5% 62.7%
Passenger yield (cents)(5).......................... 12.89c 12.80c 12.66c
Passenger revenue per available seat mile (cents)
(6)................................................ 8.33c 8.13c 7.94c
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
INTERNATIONAL
Passenger revenues ($ millions)......................... $ 563 $ 544 $ 597
Revenue passenger miles (millions)(2)................... 7,598 7,000 7,363
Available seat miles (millions)(3)...................... 10,393 9,719 11,228
Passenger load factor (4)............................... 73.1% 72.1% 65.6%
Passenger yield (cents)(5).............................. 7.41c 7.78c 8.10c
Passenger revenue per available seat mile (cents)(6).... 5.42c 5.60c 5.31c
TOTAL SYSTEM
Passenger revenues ($ millions)......................... $3,078 $2,836 $2,818
Revenue passenger miles (millions)(2)................... 27,111 24,902 24,906
Available seat miles (millions)(3)...................... 40,594 37,905 39,191
Passenger load factor (4)............................... 66.8% 65.7% 63.5%
Passenger yield (cents)(5).............................. 11.35c 11.39c 11.31c
Passenger revenue per available seat mile (cents)(6).... 7.58c 7.48c 7.19c
Operating cost per available seat mile (cents)(7)....... 8.76c 8.12c 8.45c
Average daily utilization per aircraft (hours)(8)....... 9.63 9.45 9.30
Aircraft in fleet being operated at end of period....... 192 188 185
</TABLE>
- - --------
(1) Excludes subsidiary companies.
(2) The number of scheduled miles flown by revenue passengers.
(3) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(4) Revenue passenger miles divided by available seat miles.
(5) Passenger revenue per revenue passenger mile.
(6) Passenger revenue divided by scheduled available seat miles.
(7) Operating expenses, excluding special charges, earned stock compensation,
other nonrecurring charges and subsidiaries, divided by total available
seat miles.
(8) The average block hours flown per day in revenue service per aircraft.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO
THE FOUR MONTHS ENDED DECEMBER 31, 1995 AND EIGHT MONTHS ENDED AUGUST 31, 1995
In the following discussion, the results of operations for the fiscal year
ended December 31, 1996 is compared to the combined results of the four months
ended December 31, 1995 and eight months ended August 31, 1995 (twelve months
ended December 31, 1995) unless specified otherwise.
Total operating revenues of $3,554.4 million for 1996 were $237.6 million or
7.2% more than the total operating revenues of $3,316.8 million for the year
ended December 31, 1995. The increase was primarily reflected in TWA passenger
revenues which were $241.6 million higher than in 1995. Additionally, revenues
from contract work increased $15.7 million and revenue from freight and mail
increased $9.9 million. Operating revenues for 1995 included $35.9 million in
passenger revenues from Trans World Express which discontinued operations in
November 1995.
Capacity and traffic increased in 1996 as compared to 1995. System-wide
capacity, measured in ASMs, increased by 7.1% in 1996 as compared to 1995
(representing increases in domestic and international ASMs of 7.1% and 7.0%,
respectively). Passenger traffic volume, as measured by total RPMs in
scheduled service, increased 8.9% in 1996 over 1995. Passenger load factor for
1996 was 66.8% compared to 65.7% in 1995. TWA's yield per passenger mile
decreased slightly from 11.39 cents in 1995 to 11.35 cents in 1996. Although
the yield per passenger mile declined only slightly year over year, the yield
during the second half of 1996 was 10.97 cents compared to 11.40 cents during
the second half of 1995.
27
<PAGE>
Operating expenses of $3,752.9 million in 1996 reflect an increase of $461.2
million (14.0%) over the total operating expenses of $3,291.7 million for the
year ended December 31, 1995, representing a net change in the following
expense groups:
Salaries, wages and benefits of $1,254.3 million for 1996 were $125.6
million (11.1%) more than 1995, primarily due to an increase in the average
number of employees, overtime costs required due to poor operating performance
in 1996 and lower productivity levels. The Company had an average of 24,254
employees in 1996 as compared to 22,927 in 1995.
Earned stock compensation charges of $9.1 million for 1996 and $58.0 million
for 1995 represents primarily the non-cash compensation charge recorded to
reflect the expense associated with the distribution of shares of stock on
behalf of employees as part of the '95 Reorganization. Additional non- cash
compensation charges will be recorded in 1997, a substantial portion of which
will depend on the market price of the Common Stock. For a further discussion
of future charges related to non-cash compensation, see Notes 11 and 12 to the
Consolidated Financial Statements.
Aircraft fuel and oil expense of $585.2 million for 1996 was $126.6 million
(27.6%) over the total expenses of $458.6 million for the year ended December
31, 1995. The increase in expenses is primarily due to an increase in the
price of fuel (22.3%), an increase in gallons consumed (4.3%) and the
expiration in October 1995 of the airlines' exemption from paying fuel taxes
of 4.3 cents per gallon, which impacted fuel expense by approximately $13.6
million.
Passenger sales commission expense of $268.1 million for 1996 was $2.1
million (0.8%) higher than the combined expenses of $266.0 million in 1995,
and is primarily related to the $241.6 million increase in TWA passenger
revenues offset by an increase in non-commissionable international tickets.
Aircraft maintenance materials and repairs expense of $208.2 million in 1996
represented an increase of $60.5 million (41.0%) from $147.7 million for 1995.
The increase was primarily the result of higher levels of scheduled
maintenance in 1996, including heavy maintenance, a 3.6% increase in flying
hours and increased repair work performed by the Company for other air
carriers and third parties.
Depreciation and amortization expense of $161.8 million for 1996 increased
slightly from combined expenses of $161.6 million for 1995.
Operating lease rentals of $303.0 million for 1996 were $24.1 million (8.6%)
more than the total rentals of $278.9 million for 1995. The increase was
primarily due to an increase in the average number of leased aircraft from 119
in 1995 to 123 in 1996 and higher lease rates.
Passenger food and beverage expense of $110.1 million in 1996 represented an
increase of $7.3 million (7.1%) from $102.8 million for the twelve months of
1995. The increase is primarily due to the 8% increase in the number of
passengers boarded.
During the fourth quarter of 1996, special charges of $85.9 million were
recorded in connection with the Company's decision to modify its international
route structure and related aircraft fleet plan. The charges included a write-
off of the New York-Athens route ($26.7 million), international employee
severance liabilities ($5.6 million) related to the termination of service to
Athens and Frankfurt and a write-down of the L-1011 and B-747 fleets ($32.2
million) and the related inventories ($21.5 million) reflecting the planned
retirement of these fleets. These costs are based upon management's current
estimate. Actual costs could materially differ from these current estimates.
See Note 16 to the Consolidated Financial Statements for a further discussion
of these special charges. Special charges of $1.7 million were recorded in the
third quarter of 1995 related to the shutdown of TWE.
All other operating expenses of $767.2 million in 1996 represented an
increase of $79.6 million (11.6%) from $687.6 million for the year ended
December 31, 1995. An increase in flight cancellations during 1996
28
<PAGE>
resulted in increased CRS fees related thereto ($19.4 million) and interrupted
trip expenses ($3.7 million). In addition, expenses relating to maintenance
services provided under a contract with the military increased approximately
$21.6 million in 1996 compared to 1995. The Company also experienced a
significant increase in professional/technical fees ($18.7 million) which was
primarily due to the use of contract programmers for ongoing development of
new systems and external consultants' fees for re-engineering.
Other charges (credits) were a net charge of $76.1 million for 1996 as
compared to $42.7 million and $353.0 million in the four month and the eight
month periods of 1995, respectively (included in the eight month period is a
charge of $242.3 million for reorganization items in connection with the
application of fresh start reporting pursuant to the '95 Reorganization).
Interest expense decreased $42.3 million in 1996 over 1995 as a result of the
reduction of debt arising from the '95 Restructuring and additional reductions
of debt during 1996. Interest income increased by $3.5 million in 1996
primarily as a result of higher levels of invested funds. Other charges and
credits-net improved $35.8 million in 1996 compared to 1995, primarily due to
a $19.8 million improvement in the Company's share of earnings of Worldspan
and a $2.5 million credit to reflect a litigation settlement. Additionally,
other charges and credits-net for 1995 included a $14.0 million charge for
restructuring expenses.
As a result of the above, the operating loss of $198.5 million for 1996 was
$223.6 million unfavorable to the combined operating income of $10.5 million
and $14.6 million for the four month and the eight month periods of 1995,
respectively. The net loss of $284.8 million for 1996 was $57.4 million
greater than the combined loss of $227.4 for 1995. The 1996 net loss included
$9.8 million in extraordinary losses related to the early extinguishment of
debt, while the 1995 net loss included $144.4 million in extraordinary gains
related to the discharge of indebtedness pursuant to the '95 Reorganization
and the cancellation of debt between TWE and an aircraft lessor.
RESULTS OF OPERATIONS FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995 AND EIGHT
MONTHS ENDED AUGUST 31, 1995 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31,
1994
Total operating revenues of $1,098.5 million and $2,218.4 million for the
four months ended December 31, 1995 and the eight months ended August 31,
1995, respectively, were, on a combined basis, $90.9 million (2.7%) less than
1994, primarily because of an $80.5 million decrease in other revenues. This
decrease is primarily due to the sale of subsidiary companies in 1994 ($51.9
million), a decrease of $13.0 million in TWA Nippon, Inc. ("Nippon") revenues,
and a $12.3 million decrease in TWA Getaway Vacations ("Getaway Vacations")
revenue.
During 1995, passenger revenue remained virtually unchanged from 1994,
despite the adverse publicity generated by the '95 Reorganization, and in the
four months since emerging from bankruptcy, passenger revenue increased by
$48.3 million, a 5.5% improvement over the same period of 1994. System
capacity as measured by ASMs was trimmed by 3.2% on a system-wide basis in
1995 versus 1994. International capacity decreased 13.7% due to the
termination of flights to several international destinations, while domestic
capacity increased slightly (1.1%). During 1995, system traffic volume, as
measured by total RPMs, improved slightly (0.1%), the result of a decrease in
international traffic by 5.1% and an increase in domestic traffic by 2.3%.
TWA's yield per passenger mile for 1995 increased to 11.39 cents from 11.31
cents in 1994 (reflecting a domestic increase to 12.80 cents from 12.66 cents
and an international decrease to 7.78 cents from 8.10 cents).
Operating expenses of $1,088.0 million and $2,203.7 million for the four
months ended December 31, 1995 and the eight months ended August 31, 1995,
respectively, were, on a combined basis, $395.5 million (10.7%) less than the
operating expenses of $3,687.2 million for 1994, representing a net change in
the following expense groups.
Employment costs, excluding non-cash stock compensation costs, for the four
months ended December 31, 1995 and the eight months ended August 31, 1995 of
$373.0 million and $755.7 million, respectively, were, on a combined basis,
$164.8 million (12.7%) less than 1994. The reduction in employment costs
reflect a full year
29
<PAGE>
of savings realized from the '94 Labor Agreements entered into in August 1994
as the average number of employees was reduced from approximately 25,200 in
1994 to approximately 22,900 in 1995. The four months ended December 31, 1995
included the favorable impacts of changes in estimates which reduced employee
benefit costs by approximately $6.2 million. Additionally, 1994 employment
costs included a non-recurring contractual benefit accrual of approximately
$36.3 million.
During 1995, the Company distributed shares of stock to employees as part of
its financial restructuring which, together with certain other non-cash
compensation charges, resulted in an aggregate charge of $58.0 million to
operating expense. Additional non-cash compensation charges will be recorded
in 1996 and 1997, a substantial portion of which will depend on the market
price of the Common Stock at such times. For a further discussion of this
charge and future charges related to non-cash compensation, see Notes 11 and
12 to Consolidated Financial Statements.
Aircraft fuel and oil expense of $161.8 million for the four months ended
December 31, 1995 and $296.8 million for the eight months ended August 31,
1995, reflected a combined decrease of $18.9 million from 1994. The combined
effect of decreased fuel usage (5.6%), offset by a slight increase in the unit
price (1.8%), resulted in a decrease of 4.0% in fuel costs for 1995. The
average unit price of fuel was $0.57 per gallon in 1995 compared to $0.56 in
1994. Effective October 1, 1995, an exemption expired related to a federal
fuel tax of 4.3 cents per gallon on commercial jet fuel purchased for use in
domestic operations. This additional tax increased fuel costs by $7 million in
the fourth quarter of 1995. See "Item 1. Business--Aircraft Fuel".
Passenger sales commission expense of $80.0 million in the four months ended
December 31, 1995 and $186.0 million in the eight months ended August 31,
1995, respectively, together represent a decrease of $22.0 million (7.6%) from
1994. The decrease is primarily due to incentive commissions and a reduction
in the commission rate on international tickets. The four months ended
December 31, 1995 included the favorable impacts of changes in estimated
commissions which reduced commission expense by approximately $6.7 million.
Aircraft maintenance materials and repairs expense of $52.0 million and
$95.7 million for the four-month and the eight-month periods of 1995,
respectively, together represent a slight increase of $2.3 million (1.6%) over
1994.
Depreciation and amortization decreased $21.6 million (11.8%) to the
combined $55.2 million for the four months ended December 31, 1995 and the
$106.5 million for the eight months ended August 31, 1995 from $183.3 million
in 1994. The decrease is generally due to the normal decline in depreciation
as property reaches the end of its estimated economic life, partially offset
by an increase in the amortization of intangible assets arising from fresh
start reporting on the '95 Effective Date and the sale (and simultaneous
leaseback) of five Boeing 727 and two Boeing 747 aircraft in March 1995.
Operating lease rentals were $96.4 million for the last four months of 1995
and $182.5 million for the first eight months of 1995, a combined increase of
$17.6 million (6.7%) over 1994. The increase was principally due to the sale
and simultaneous leaseback of five Boeing 727s and two Boeing 747s in March
1995 and the addition of three new MD-83 aircraft in late 1995. The increase
was also due to the reclassification of the JFK International Terminal lease
from capital to operating ($3.8 million).
Passenger food and beverage expenses were $34.7 million and $68.1 million
for the four months ended December 31, 1995 and the eight months ended August
31, 1995, respectively, a combined decrease of $18.0 million (14.9%) in 1995
compared to 1994. The decrease is primarily due to decreased international
traffic and cost savings as a result of the closing of the JFK and Los Angeles
dining units in the fourth quarter of 1994.
Special charges of $1.7 million were recorded in the third quarter of 1995
related to the shut-down of TWE.
All other operating expenses, excluding special charges, aggregated $232.7
million for the four months ended December 31, 1995 and $454.9 million for the
eight months ended August 31, 1995, a combined decrease
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of $90.9 million (11.7%) compared to 1994. The decrease is primarily the
result of the operating subsidiaries sold in 1994 ($34.6 million) and
decreases in the operating costs of TWE ($14.2 million) and other subsidiaries
($27.3 million).
Other charges (credits) were a net charge of $42.7 million for the last four
months of 1995 and a net charge of $352.9 million for the first eight months
of 1995 compared to a net charge of $153.4 million in 1994. This increase of
$242.3 million was primarily due to a $242.2 million non-recurring charge
related to the Company's restructuring. Additionally, interest expense
declined by $26.2 million and investment income increased by $5.8 million. See
Note 17 to Consolidated Financial Statements.
In future periods, the amortization of reorganization value in excess of
amounts allocable to identifiable assets and certain other non-deductible
items will likely result in the Company's effective tax rate for financial
reporting periods exceeding statutory rates. See Note 5 to Consolidated
Financial Statements.
As a result of the above, the operating profit of $10.4 million for the four
months ended December 31, 1995 and $14.6 million for the eight months ended
August 31, 1995 reflected, on a combined basis, a $304.5 million improvement
from the operating loss of $279.5 million in 1994. The net loss of $30.1
million for the last four months of 1995 and $197.3 million for the first
eight months of 1995 was, on a combined basis, $208.4 million less than the
net loss of $435.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following is a discussion of the impact of significant factors affecting
TWA's liquidity position and capital resources. These comments should be read
in conjunction with, and are qualified in their entirety by, the Consolidated
Financial Statements and Notes thereto.
Liquidity
The Company's consolidated cash and cash equivalents balance at December 31,
1996 was $181.6 million (including approximately $28.3 million in cash and
cash equivalents held in its international operations and by its subsidiaries
which, based upon various foreign monetary regulations and other factors,
might not be immediately available to the Company), a $122.7 million decrease
from the December 31, 1995 balance of $304.3 million. Due to seasonal factors,
the Company's cash balances during the first quarter of each year are
typically lower than in other periods. These seasonal factors, when combined
with the large anticipated loss in the first quarter of 1997 which would
significantly exceed the loss reported in the comparable quarter of 1996, will
reduce cash balances significantly below the cash balance at December 31,
1996. In February 1997, in order to improve its liquidity, the Company entered
into an agreement with and received approximately $26 million from certain St.
Louis business enterprises, representing the advance payment for tickets for
future travel by such enterprises. The Company is currently pursuing other
projects intended to increase its cash balances.
In March 1997, the Company offered 50,000 Units ("Units"), with each Unit
consisting of (i) one 12% Senior Secured Note due 2002 (a "Note"), in the
principal amount of $1,000, and (ii) one Redeemable Warrant (a "Warrant") to
purchase 126.26 shares of Common Stock at an exercise price of approximately
$7.92 per share (the "Offering"). The Notes are secured by a lien on certain
assets of the Company, including 1) the Company's beneficial interest in its
FAA designated take-off and landing slots at three high-density, capacity-
controlled airports 2) currently-owned and hereafter-acquired defined ground
equipment of the Company used at certain domestic airports, and 3) all of the
issued and outstanding stock of (a) a wholly-owned subsidiary of TWA holding
the leasehold interest in a hangar at Los Angeles International Airport and
(b) three wholly-owned subsidiaries of TWA holding leasehold interests in
gates and related support space at certain domestic airports served by the
Company. The Company realized $47.175 million (net of discounts and
commissions and estimated expenses) in proceeds from the Offering. The Company
intends to use a portion of the proceeds from the Offering (not to exceed
approximately $5 million) to release certain of the collateral to be used to
secure the Notes from a prior existing lien and the remainder of the proceeds
for general corporate purposes.
The Offering was made pursuant to Rule 144A of the Securities Act of 1933,
as amended (the "Securities Act"), and, accordingly, the Units, Notes and
Warrants and underlying shares of Common Stock issuable upon exercise of the
Warrants are not registered under the federal and state securities laws. The
Company has agreed
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<PAGE>
to use its best efforts to file and, if declared effective, to effect, the
registration of the Notes and the Warrants under the Securities Act under
certain circumstances.
The net decrease in cash and cash equivalents during 1996 was due, in large
part, to the fact that cash used in operating activities in 1996 was $16.8
million as compared to 1995 when cash provided by operating activities was
$212.2 million. The adverse change was primarily attributable to the decrease
in 1996 operating income as compared with 1995. Additionally, pursuant to the
eight-year Karabu Ticket Program Agreement between the Company and Karabu (the
"Karabu Ticket Agreement") net discounted sales from tickets sold under the
agreement are excluded from cash provided by operating activities as the
related amounts are applied as a $62.9 million reduction of the Icahn Loans
and a $6.4 million reduction of the PBGC Notes. At December 31, 1995
approximately $2.0 million of such proceeds had been applied to the principal
balance of the Icahn Loans, while no proceeds had been applied to the PBGC
Notes. The increase of $79.5 million in trade accounts payable during 1996 was
primarily due to the Company utilizing a safe harbor provision with regard to
payment of U.S. transportation taxes of $60 million for the period September
through December 1996, a significant portion of which was paid in February
1997. Cash used in investing activities increased $106.1 million from $18.9
million in 1995 to $125.0 million in 1996. A large part of this increase was
related to capital expenditures ($121.5 million in 1996 versus $59.5 million
in 1995) which had been somewhat restricted by fiscal controls in place during
most of 1995. Financing activities provided $19.1 million of cash in 1996,
compared with a net use of cash of $27.5 million in 1995. Proceeds from long-
term debt and sale and leaseback transactions decreased from $22.1 million in
1995 to $16.6 million in 1996. Repayments of long-term debt and capital leases
required $15.4 million more cash in 1996 than in 1995. In 1996, net proceeds
from the sale of 8% Cumulative Convertible Exchangeable Preferred Stock ("8%
Preferred Stock") were $186.2 million while the early redemption of the 12%
Mandatorily Redeemable Stock and cash dividends required $81.7 million and
$14.5 million, respectively. In 1995 the net proceeds from an equity rights
offering generated $51.9 million.
As previously described, management has indicated that it is focusing on the
improvement of TWA's schedule reliability and on-time performance and that it
plans to accelerate the replacement of it's L-1011 and B-747 fleets with B-
757, B-767 and MD-80 aircraft. Management believes that these, as well as
other actions which it has taken or expects to take, should substantially
improve TWA's unit revenues and reduce its operating costs in 1997. The
Company believes that a substantial improvement in its operating results is
necessary for TWA to maintain adequate liquidity to meet its obligations
throughout the remainder of 1997. The achievement of these improved operating
results are subject to significant uncertainties, including the Company's
ability to achieve higher revenue yields and load factors, the cost of
aircraft fuel, the Company's ability to finance or lease suitable replacement
aircraft at reasonable rates and the containment of operating costs.
In March 1996 the Company completed the sale of 3,869,000 shares of its 8%
Preferred Stock for gross proceeds of approximately $193.5 million and net
proceeds to the Company of approximately $186.2 million, after commissions and
expenses. A portion of the net proceeds from the offering were used to redeem
the Company's outstanding 12% Cumulative Preferred Stock, pursuant to the
terms thereof, at an aggregate redemption price of approximately $81.7
million, plus accrued dividends from February 1, 1996 to the redemption date
of April 26, 1996. The Company utilized the balance of the net proceeds for
general corporate purposes, including but not limited to, capital expenditures
and increasing working capital.
Pursuant to the '95 Reorganization, the Company issued 600,000 ticket
vouchers, each with a face value of $50.00, which may be used for up to 50%
discount off the cost of a TWA airline ticket for transportation on TWA
("Ticket Vouchers"). Pursuant to certain agreements, the Company repurchased
approximately 236,000 of the Ticket Vouchers at an aggregate cost of $8.8
million. Payments in respect of these Ticket Vouchers were approximately
$700,000 in 1995 and approximately $8.1 million in 1996. Concurrently, the
Company undertook aircraft lease payment deferrals to increase liquidity and
improve the Company's financial condition. Gross deferrals of lease and
conditional sale indebtedness payments aggregated approximately $91.0 million
with a weighted average repayment period of approximately two years. The
aircraft lease payment deferrals contemplated by the '95 Reorganization
generally anticipated six month deferrals with various payback periods,
extending in some instances over the remaining life of the lease, and in other
cases over a specified period. Cash repayments of lease deferrals, including
interest, were approximately $9.5 million in the fourth quarter of 1995, $23.8
million in 1996 and are expected to approximate $8.7 million in 1997.
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On June 14, 1995, the Company signed an agreement (the "Extension and
Consent Agreement") with Karabu to extend the term of the Icahn Loans from
January 8, 1995 to January 8, 2001, to obtain the consent of Karabu and the
Icahn Entities to certain modifications to certain promissory notes issued to
the PBGC in connection with the '93 Reorganization (the "PBGC Notes") and to
obtain agreement with the Icahn Entities to refrain from exercising the right
to terminate certain pension plans, covering employees of the Company as to
which Mr. Icahn and the Icahn Entities assumed certain obligations in the '93
Reorganization. Any such termination would not increase the obligations of TWA
under the PBGC Notes or other obligations of TWA to Mr. Icahn, the Icahn
Entities or the PBGC. Collateral for the Icahn Loans includes a number of
aircraft, engines and related equipment, along with substantially all of the
Company's receivables. On June 26, 1995, the Company made a $12.6 million
interest payment on the Icahn Loans. At December 31, 1996, the outstanding
balance of the Icahn Loans was approximately $125.1 million (excluding
approximately $4.7 million in accrued and unpaid interest). The notes
evidencing the Icahn Loans have been pledged by Mr. Icahn and certain
affiliated entities as security for certain obligations of the Icahn Entities
to the PBGC and /or in respect of funding obligations on the Company's pre-'93
Reorganization pension plans.
On June 14, 1995, in consideration of, among other things, the extension of
the Icahn Loans, TWA and Karabu entered into an eight-year Karabu Ticket
Program Agreement (the "Ticket Agreement"). There are two categories of
tickets under the Ticket Agreement: (1) "Domestic Consolidator Tickets," which
are subject to a cap of $610 million, based on the full retail price of the
tickets ($120 million in the first 15 months and $70 million per year for
seven consecutive years through the term of the Ticket Agreement) and (2)
"System Tickets," which are not subject to any cap throughout the term of the
Ticket Agreement.
Tickets sold by the Company to Karabu pursuant to the Ticket Agreement are
priced at levels intended to approximate current competitive discount fares
available in the airline industry. The Ticket Agreement provides that no
ticket may be included with an origin or destination of St. Louis, nor may any
ticket include flights on other carriers. Tickets sold by Karabu pursuant to
the Ticket Agreement are required to be at fares specified in the Ticket
Agreement, net to TWA, and exclusive of tax. No commissions will be paid by
TWA for tickets sold under the Ticket Agreement, and TWA believes that under
the applicable provisions of the Ticket Agreement, Karabu may not market or
sell such tickets through travel agents. Karabu, however, has been marketing
tickets through travel agents. TWA has demanded that Karabu cease doing so and
Karabu has stated that it disagrees with the Company's interpretation
concerning sales through travel agents. In December 1995, the Company filed a
lawsuit against Karabu, Mr. Icahn and affiliated companies seeking damages and
to enjoin further violations. Mr. Icahn countered threatening to attempt to
declare a default on the Icahn Loans on a variety of claims related to his
various interpretations of the security documents related to such loans as
well as with respect to alleged violations of the Ticket Agreement by the
Company. A violation of the Ticket Agreement by the Company could result in a
cross-default under the Icahn Loans. Mr. Icahn also alleged independent
violations of the Icahn Loans, including, among other things, that the Company
has not been maintaining, as required by the terms of the Icahn Loans, certain
aircraft which TWA has retired from service and stored which are pledged as
security for the Icahn Loans.
To endeavor to eliminate this issue from the various disputes with Mr.
Icahn, the Company has deposited an amount equal to the appraised fair market
value with a security trustee and requested the release of the liens on such
aircraft. To date, the Trustee has not released such liens. The parties
negotiated a series of standstill agreements pursuant to which TWA's original
lawsuit was withdrawn, while the Company and Mr. Icahn endeavored to negotiate
a settlement of their differences and respective claims. Those negotiations
reached an impasse and the Company re-filed its suit on March 20, 1996 in the
St. Louis County Circuit Court. Also on March 20, 1996, Karabu and certain
other companies controlled by Mr. Icahn filed suit against the Company
alleging violations by the Company of the Ticket Agreement and federal anti-
trust laws. On March 24, 1997, the federal District Court for the Southern
District of New York, on the Company's motion, dismissed the suit in its
entirety. If Karabu's interpretation as to sales of discount tickets to the
general public through travel agents was determined by a court or otherwise to
be correct and the Company did not otherwise take appropriate action to
mitigate the effect of such sales, the Company could suffer significant loss
of revenue so as to reduce overall passenger yields on a continuing basis
during the term of the Ticket Agreement. In addition, any default by the
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<PAGE>
Company under the ticket agreement or directly on the Icahn loans which
resulted in an acceleration of the Icahn Loans could result in a cross-default
to the Company's other indebtedness and leases and otherwise have a material
adverse effect on the Company.
Domestic Consolidator Tickets sold under the Ticket Agreement are limited to
certain origin/destination city markets in which TWA has less than a 5% market
share limit except for New York where there is a 10% limit. These restricted
markets will be reviewed from time to time to determine any change in TWA's
market share, and other markets may be designated as necessary.
The purchase price for the tickets purchased by Karabu are required to
either, at Karabu's option, be retained by Karabu and the amount so retained
credited as prepayments against the outstanding balance of the Icahn Loans, or
be paid over by Karabu to a settlement trust established in connection with the
'93 Reorganization for TWA's account as prepayments on the PBGC Notes. At
December 31, 1996, approximately $64.9 million of such proceeds had been
applied to the principal balance of the Icahn Loans and $6.4 million had been
applied to the PBGC Notes.
The Company elected to pay interest, due August 1, 1995 and February 1, 1996,
on its 12% Senior Secured Reset Notes, in shares of Common Stock. The amount of
such interest aggregated approximately $10.4 million and $10.2 million,
respectively, and resulted in the issuance of approximately 1.9 million and 1.1
million shares of Common Stock on the respective dates. The Company elected to
pay dividends due February 1, 1996 on its 12% Preferred Stock for the period
from November 1, 1995 to and including January 31, 1996, in the amount of
approximately $3.3 million, in shares of Common Stock.
Capital Resources
TWA has no unused credit lines and must satisfy all of its working capital
and capital expenditure requirements from cash provided by operating
activities, from external borrowings or from the sale of assets. Substantially
all of TWA's strategic assets, including its owned aircraft, ground equipment,
gates, slots and overhaul facilities, have been pledged to secure various
issues of outstanding indebtedness of the Company. Sales of such assets which
are not replaced would, under the terms of applicable financing agreements,
generally require payment of the indebtedness secured thereby, which
indebtedness in many cases would likely exceed the immediately realizable value
of such assets. TWA has relatively few non-strategic assets which it could
monetize, substantially all of such assets being subject to various liens and
security interests which would restrict and/or limit the ability of TWA to
realize any significant proceeds from the sale thereof. To the extent that the
Company's access to capital is constrained, the Company may not be able to make
certain capital expenditures or implement certain other aspects of its
strategic plan, and the Company may therefore be unable to achieve the full
benefits expected therefrom.
As a result of the redemption of the 12% Mandatorily Redeemable Preferred
Stock, certain of TWA's leasehold interests in domestic airport gates were
released as collateral and are now unencumbered. As a result of the exchange of
common stock for 12% Senior Secured Notes as described in Note 8 to the
Consolidated Financial Statements, liens on the stock of wholly owned
subsidiary which owns TWA's interest in a hangar at Los Angeles International
Airport and a floating lien on certain of TWA's domestic airport ground
equipment were released as collateral and are also now unencumbered. In
addition, based on the current level of outstanding 12% Senior Secured Notes,
TWA expects that certain slots at New York's LaGuardia and JFK airports, as
well as Chicago's O'Hare airport, will be released as security for the 12%
Senior Secured Notes.
Commitments
In February 1996, TWA executed definitive agreements providing for the
operating lease of 10 new B-757 aircraft to be delivered in 1996 and 1997 with
deliveries commencing in July 1996. Although individual aircraft rentals
escalate over the term of the leases, aggregate rental obligations are
estimated to average approximately $50 million per annum over the lease terms
after all 10 aircraft have been delivered. These aircraft have an initial lease
term of 10 years. As of February 28, 1997, the Company has taken delivery of
six leased B-757 aircraft. The Company also entered into an agreement in
February 1996 with Boeing for the purchase of ten B-757 aircraft and related
engines, spare parts and equipment for an aggregate purchase price of
approximately $500
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<PAGE>
million. The agreement requires the delivery of the aircraft in 1997, 1998 and
1999, and provides for the purchase of up to ten additional aircraft.
Furthermore, to the extent TWA exercises its options for additional aircraft,
the Company will have the right to an equal number of additional option
aircraft. TWA has obtained commitments for debt financing for approximately
80% of the total costs associated with the acquisition of eight of the
original ten aircraft and obtained commitments for 100% lease financing of the
total costs of the remaining two original aircraft. Such commitments are
subject to, among other things, so-called material adverse change clauses
which, given the Company's financial results for 1996 and anticipated results
for the first quarter of 1997, could make the availability of such debt and
lease financing dependent upon the lender's and lessor's ongoing evaluation of
and satisfaction with the financial condition of TWA.
TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce plc
relating to the purchase of ten A330-300 twin-engine wide body aircraft and
related engines, spare parts and equipment for an aggregate purchase price of
approximately $1.1 billion. The agreements, as amended, require the delivery
of the aircraft in 1999 and 2000 and provide for the purchase of up to ten
additional aircraft. TWA has not yet made arrangements for the permanent
financing of the purchases subject to the agreements. In the event of
cancellation, predelivery payments of approximately $18 million would be
subject to forfeiture.
The Company has entered into an agreement to acquire from the manufacturer
fifteen new MD- 83s. The long-term leasing arrangement provides for delivery
of the aircraft between the second half of 1997 and April 1999.
TWA has elected to comply with the transition requirements of the Noise Act
by adopting the Stage 2 aircraft phase-out/retrofit option, which requires
that 50% of its base level (December 1990) Stage 2 fleet be phased-
out/retrofitted by December 31, 1996, 75% by December 31, 1998 and 100% by
December 31, 1999. To comply with the 1996 requirement, the Company has
retrofitted, by means of engine hush-kits, 30 of its DC-9 aircraft. The
aggregate cost of these hush-kits is estimated to be $49 million, most of
which has been financed by lessors with repayments being facilitated through
increased rental rates.
TWA's capital expenditures for 1997 are currently anticipated to total
approximately $107 million, including approximately $91 million for flight
equipment related expenditures (e.g., progress payments for aircraft and the
purchase of related aircraft engines and spare parts). While the Company is
seeking financing for certain of its planned capital expenditures, a
substantial portion of such expenditures are expected to utilize internally
generated funds. The inability to finance or otherwise fund such expenditures
could materially adversely affect the ability of the Company to implement its
strategic plan.
CERTAIN OTHER CAPITAL REQUIREMENTS
Expenditures for facilities and equipment, other than aircraft, generally
are not committed prior to purchase and, therefore, no such significant
commitments exist at the present time. TWA's ability to finance such
expenditures will depend in part on TWA's financial condition at the time of
the commitment.
Availability of NOLs
The Company estimates that it had, for federal income tax purposes, net
operating loss carryforwards ("NOLs") amounting to approximately $625 million
at December 31, 1996, which includes increases in the NOLs as originally
filed. Such NOLs expire in 2008 through 2011 if not utilized before then to
offset taxable income. Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations issued thereunder, impose limitations on
the ability of corporations to use NOLs, if the corporation experiences a more
than 50% change in ownership during certain periods. In connection with the
change of ownership caused by the '95 Reorganization, the Company elected to
reduce its NOLs in accordance with Section 382 of the Code and regulations
issued thereunder. If another ownership change were to occur prior to
September 1997, the annual limitation on the Company's utilization of its then
existing NOLs would be reduced to zero. Changes in ownership in periods
thereafter could substantially restrict the Company's ability to utilize its
tax net operating loss carryforwards. There can be no assurance that an
ownership change will not occur in the future. In addition, the NOLs are
subject to examination by the IRS, and thus, are subject to adjustment or
disallowance resulting from any such IRS examination. For financial reporting
purposes, the tax benefits from tax net operating loss
35
<PAGE>
carryforwards arising prior to the '95 Effective Date will, to the extent
realized in future periods, have no impact on the Company's operating results,
but instead be applied to reduce reorganization value in excess of amounts
allocable to identifiable assets.
FORWARD-LOOKING STATEMENTS
Certain statements made above relating to plans, conditions, objectives, and
economic performance go beyond historical information and may provide an
indication of future results. To that extent, they are forward-looking
statements within the meaning of Section 21E of the Exchange Act, and each is
subject to factors that could cause actual results to differ from those in the
forward-looking statement. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements, which appears on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding the identification of the
Company's directors and executive officers is incorporated by reference to
information contained under the caption "Directors and Executive Officers" of
the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 29, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
information contained under the caption "Executive Compensation" of the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 29, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 29, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 29, 1997.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Schedules. See Index to Financial Statements and
Schedules, which appears on age F-1 hereof.
Reports on Form 8-K. The following reports on Form 8-K have been filed.
(1) A Form 8-K was filed on October 25, 1996, reporting the resignation
of Jeffrey H. Erickson as President and Chief Executive Officer.
(2) A Form 8-K was filed on December 16, 1996, reporting the appointment
of the Company's interim management team.
Exhibits. The exhibits listed on the Exhibit Index following the signature
page hereof are filed herewith in response to this Item.
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<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditors' Report.......................................... F-2
Statements of Consolidated Operations for the Year Ended December 31,
1996, the Four Months Ended December 31, 1995, the Eight Months Ended
August 31, 1995, and the Year Ended December 31, 1994................ F-3
Consolidated Balance Sheets, December 31, 1996 and 1995............... F-4
Statements of Consolidated Cash Flows for the Year Ended December 31,
1996, the Four Months Ended December 31, 1995, the Eight Months Ended
August 31, 1995, and the Year Ended December 31, 1994................ F-6
Consolidated Statements of Shareholders' Equity (Deficiency) for the
Year Ended December 31, 1996, the Four Months Ended December 31,
1995, the Eight Months Ended August 31, 1995, and the Year Ended
December 31, 1994.................................................... F-8
Notes to Consolidated Financial Statements............................ F-9
SCHEDULE:
II Valuation and Qualifying Accounts.................................. S-1
</TABLE>
SCHEDULES OMITTED
Schedules not filed herewith are omitted because of the absence of conditions
under which they are required or because the information called for is shown in
the financial statements or notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Trans World Airlines, Inc.
We have audited the accompanying consolidated balance sheets of Trans World
Airlines, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related statements of consolidated operations, cash flows and shareholders'
equity (deficiency) for the year ended December 31, 1996, the four months
ended December 31, 1995, the eight months ended August 31, 1995 and the year
ended December 31, 1994. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule
for the year ended December 31, 1996, the four months ended December 31, 1995,
the eight months ended August 31, 1995 and the year ended December 31, 1994.
These consolidated financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans
World Airlines, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the year ended
December 31, 1996, the four months ended December 31, 1995, the eight months
ended August 31, 1995 and the year ended December 31, 1994, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the
consolidated financial statements reflect the application of fresh start
reporting as of September 1, 1995 and, therefore, are not comparable in all
respects to the consolidated financial statements for periods prior to such
date.
The accompanying consolidated financial statements have been prepared
assuming that Trans World Airlines, Inc. and subsidiaries will continue as a
going concern. The company's recurring losses from operations and its limited
sources of additional liquidity raise substantial doubt about the entity's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
March 24, 1997
F-2
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger................ $3,077,905 $ 943,077 $1,929,166 $2,875,851
Freight and mail......... 153,076 48,384 94,784 149.932
All other................ 323,426 107,013 194,405 381,919
---------- ---------- ---------- ----------
Total.................. 3,554,407 1,098,474 2,218,355 3,407,702
---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and
benefits................ 1,254,341 373,041 755,708 1,293,570
Earned stock compensation
(Note 12)............... 9,056 2,192 55,767 -
Aircraft fuel and oil.... 585,163 161,799 296,833 477,555
Passenger sales
commissions............. 268,131 80,045 185,981 288,000
Aircraft maintenance
materials and repair.... 208,183 51,998 95,657 145,321
Depreciation and
amortization............ 161,822 55,168 106,474 183,283
Operating lease rentals.. 302,990 96,393 182,548 261,365
Passenger food and
beverages............... 110,092 34,676 68,137 120,804
Special charges (Note
16)..................... 85,915 -- 1,730 138,849
All other................ 767,241 232,716 454,878 778,449
---------- ---------- ---------- ----------
Total.................. 3,752,934 1,088,028 2,203,713 3,687,196
---------- ---------- ---------- ----------
Operating income (loss).... (198,527) 10,446 14,642 (279,494)
---------- ---------- ---------- ----------
Other charges (credits):
Interest expense
(contractual interest of
$141,967 for the eight
months ended August 31,
1995).................... 126,822 45,917 123,247 195,352
Interest and investment
income................... (21,309) (7,484) (10,366) (12,058)
Disposition of assets,
gains and losses-net
(Note 15)................ 1,135 (3,330) 206 (1,072)
Reorganization items (Note
19)...................... -- -- 242,243 -
Other charges and credits-
net (Note 17)............ (30,598) 7,611 (2,379) (28,847)
---------- ---------- ---------- ----------
Total.................. 76,050 42,714 352,951 153,375
---------- ---------- ---------- ----------
Loss before income taxes
and extraordinary items... (274,577) (32,268) (338,309) (432,869)
Provision (credit) for in-
come taxes (Note 5)....... 450 1,370 (96) 960
---------- ---------- ---------- ----------
Loss before extraordinary
items..................... (275,027) (33,638) (338,213) (433,829)
Extraordinary items, net of
income taxes (Note 14).... (9,788) 3,500 140,898 (2,005)
---------- ---------- ---------- ----------
Net loss................... (284,815) (30,138) (197,315) (435,834)
Preferred stock dividend
requirements.............. 36,649 4,751 11,554 15,000
---------- ---------- ---------- ----------
Loss applicable to common
shares.................... $ (321,464) $ (34,889) $ (208,869) $ (450,834)
========== ========== ========== ==========
Per share amounts:
Loss before extraordinary
item and special dividend
requirements............. $ (6.60) $ (1.15)
Extraordinary item and
special dividend
requirements............. (.67) .10
---------- ----------
Net loss.................. $ (7.27) $ (1.05)
========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY
---------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 181,586 $ 304,340
Receivables, less allowance for doubtful accounts,
$12,939 in 1996 and $13,517 in 1995 (Note 8)........... 239,496 226,451
Spare parts, materials and supplies, less allowance for
obsolescence, $11,563 in 1996 and $2,201 in 1995 (Note
8)..................................................... 111,239 143,374
Prepaid expenses and other.............................. 54,121 41,482
---------- ----------
Total................................................ 586,442 715,647
---------- ----------
Property (Notes 8,9 and 18):
Property owned:
Flight equipment....................................... 339,150 303,248
Prepayments on flight equipment........................ 39,072 -
Land, buildings and improvements....................... 59,879 54,722
Other property and equipment........................... 60,750 39,032
---------- ----------
Total owned property................................. 498,851 397,002
Less accumulated depreciation.......................... 71,810 18,769
---------- ----------
Property owned--net.................................. 427,041 378,233
---------- ----------
Property held under capital leases:
Flight equipment....................................... 172,812 172,812
Land, buildings and improvements....................... 54,761 54,761
Other property and equipment........................... 6,570 6,862
---------- ----------
Total property held under capital leases............. 234,143 234,435
Less accumulated amortization.......................... 46,977 12,602
---------- ----------
Property held under capital leases--net.............. 187,166 221,833
---------- ----------
Total property--net.................................. 614,207 600,066
---------- ----------
Investments and other assets:
Investments in affiliated companies (Note 4)............ 108,173 98,156
Investments, receivables and other (Note 9)............. 188,331 178,347
Routes, gates and slots--net............................ 401,659 450,916
Reorganization value in excess of amounts allocable to
identifiable assets--net............................... 783,127 825,079
---------- ----------
Total................................................ 1,481,290 1,552,498
---------- ----------
$2,681,939 $2,868,211
========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY
----------------------
1996 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt (Note 8)........... $ 92,447 $ 67,566
Current obligations under capital leases (Note 9)....... 42,501 42,835
Advance ticket sales.................................... 241,516 209,936
Accounts payable, principally trade..................... 216,675 137,140
Accounts payable to affiliated companies (Note 4)....... 4,894 6,104
Accrued expenses:
Employee compensation and vacations earned............. 116,846 101,637
Contributions to retirement and pension trusts (Note
6).................................................... 14,091 17,716
Interest on debt and capital leases.................... 39,420 44,710
Taxes.................................................. 19,018 16,995
Other accrued expenses................................. 203,184 195,454
---------- ----------
Total accrued expenses............................... 392,559 376,512
---------- ----------
Total................................................ 990,592 840,093
---------- ----------
Long-Term Liabilities and Deferred Credits:
Long-term debt, less current maturities (Note 8)........ 608,485 764,031
Obligations under capital leases, less current
obligations (Note 9)................................... 220,790 259,630
Postretirement benefits other than pensions (Note 6).... 471,171 461,346
Noncurrent pension liabilities (Note 6)................. 30,716 21,253
Other noncurrent liabilities and deferred credits....... 122,080 157,573
---------- ----------
Total................................................ 1,453,242 1,663,833
---------- ----------
Mandatorily redeemable 12% preferred stock,(aggregate
liquidation preference of $111,179 in 1995)(Note 10).... -- 61,430
---------- ----------
Commitments and Contingent Liabilities (Notes
1,2,3,6,7,8,9,11,12,16,18)
Shareholders' equity:
8% cumulative convertible exchangeable preferred stock,
$50 liquidation preference; 3,869 shares issued and
outstanding............................................ 39 -
Employee preferred stock, $0.01 liquidation preference;
special voting rights; shares issued and outstanding;
1996-5,681; 1995-5,277................................. 57 53
Common Stock, $0.01 par value; shares issued and
outstanding; 1996-41,763; 1995-35,129.................. 418 351
Additional paid-in capital.............................. 552,544 332,589
Accumulated deficit..................................... (314,953) (30,138)
---------- ----------
Total................................................ 238,105 302,855
---------- ----------
$2,681,939 $2,868,211
========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net loss.................. $ (284,815) $ (30,138) $ (197,315) $ (435,834)
Adjustments to reconcile
net loss to net cash
provided (used) by
operating activities:
Employee earned stock
compensation............ 9,056 2,192 55,767 --
Depreciation and
amortization............ 161,822 55,168 106,474 183,283
Amortization of discount
and expenses on debt.... 14,744 3,063 12,472 18,571
Extraordinary loss (gain)
on extinguishment of
debt.................... 9,788 (3,500) (140,898) --
Interest paid in common
stock................... 11,332 11,587 -- --
Equity in undistributed
earnings of affiliates
not consolidated........ (10,017) 12,169 (2,339) 5,517
Revenue from Icahn ticket
program................. (71,534) (4,356) -- --
Net gains-losses on
disposition of assets... 1,135 (3,330) 206 (1,072)
Non-cash special charges. 85,915 -- -- 119,829
Reorganization items..... -- -- 242,243 --
Change in operating
assets and liabilities:
Decrease (increase) in:
Receivables........... 3,927 69,121 (62,094) 37,628
Inventories........... (4,897) 510 5,866 1,259
Prepaid expenses and
other current assets. (10,639) 7,686 2,244 6,963
Other assets.......... 111 (3,088) (1,586) (10,079)
Increase (decrease) in:
Accounts payable and
accrued expenses..... 62,594 (40,047) 105,084 48,587
Advance ticket sales.. 19,698 (39,350) 81,598 (33,890)
Benefits, other
noncurrent
liabilities and
deferred credits..... (15,057) (5,559) (27,667) 65,182
---------- --------- ---------- ----------
Net cash provided
(used).............. (16,837) 32,128 180,055 5,944
---------- --------- ---------- ----------
Cash Flows from Investing
Activities:
Proceeds from sales of
property................. 3,234 7,069 2,221 76,240
Capital expenditures...... (121,547) (42,973) (16,554) (44,897)
Net decrease (increase) in
investments, receivables
and other................ (6,708) 16,397 14,926 23,733
---------- --------- ---------- ----------
Net cash provided
(used).............. (125,021) (19,507) 593 55,076
---------- --------- ---------- ----------
Cash Flows from Financing
Activities:
Proceeds from long-term
debt issued.............. 2,750 22,100 -- 6,213
Proceeds from sale and
leaseback of certain
aircraft................. 13,800 -- -- --
Repayments on long-term
debt and capital lease
obligations.............. (117,203) (39,654) (62,158) (116,331)
Net proceeds from sale of
preferred stock.......... 186,163 -- -- --
Net proceeds from exercise
of equity rights,
warrants and options..... 1,034 51,930 -- --
Redemption of 12%
Preferred Stock.......... (81,749) -- -- --
Cash dividends paid on
preferred stock.......... (14,489) -- -- --
Increase (decrease) in
checks outstanding and
other.................... 28,798 (2,770) 3,092 276
---------- --------- ---------- ----------
Net cash provided
(used).............. 19,104 31,606 (59,066) (109,842)
---------- --------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents. (122,754) 44,227 121,582 (48,822)
Cash and cash equivalents
at beginning of period.... 304,340 260,113 138,531 187,353
---------- --------- ---------- ----------
Cash and cash equivalents
at end of period.......... $ 181,586 $ 304,340 $ 260,113 $ 138,531
========== ========= ========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Paid During the
Period for:
Interest.............. $102,311 $27,318 $ 55,878 $110,287
======== ======= ======== ========
Income taxes.......... $ 159 $ 7 $ 39 $ 24
======== ======= ======== ========
Information About
Noncash Operating,
Investing and Financing
Activities:
Promissory notes
issued to finance
aircraft acquisition. $ 10,565 $ -- $ -- $ --
======== ======= ======== ========
Promissory notes
issued to finance
aircraft predelivery
payments............. $ 19,862 $ -- $ 12,690 $ 7,000
======== ======= ======== ========
Property acquired and
obligations recorded
under new capital
lease transactions... $ 4,266 $ -- $ 12,690 $ 7,000
======== ======= ======== ========
Partial interest on
debt paid in kind,
issued and valued at
principal amount..... $ -- $ 574 $ 18,496 $ --
======== ======= ======== ========
Common Stock issued in
lieu of cash
dividends on
mandatorily
redeemable 12%
preferred stock...... $ 3,255 $ -- $ -- $ --
======== ======= ======== ========
Exchange of long-term
debt for common
stock:
Debt cancelled
including accrued
interest, net of
unamortized
discount........... $ 41,021 $ -- $ -- $ --
Common stock issued,
at fair value...... 49,182 -- -- --
-------- ------- -------- --------
Extraordinary loss.. $ 8,161 $ -- $ -- $ --
======== ======= ======== ========
</TABLE>
ACCOUNTING POLICY
For purposes of the Statements of Consolidated Cash Flows, TWA considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
See Notes to Consolidated Financial Statements
F-7
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
12% 8% EMPLOYEE PAID-IN
PREFERRED PREFERRED PREFERRED COMMON CAPITAL ACCUMULATED
STOCK STOCK STOCK STOCK (DEFICIENCY) DEFICIT TOTAL
--------- --------- --------- ------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance, December 31,
1993................... $ 125 $ - $ - $ 200 $ 105,925 $ (87,892) $ 18,358
Net loss for 1994....... -- -- -- -- -- (435,834) (435,834)
----- ---- ---- ----- --------- ---------- ---------
Balance, December 31,
1994................... 125 -- -- 200 105,925 (523,726) (417,476)
Net loss for the eight
months ended August 31,
1995................... -- -- -- -- -- (197,315) (197,315)
Eliminate Predecessor
equity accounts in
connection with fresh
start reporting........ (125) -- -- (200) (105,925) 35,817 (70,433)
Record additional excess
of reorganization value
over identifiable
assets................. -- -- -- -- -- 685,224 685,224
Issuance of Common and
Employee Preferred
Stock pursuant to Plan
of Reorganization...... -- -- 53 172 269,775 -- 270,000
----- ---- ---- ----- --------- ---------- ---------
Balance, August 31,
1995................... -- -- 53 172 269,775 -- 270,000
REORGANIZED COMPANY:
Equity rights exercised. -- -- -- 132 51,727 -- 51,859
Interest on 12% Notes
paid in Common Stock... -- -- -- 19 11,568 -- 11,587
Options and warrants
exercised.............. -- -- -- 28 43 -- 71
Earned Stock
Compensation........... -- -- -- -- 2,046 -- 2,046
Amortization of the
excess of redemption
value over carrying
value of Mandatorily
Redeemable 12%
Preferred Stock........ -- -- -- -- (2,570) -- (2,570)
Net loss for the four
months ended December
31, 1995............... -- -- -- -- -- (30,138) (30,138)
----- ---- ---- ----- --------- ---------- ---------
Balance, December 31,
1995................... -- -- 53 351 332,589 (30,138) 302,855
Warrants exercised...... -- -- -- 4 68 -- 72
Options exercised....... -- -- -- 2 1,248 -- 1,250
Earned Stock
Compensation........... -- -- -- -- 6,875 -- 6,875
Allocation of employee
preferred stock to ALPA
ESOP................... -- -- 6 -- (6) -- --
Conversion of employee
preferred stock to
Common Stock........... -- -- (2) 2 -- -- --
Net proceeds from
issuance of 8%
preferred stock........ -- 39 -- -- 186,124 -- 186,163
Dividends on 8%
preferred stock paid in
cash................... -- -- -- -- (11,349) -- (11,349)
Dividends on mandatorily
redeemable 12%
preferred stock paid in
Common Stock........... -- -- -- 3 (3) -- --
Dividends on mandatorily
redeemable 12%
preferred stock paid in
cash................... -- -- -- -- (3,140) -- (3,140)
Amortization of the
excess of redemption
value over carrying
value of mandatorily
redeemable 12%
preferred stock........ -- -- -- -- (328) -- (328)
Excess of cash paid for
early redemption of
mandatorily redeemable
12% preferred stock
over carrying value.... -- -- -- -- (19,992) -- (19,992)
Common Stock issued in
exchange for 12% notes. -- -- -- 45 49,137 -- 49,182
Interest on 12% Notes
paid in Common Stock... -- -- -- 11 11,321 -- 11,332
Net loss for 1996....... -- -- -- -- -- (284,815) (284,815)
----- ---- ---- ----- --------- ---------- ---------
Balance, December 31,
1996................... $ - $ 39 $ 57 $ 418 $ 552,544 $ (314,953) $ 238,105
===== ==== ==== ===== ========= ========== =========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL CONDITION AND LIQUIDITY:
Trans World Airlines, Inc. ("TWA" or the "Company") has undergone two
reorganizations under Chapter 11 of the Bankruptcy Code since 1992, as further
described in Note 3--Chapter 11 Reorganizations. In August 1995 the Company
emerged from the most recent bankruptcy proceeding and thereafter, through the
second quarter of 1996, the Company had experienced improvements in its
operating performance as operating income had increased to $7.8 million in six
months ended June 30, 1996, as compared to an operating loss of $21.9 million
in the same period of 1995. However, beginning in the third quarter of 1996,
the Company's operating performance substantially deteriorated as the
Company's operating profit for the third quarter, typically the strongest
period of the year, declined to $26.0 million in the three months ended
September 30, 1996, as compared to a combined operating profit (excluding
special charges and earned stock compensation charges aggregating $57.9
million) of $103.7 million in the comparable period of the prior year. The
results of the fourth quarter of 1996 evidenced a further acceleration of
deterioration as the Company reported an operating loss (excluding special
charges) of $146.5 million, as compared to operating income of $1.1 million in
the same period of 1995. In the second half of 1996, the Company's revenues
increased only 2.4%, while capacity operated, measured in ASMs, increased by
6.9%, as compared to the second half of 1995. Operating costs, excluding
earned stock compensation and special charges, increased 16.0% over this same
period. The most significant increases were; salaries, wages and benefits
($82.4 million), which reflected the increased number of employees and
additional overtime costs; fuel ($69.4 million), reflecting significantly
higher units costs and increased usage; and maintenance costs. Notwithstanding
the actions taken and planned by management to improve the Company's future
operating results as described below, management expects that its first
quarter 1997 operating loss will significantly exceed that reported in the
first quarter of 1996.
In light of the deterioration in the Company's operating results, management
has over the last several months refocused and accelerated certain aspects of
its business strategy, including its fleet modernization and consolidation
plan, route structure and facility improvements and efficiencies. Management
believes that its recent operating results have been adversely affected by an
aggressive increase in capacity, which when combined with unexpected
maintenance delays and related costs, has negatively impacted schedule
reliability resulting in excessive levels of flight cancellations and
deterioration in its on-time performance. The Company believes that this has
adversely affected its unit revenues (principally yields) and costs. In
response to these issues, management has taken action to accelerate the phase
out of all B-747 and L-1011 aircraft, reduce low yield domestic JFK feed
service, curtail and/or eliminate historically unprofitable international
routes and consolidate for the near term most operations at JFK to a single
terminal. The above actions are designed to improve its operational
performance and make its product more attractive to the business segment which
offers higher yields. The Company has also curtailed the amount of contract
maintenance services provided to third parties and redeployed those resources
to TWA's aircraft. Furthermore, the Company has reviewed its route structure
and fleet plan. The Company recently announced that it would discontinue
service to Athens and Frankfurt and that it would undertake to accelerate the
replacement of its L-1011 and B-747 aircraft with newer and smaller sized
aircraft, specifically B-757, B-767 and MD-80 aircraft. Management believes
such aircraft will better match the market demands in cities served and
provide efficiencies relative to the costs of fuel, flight crews and
maintenance. The Company plans to retire its remaining fleet of L-1011 and B-
747 aircraft in 1997, although the implementation of this plan could be
delayed if suitable replacement aircraft can not be obtained within this time
frame. The Company has also determined to consolidate a substantial potion of
its operations at JFK into a single terminal which should result in reductions
in labor and other costs and improve the overall utilization of this facility.
In connection with the above described plans, management has announced a
comparable reduction in employee headcount. Management may undertake further
actions to reduce costs which may result in additional reductions of the
number of employees.
The Company's consolidated cash and cash equivalents balance at December 31,
1996 was $181.6 million (including approximately $28.3 million in cash and
cash equivalents held in its international operations and by
F-9
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
its subsidiaries which, based upon various foreign monetary regulations and
other factors, might not be immediately available to the Company), a $122.7
million decrease from the December 31, 1995 balance of $304.3 million. Due to
seasonal factors, the Company's cash balances during the first quarter of each
year are typically lower than in other periods. These seasonal factors, when
combined with the large anticipated loss in the first quarter of 1997 which
would significantly exceed the loss reported in the comparable quarter of
1996, will reduce cash balances significantly below the cash balance at
December 31, 1996. In February 1997, in order to improve its liquidity, the
Company entered into an agreement with and received approximately $26 million
from certain St. Louis business enterprises, representing the advance payment
for tickets for future travel by such enterprises. The Company is currently
pursuing other projects intended to increase its cash balances.
In March 1997, the Company offered 50,000 Units ("Units"), with each Unit
consisting of (i) one 12% Senior Secured Note due 2002 (a "Note"), in the
principal amount of $1,000, and (ii) one Redeemable Warrant (a "Warrant") to
purchase 126.26 shares of Common Stock at an exercise price of approximately
$7.92 per share (the "Offering"). The Notes are secured by a lien on certain
assets of the Company, including 1) the Company's beneficial interest in its
FAA designated take-off and landing slots at three high-density, capacity-
controlled airports 2) currently-owned and hereafter-acquired defined ground
equipment of the Company used at certain domestic airports, and 3) all of the
issued and outstanding stock of (a) a wholly-owned subsidiary of TWA holding
the leasehold interest in a hangar at Los Angeles International Airport and
(b) three wholly-owned subsidiaries of TWA holding leasehold interests in
gates and related support space at certain domestic airports served by the
Company. The Company realized $47.175 million (net of discounts and
commissions and estimated expenses) in proceeds from the Offering. The Company
intends to use a portion of the proceeds from the Offering (not to exceed
approximately $5 million) to release certain of the collateral to be used to
secure the Notes from a prior existing lien and the remainder of the proceeds
for general corporate purposes.
The Offering was made pursuant to Rule 144A of the Securities Act of 1933,
as amended (the "Securities Act"), and, accordingly, the Units, Notes and
Warrants and underlying shares of Common Stock issuable upon exercise of the
Warrants are not registered under the federal and state securities laws. The
Company has agreed to use its best efforts to file and, if declared effective,
to effect, the registration of the Notes and the Warrants under the Securities
Act under certain circumstances.
The Company's collective bargaining agreements with all of its union-
represented employee groups, which represent approximately 82% of the
Company's work force, become amendable after August 31, 1997. While the
Company cannot predict the precise wage rates that will be in effect at such
time (since such rates will be determined by subsequent events), the wage
rates then in effect will likely increase. However, management believes that
it is essential that the Company's labor costs remain favorable in comparison
to its largest competitors. The Company will seek to continue to improve
employee productivity as an offset to any wage increases and will continue to
explore other ways to control and/or reduce operating expenses. There can be
no assurance that the Company will be successful in obtaining such
productivity improvements or unit cost reductions. In the opinion of
management, the Company's financial resources are not as great as those of
most of its competitors and, therefore, any substantial increase in its labor
cost as a result of any new labor agreements or any cessation or disruption of
operation due to any strike or work action could be particularly damaging to
the Company.
As a result of application of fresh start reporting in August of 1995,
substantial values were assigned to routes, gates and slots ($458.4 million)
and reorganization value in excess of amounts allocable to identifiable assets
($839.1 million). The Company has evaluated its future cash flows and,
notwithstanding its substantial operating losses in recent periods, expects
that the carrying value of the intangibles at December 31, 1996 will be
recovered. However, the achievement of such improved future operating results
and cash flows are subject to considerable uncertainties. In future periods
these intangibles will be evaluated for recoverability based upon estimated
future cash flows. If expectations are not substantially achieved, charges to
future operations for impairment of those assets may be required and such
changes could be material.
F-10
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying consolidated financial statements have been prepared on a
going concern basis which assumes continuity of operations and realization of
assets and liquidation of liabilities in the ordinary course of business. The
Company remains highly leveraged and substantially all of TWA's assets are and
will likely remain subject to various liens and security interest, and many of
its loan agreements contain mandatory prepayment provisions in the event that
the assets are sold. Accordingly, management expects that TWA will not be able
to rely, in any significant degree, on the proceeds from sales of assets to
fund operations and that TWA may have limited sources of additional liquidity
other than cash generated by operations. The Company's ability to improve its
financial position and meet its financial obligations will depend upon a
variety of factors including; significantly improved operating results,
favorable domestic and international airfare pricing environments, absence of
adverse general economic conditions, more effective operating cost controls
and efficiencies, and the Company's ability to attract new capital and
maintain adequate liquidity. No assurance can be given that the Company will
be successful in generating the operating results or attracting new capital
required for future viability.
As a result of the redemption of the 12% Mandatorily Redeemable Preferred
Stock, certain of TWA's leasehold interests in domestic airport gates were
released as collateral and are now unencumbered. As a result of the exchange
of common stock for 12% Senior Secured Notes as described in Note 8, liens on
the stock of wholly owned subsidiary which owns TWA's interest in a hangar at
Los Angeles International Airport and a floating lien on certain of TWA's
domestic airport ground equipment were released as collateral and are also now
unencumbered. In addition, based on the current level of outstanding 12%
Senior Secured Notes, TWA expects that certain slots at New York's LaGuardia
and JFK airports and Chicago's O'Hare airport will be released as security for
the 12% Senior Secured Notes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows, and results of
operations are as follows:
(a) Description of Business: TWA is one of the major airlines in the United
States serving many of the principal domestic and transatlantic
destinations. TWA's principal domestic routes include service to and from
its St. Louis and New York-JFK hubs and between other cities in the U.S.,
both nonstop and through St. Louis. TWA's domestic routes also provide
connections with its international service to and from U.S. cities and
certain major cities in Europe and the Middle East (see Note 21).
The airline industry is highly competitive and the factors affecting
competition are subject to rapid change. Many of the Company's competitors
are larger and have significantly greater financial resources. In addition,
several carriers have introduced or have announced plans to introduce low-
cost, short-haul service, which may result in increased competition to the
Company. Internationally, TWA competes in several "limited entry" markets
in which, as a result of governmental regulations and agreements with
foreign governments, TWA has traditionally competed with a limited number
of carriers. No assurance can be given that TWA will continue to have the
advantage of all of the "limited entry" markets in which it currently
operates or that it will not face substantial additional competition.
Historically, the airline industry has experienced substantial volatility
in profitability as a result of, among other factors, general economic
conditions, competitive pricing initiatives, the overall level of capacity
operated in the industry and fuel prices. TWA continues to be highly
leveraged and has and will continue to have significant debt service
obligations. TWA presently has no unused credit lines and substantially all
of TWA's strategic assets have been pledged to secure indebtedness of the
Company.
(b) Fresh Start Reporting: Financial accounting during a Chapter 11 proceeding
is prescribed in "Statement of Position 90-7 of the American Institute of
Certified Public Accountants", titled "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which TWA adopted
effective June 30, 1995. The emergence from the 1995 Chapter 11 proceeding
(the "'95 Reorganization") on August 23,
F-11
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995 (the "'95 Effective Date"), resulted in the creation of new reporting
entities without any accumulated deficit and with the Company's assets and
liabilities restated to their estimated fair values (also see Note 19-Fresh
Start Reporting). Because of the application of fresh start reporting, the
financial statements for periods after reorganization are not comparable in
all respects to the financial statements for periods prior to the '95
Reorganization.
For periods during the Chapter 11 proceedings, prepetition liabilities
which were unsecured or estimated to be undersecured were classified as
"Liabilities Subject to Compromise in the Chapter 11 Reorganization
Proceedings." The accrual of interest on such liabilities was discontinued
for the period from June 30, 1995 to the '95 Effective Date.
(c) Consolidation: The consolidated financial statements include the accounts
of TWA and its subsidiaries. All significant inter-company transactions
have been eliminated. The results of Worldspan, L.P. ("Worldspan"), a 25%
owned affiliate are recorded under the equity method and are included in
the Statements of Consolidated Operations in Other Charges (Credits).
Certain amounts previously reported have been reclassified to conform with
revised classifications.
(d) Property and Depreciation: Property and equipment owned are depreciated to
residual values over their estimated useful service lives on the straight-
line method. Property held under capital leases is amortized on the
straight-line method over its estimated useful life, limited generally by
the lease period. Estimated remaining useful service lives and residual
values are reviewed periodically for reasonableness and any necessary
change is effected at the beginning of the accounting period in which the
revision is adopted. In connection with the application of fresh start
reporting, no significant changes in the estimated useful lives of assets
have been made.
Estimated useful service lives in effect for the purpose of computing the
provision for depreciation, were:
Flight equipment (aircraft and engines, including related spares)--16 to
25 years, varying by aircraft fleet type
Buildings--20 to 50 years
Other equipment--3 to 20 years
Leasehold improvements--Estimated useful life limited by the lease
period
Maintenance and repairs, including periodic aircraft overhauls, are
expensed in the year incurred; major renewals and betterments of equipment
and facilities are capitalized and depreciated over the remaining life of
the asset.
(e) Intangible Assets: Route authorities are amortized on a straight line
basis over 30 years (1), gates over the term of the related leases and
slots over 20 years. Routes, gates and slots consist of the following
amounts at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Routes................................................... $ 248,100 $276,000
Gates.................................................... 86,649 86,649
Slots.................................................... 95,800 95,800
--------- --------
430,549 458,449
Accumulated Amortization................................. 28,890 7,533
--------- --------
$ 401,659 $450,916
========= ========
</TABLE>
--------
(1) Prior to January 1, 1995, the Company utilized an estimated useful life
for route authorities of 40 years (also see Note 16-Special Charges and
Other Nonrecurring Items).
The reorganization value in excess of amounts allocable to identifiable
assets is being amortized over a twenty year period on the straight-line
method. Accumulated amortization at December 31, 1996 and 1995 was
$55,937,000 and $13,984,000, respectively.
F-12
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
When facts and circumstances suggest that intangible and other long-term
assets may be impaired, the Company evaluates their recoverability based
upon estimated undiscounted future cash flows over the remaining estimated
useful lives. The amount of impairment, if any, is measured based on
projected undiscounted future operating cash flows.
(f) Foreign Exchange: Foreign currency and amounts receivable and payable in
foreign currencies are translated into U.S. dollars at current exchange
rates on the date of the financial statements. Revenue and expense
transactions are translated at average rates of exchange in a manner that
produces approximately the same dollar amounts that would have resulted
had the underlying transactions been translated into dollars on the dates
they occurred. Exchange gains and losses are included in net income for
the period in which the exchange rate changes.
(g) Inventories: Inventories, valued at standard cost, which approximates
actual average unit cost, consist primarily of expendable spare parts used
for the maintenance and repair of flight equipment, plus aircraft fuel and
other operating supplies. A provision for obsolescence of spare parts is
accrued at annual rates which will provide an allowance such that the
unused inventory, at the retirement date of the related aircraft fleet, is
reflected at the lower of cost or estimated net realizable value.
(h) Passenger Revenue Recognition: Passenger ticket sales are recognized as
revenue when the transportation service is rendered. At the time of sale a
current liability for advance ticket sales is established and subsequently
is eliminated either through carriage of the passenger by TWA, through
billing from another carrier that renders the service, or by refund to the
passenger.
Under TWA's "Frequent Flight Bonus Program" ("FFB"), frequent travelers may
accumulate certain defined unit mileage credits which entitle them to a
choice of various awards, including certain free air transportation on TWA
at a future date. When the free travel award level is achieved by a
frequent traveler, a liability is accrued and TWA's operating expense is
charged for the estimated incremental cost which will be incurred by TWA
upon the future redemption of the free travel awarded.
Pursuant to the 1995 Restructuring, TWA issued 600,000 ticket vouchers,
each having a face value of $50, which may be used for a discount of up to
50% off the cost of a ticket for transportation on TWA. Concurrently, TWA
entered into an agreement, as amended, to purchase for cash from a third
party any ticket vouchers acquired by the stand-by purchaser. The ticket
vouchers were initially recorded as a liability at their estimated fair
value, approximately $26.2 million. The liability will be relieved in
future periods as vouchers are redeemed for cash or will be reflected as
revenue when the transportation is provided for tickets purchased with
vouchers. Approximately 180,000 and 396,000 vouchers were outstanding at
December 31, 1996 and 1995, respectively.
(i) Interest Capitalized: Interest cost associated with funds expended for the
acquisition of qualifying assets is capitalized. Interest capitalized was
$5,463,000 in 1996 and $2,133,000 in 1994. There was no interest
capitalized during 1995.
(j) Income Taxes: TWA accounts for income taxes based on Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". This statement requires the use of the liability method to record
the deferred income tax consequences of differences between the financial
reporting and income tax bases of assets and liabilities.
(k) Postretirement Benefits Other Than Pensions: TWA accounts for
postretirement benefits other than pensions based on SFAS No. 106 which
requires that the expected cost of providing such benefits be accrued over
the years that the employee renders service, in a manner similar to the
accounting for pension benefits.
(l) Deferred Credit-Aircraft Operating Leases: The present value of the excess
of contractual rents due under aircraft operating leases over the fair
rentals for such aircraft were recorded as deferred credits as part of the
application of fresh start reporting. The deferred credit will be
increased through the accrual of interest
F-13
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expense and reduced through a reduction in operating lease rentals over the
terms of the respective aircraft leases. At December 31, 1996 and 1995, the
unamortized balance of the deferred credits were $31,408,000 and
$41,727,000 respectively.
(m) Environmental Contingencies: TWA is subject to numerous environmental laws
and regulations and is subject to liabilities and compliance costs arising
from its past and current handling, processing, recycling, storing and
disposing of hazardous substances and hazardous wastes. It is TWA's policy
to accrue environmental remediation costs when it is probable that a
liability has been incurred and an amount can be reasonably estimated. As
potential environmental liabilities are identified and assessments and
remediation proceed, these accruals are reviewed periodically and
adjusted, if necessary, as additional information becomes available. The
accruals for these liabilities can significantly change due to factors
such as the availability of additional information on the nature or extent
of the contamination, methods and costs of required remediation and other
actions by governmental agencies. Costs of future expenditures for
environmental remediation obligations are not discounted to their present
value.
(n) Mandatorily Redeemable 12% Preferred Stock: The Mandatorily Redeemable
12% Preferred Stock issued in connection with the 1995 Reorganization was
initially recorded at its estimated fair value. Until its redemption in
April 1996, the carrying amount was being increased by amortization of the
difference between the redemption value and the carrying amount, using the
interest method. Such amounts were recorded as additional preferred stock
dividend requirements. A special dividend requirement of approximately
$20.0 million was recorded in 1996 to reflect the excess of the early
redemption price over the carrying value of the Mandatorily Redeemable 12%
Preferred Stock.
(o) Earnings (Loss) Per Share: In computing the loss applicable to common
shares for 1996 and the four months ended December 31, 1995, the net loss
has been increased by dividend requirements on the Mandatorily Redeemable
12% Preferred Stock (including amortization of the difference between the
carrying amount and the redemption value and the special dividend
requirement related to the early redemption in 1996) and on the 8%
Cumulative Convertible Exchangeable Preferred Stock from the date of
issuance in March 1996. In computing the related net loss per share, the
loss applicable to common shares has been divided by the aggregate average
number of outstanding shares of Common Stock (38.5 million in 1996 and
28.0 million in 1995) and Employee Preferred Stock (5.7 million in 1996
and 5.3 million in 1995) which, with the exception of certain special
voting rights, is the functional equivalent of Common Stock. No effect has
been given to stock options, warrants or potential issuances of additional
Employee Preferred Stock as the impact would have been anti-dilutive.
Earnings per share of the predecessor company are not presented as the
amounts are not meaningful.
(p) Concentration of Credit Risk: TWA does not believe it is subject to any
significant concentration of credit risk. At December 31, 1996 most of the
Company's receivables related to tickets sold to individual passengers
through the use of major credit cards (37%) or to tickets sold by other
airlines (16%) and used by passengers on TWA. These receivables are short-
term, generally being settled shortly after sale or in the month following
usage. Bad debt losses, which have been minimal in the past, have been
considered in establishing allowances for doubtful accounts.
(q) Use of Estimates: Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(r) Stock-Based Compensation: TWA applies APB Opinion No. 25 and related
interpretations in accounting for its plans. This opinion allows for
stock-based employee compensation to be recognized based on the intrinsic
value.
(s) Presentation: Certain prior period amounts have been reclassified to
conform with current year presentation.
F-14
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. CHAPTER 11 REORGANIZATIONS:
On January 31, 1992, TWA commenced a reorganization case (the "'93
Reorganization") by filing a voluntary petition for relief under Chapter 11,
Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the
U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
TWA's subsidiary companies did not file for Chapter 11 protection. On August
12, 1993 the Bankruptcy Court entered an order confirming the '93
Reorganization, which was jointly proposed by TWA and the Official Unsecured
Creditors' Committee. The '93 Reorganization became effective on November 3,
1993 (the "'93 Effective Date").
Pursuant to the '93 Reorganization Plan, on the '93 Effective Date: (i) all
prepetition interests in TWA (including TWA's previously existing preferred
stock, preference stock and common stock) were cancelled without any
consideration being distributed on account of those interests; (ii) nine
million shares of newly authorized TWA common stock, representing 45% of TWA's
then authorized common stock, were issued to trusts established for the
benefit of TWA's domestic unionized and domestic non-unionized and management
employees (the "Employee Stock Trusts") in exchange for certain wage, benefit
and claim concessions granted pursuant to certain agreements entered into by
TWA with its domestic unionized and domestic non-unionized and management
employees (the "'92 Labor Agreements"); (iii) 11 million shares of newly
authorized common stock, representing 55% of TWA's authorized common stock,
were issued to a voting trust established on the '93 Effective Date for the
benefit of certain creditors of TWA in partial satisfaction and discharge of
their claims, which trust issued 11 million Voting Trust Certificates ("VTCs")
evidencing the rights of the VTC holders in the Voting Trust; (iv) 12.5
million shares of newly authorized preferred stock were issued for the benefit
of certain creditors of TWA in partial satisfaction and discharge of their
claims; (v) new five year notes (the "10% Senior Secured Notes"), new seven
year notes (the "8% Senior Secured Notes"), new eight year, 8% secured notes
(the "IAM Back Pay Notes"), new equipment trust certificate notes (the "11%
ETC Notes") and Aircraft Financing Secured Notes with varying interest rates
and maturity dates (the "Aircraft Financing Notes"), the aggregate principal
amount of which was approximately $730.6 million, were issued to certain
creditors of TWA in full satisfaction and discharge of their claims; (vi) all
claims except for certain claims to be reinstated under the '93 Reorganization
Plan were discharged; (vii) certain contingent and/or unliquidated claims were
settled and (viii) executory contracts and unexpired leases to which TWA was a
party were assumed or rejected, in each case on the terms and subject to the
conditions set forth in the '93 Reorganization.
Notwithstanding the reductions in levels of debt and obligations achieved
through the '93 Reorganization, TWA's operating results and cash flows did not
meet the projected levels upon which the '93 Reorganization Plan was
formulated, and in 1994 it was determined that a recapitalization of the
Company was needed.
In the second quarter of 1995, the Company solicited and received sufficient
acceptances to effect the proposed "prepackaged" plan of bankruptcy.
Therefore, on June 30, 1995, the Company filed a prepackaged Chapter 11 plan
of reorganization, which with certain modifications was confirmed by the
United States Bankruptcy Court for the Eastern District of Missouri (the
"Bankruptcy Court") on August 4, 1995. On August 23, 1995, approximately eight
weeks after filing the prepackaged Chapter 11 plan, the '95 Reorganization
became effective and the Company emerged from the protection of this second
Chapter 11 proceeding. In connection with the '95 Reorganization, the Company
(i) exchanged certain of its then outstanding debt securities for a
combination of newly issued Mandatorily Redeemable 12% Preferred Stock, Common
Stock, warrants to purchase Common Stock and debt securities, (ii) converted
the then outstanding preferred stock of the Company to shares of Common Stock,
warrants and equity rights, (iii) obtained certain short-term lease payment
and conditional sale indebtedness deferrals amounting to approximately $91
million and other modifications to certain aircraft leases and (iv) obtained
an extension of the Company's approximately $190 million principal amount of
indebtedness to certain entities controlled by Mr. Carl C. Icahn (the "Icahn
Loans"). The Company also (i) effected a reverse stock split of its then
outstanding common stock for Common Stock, (ii) completed an equity rights
offering, (iii) distributed certain warrants to its then current equity
holders and (iv) implemented certain amendments to the Company's Certificate
of Incorporation.
F-15
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with and as a precondition to the '95 Reorganization, in
August and September of 1994, the Company entered into new three-year labor
agreements (the "'94 Labor Agreements"), amending existing collective
bargaining agreements with the three labor unions representing approximately
84% of the Company's employees, the IAM, ALPA and IFFA. The '94 Labor
Agreements provided for waiver of certain contractually agreed wage
concessions, modifications to work rules and the deletion of certain
provisions of the then existing labor agreements, including eliminating so
called snapbacks, i.e., the automatic restoration of the wage reductions
granted in such agreements upon their expiration. During 1994 and 1995, the
Company also implemented a number of similar saving initiatives with respect
to domestic non-union and management employees, primarily through reducing
head count, altering benefit packages, and eliminating certain planned
restorations of wage reductions.
On June 14, 1995, as one of the transactions contemplated by the extension
of the Icahn Loans, TWA and an entity affiliated with Mr. Icahn, Karabu
Corporation ("Karabu"), entered into an agreement for the sale of tickets (the
"Ticket Agreement"). There are two categories of tickets under the Karabu
Ticket Program: (1) "Domestic Consolidator Tickets" which are subject to a cap
of $610 million, based on the full retail price of the tickets ($120 million
in the first fifteen months and $70 million per year for seven consecutive
years through the term of the Ticket Agreement) and (2) "System Tickets" and
"Matching Tickets" which are not subject to any cap throughout the term of the
Ticket Agreement. The Ticket Agreement provides for the sale of tickets to
Karabu at prices significantly lower than the full retail price.
Domestic Consolidator Tickets sold under the Ticket Agreement are limited to
certain origin/destination city markets in which TWA has less than a 5% market
share, except for the New York market, which has a 10% market share limit.
These restricted markets will be reviewed from time to time to determine any
change in TWA's market share, and other markets may be designated as
necessary.
Ticket sales under the Ticket Program, which commenced in September 1995,
were $139.7 million in 1996 and $16.0 million in 1995 at full published fares.
The aggregate net sales, after applicable discounts under the Ticket
Agreement, were $76.9 million in 1996 and $8.8 million in 1995. Of these
amounts, $71.5 million and $4.4 million is included as passenger revenues for
1996 and the four months ended December 31, 1995, respectively, as the related
transportation had been provided. Substantially all ticket sales under the
Ticket Program to date have been "System Tickets".
The purchase price for the tickets purchased by Karabu are required to
either, at Karabu's option and with certain restrictions, be retained by
Karabu and the amount so retained shall be credited as prepayments against the
outstanding balance of the Icahn Loans, or be paid over to the settlement
trust established in connection with the '93 Reorganization for TWA's account
as prepayments on the PBGC Notes. At December 31, 1996, approximately $64.9
million of such proceeds had been applied to the principal balance of the
Icahn Loans, and $6.4 million had been applied to the PBGC Notes, which
resulted in a $1.6 million extraordinary charge related to the early
extinguishment of PBGC Notes (See Note 14).
Tickets sold to Karabu pursuant to the Ticket Agreement are priced at levels
intended to approximate current competitive discount fares available in the
airline industry. The Ticket Agreement provides that no ticket may be included
with an origin or destination of St. Louis, nor may any ticket include flights
on other carriers. Tickets sold pursuant to the Ticket Agreement are required
to be at fares specified in the Agreement, net to TWA, and be exclusive of
tax. No commissions will be paid by TWA for tickets sold under the Ticket
Agreement, and in general TWA believes that under the applicable provisions of
the Ticket Agreement such tickets may not be marketed or sold through travel
agents. Karabu, however, has been marketing tickets through travel agents. TWA
has demanded that Karabu cease doing so and Karabu has stated that it
disagrees with the Company's interpretation concerning sales through travel
agents. In December 1995, the Company filed a lawsuit against Karabu, Mr.
Icahn and affiliated companies seeking damages and to enjoin further
violations. Mr. Icahn countered threatening to attempt to declare a default on
the Icahn Loans on a variety of claims related to his
F-16
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
various interpretations of the security documents related to such loans as
well as with respect to alleged violations of the Ticket Agreement by the
Company. The parties then negotiated a series of standstill agreements
pursuant to which the lawsuit was temporarily withdrawn while the parties
endeavor to negotiate a settlement of their differences and respective claims.
Those negotiations reached an impasse and the Company re-filed its suit on
March 20, 1996 in the St. Louis County Circuit Court. Also on March 20, 1996,
Karabu and certain other companies controlled by Mr. Icahn filed suit against
the Company alleging violations by the Company of the Ticket Agreement and
federal anti-trust laws. On March 24, 1997, the federal District Court for the
Southern District of New York, on the Company's motion, dismissed Karabu's
suit in its entirety. If Karabu's interpretation as to sales of discount
tickets to the general public through travel agents was determined by a court
or otherwise to be correct and the Company did not otherwise take appropriate
action to mitigate the effect of such sales, the Company could suffer
significant loss of revenue so as to reduce overall passenger yields on a
continuing basis during the eight year term of the Ticket Agreement. In
addition, any default by the Company under the ticket agreement or directly on
the Icahn loans which resulted in an acceleration of the Icahn Loans could
result in a cross-default to the Company's other indebtedness and leases and
otherwise have a material adverse effect on the Company.
4. INVESTMENTS:
TWA, through a wholly-owned subsidiary, has a 25% partnership interest in
Worldspan, a joint venture among TWA, Delta Airlines, Inc., Northwest
Airlines, Inc. and ABACUS Distribution Systems PTE Ltd. Worldspan owns,
markets and operates a global computer airline passenger reservation system on
behalf of subscriber travel agents and contracting airlines who pay booking
fees to Worldspan for such reservation service. TWA accounts for its
investment in the partnership on the equity basis. TWA's share of the combined
net earnings (loss) of the partnership was approximately $11,919,000 for the
year ended December 31, 1996, $(11,535,000) for the four months ended December
31, 1995, $3,607,000 for the eight months ended August 31, 1995 and
$(3,616,000) for the year ended December 31, 1994, which is included in Other
Charges (Credits) in TWA's Statements of Consolidated Operations. The excess
of TWA's carrying value for its investment in Worldspan over its share of the
underlying net assets of Worldspan is being amortized over a period of 20
years. At December 31, 1996 and 1995, the unamortized balance of this excess
amounted to approximately $32.0 million and $33.9 million, respectively.
The partnership provides passenger reservations services, communication
facilities and other computer services which are purchased by TWA on a
recurring basis. The aggregate cost of the services purchased from the
partnership, which is included in all other operating expenses in TWA's
Statements of Consolidated Operations, is approximately as follows (in
thousands):
<TABLE>
<S> <C>
Year Ended December 31, 1996........................................ $54,611
Four Months Ended December 31, 1995................................. $16,566
Eight Months Ended August 31, 1995.................................. $29,604
Year Ended December 31, 1994........................................ $43,638
</TABLE>
Summary financial data for Worldspan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1995
-------- --------
<S> <C> <C>
Current assets............................................... $172,368 $ 84,854
Non-current assets........................................... 384,653 410,901
-------- --------
Total assets............................................... $557,021 $495,755
======== ========
Current liabilities.......................................... $126,774 $101,219
Non-current liabilities...................................... 125,255 137,220
Partners' equity............................................. 304,992 257,316
-------- --------
Total liabilities and equity............................... $557,021 $495,755
======== ========
</TABLE>
F-17
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Revenues..................................................... $548,419 $498,138
Costs and expenses........................................... 500,743 529,852
-------- --------
Net income (loss).......................................... $ 47,676 $(31,714)
======== ========
</TABLE>
5. INCOME TAXES:
Income tax liabilities at December 31, 1996 and 1995, included in other
noncurrent liabilities, consist of the following (in millions):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Current taxes................................................... $ -- $ --
Deferred taxes:
Federal....................................................... 10.7 10.7
Other income and franchise taxes.............................. .3 .3
----- -----
Total income tax liability...................................... $11.0 $11.0
===== =====
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996 and 1995 are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits, other than pensions............ $ 198.5 $ 194.6
Pension obligations..................................... 82.3 83.4
Employee compensation and other benefits................ 36.5 60.2
Capital leases, net..................................... 54.3 56.6
Net operating loss carryforwards........................ 247.1 207.8
Other, net.............................................. 84.0 86.7
------- -------
Total deferred tax assets............................. 702.7 689.3
------- -------
Deferred tax liabilities:
Property and spare parts, net........................... $ (34.6) $ (24.7)
Routes, gates, and slots, net........................... (158.7) (178.1)
Investment in affiliate................................. (42.7) (38.8)
------- -------
Total deferred tax liabilities........................ $(236.0) $(241.6)
======= =======
Net deferred tax asset before valuation allowance......... 466.7 447.7
Deferred tax asset valuation allowance.................. (477.7) (458.7)
------- -------
Net deferred tax asset (liability).................... $ (11.0) $ (11.0)
======= =======
</TABLE>
The valuation allowance arises primarily from the amortization of
intangibles, representing taxable temporary differences, the reversal of which
extends beyond the period in which deductible temporary differences are
expected to reverse. The net deferred tax liability, after giving effect to
the valuation allowance, arises primarily in years after 2020.
F-18
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the provision (credit) for income taxes is as follows (amounts
in thousands):
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current, primarily foreign............................................... $450 $1,370 $(96) $960
Deferred................................................................. -- -- -- --
---- ------ ---- ----
Total provision (benefit) for income taxes, net...................... $450 $1,370 $(96) $960
</TABLE>
Income tax expense for the periods presented below differs from the amounts
which would result from applying the federal statutory tax rate to pretax
income, as follows:
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income tax benefit at United States statutory rates...................... $(93,652) $(11,294) $(118,408) $(151,504)
Amortization of reorganization value in excess of amounts allocable to
identifiable assets..................................................... 14,683 4,894 1,976 2,870
Meals and entertainment disallowance .................................... 4,257 1,419 2,838 4,663
Foreign taxes............................................................ 450 1,370 (96) 960
Net operating loss not benefited and other items......................... 74,712 4,981 113,594 143,971
-------- -------- --------- ---------
Income tax expense (benefit)......................................... $ 450 $ 1,370 $ (96) $ 960
</TABLE>
A provision for income tax on the extraordinary gain from the extinguishment
of debt in the eight months ended August 31, 1995 was not required as such
income is excluded from taxation under the Internal Revenue Code of 1986, as
amended.
In May 1993, TWA and the Internal Revenue Service reached an agreement (the
"IRS Settlement") to settle both: (i) the IRS' proof of claim in the '93
Reorganization in the amount of approximately $1.4 billion covering
prepetition employment and income taxes of TWA, and (ii) the audit of TWA's
federal income tax returns through 1992. Pursuant to the IRS Settlement, TWA
paid $6 million to the IRS through the application of funds owed to TWA by
certain governmental agencies and issued a note in the amount of $19 million
payable in quarterly installments over a six year period (also see Note 8 -
Debt). As a result of the IRS Settlement, TWA increased its tax basis in
certain of its assets and will be allowed no benefit of any federal net
operating loss or credit carryforward from 1992 or any prior year. Federal
income tax losses incurred by TWA subsequent to 1992 may not be carried back
to pre-1993 years.
The Company estimates that it has tax net operating loss carryforwards
amounting to approximately $625 million at December 31, 1996 expiring in 2008
through 2011 if not utilized before then to offset taxable income. Section 382
of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations
issued thereunder, imposed limitations on the ability of corporations to use
NOLs if the corporation experiences a more than 50% change in ownership during
certain periods. In connection with the change of ownership caused by the '95
F-19
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reorganization, the Company elected to reduce its NOLs in accordance with
Section 382 of the Code and regulations issued thereunder. If another
ownership change were to occur prior to September 1997, the annual limitations
on the Company's utilization of its then existing NOLs would be reduced to
zero. Changes in ownership in periods thereafter could substantially restrict
the Company's ability to utilize its tax net operating loss carryforwards. In
addition, the tax net operating loss carryforwards are subject to examination
by the IRS and thus are subject to adjustment or disallowance resulting from
any such IRS examination. For financial reporting purposes, the tax benefits
from substantially all of the tax net operating loss carryforwards will, to
the extent realized in future periods, have no impact on the Company's
operating results, but instead be applied to reduce reorganization value in
excessive amounts allocable to identifiable assets.
6. EMPLOYEE BENEFIT PLANS:
Substantially all of TWA's employees are covered by noncontributory defined
benefit retirement plans that were frozen on January 1, 1993. While many of
TWA's employees continue participation in these plans, they have not accrued
any additional benefits since the date the plans were frozen. Employees hired
after the freeze are not entitled to participate in these defined benefit
retirement plans. TWA's policy has been to fund the defined benefit plans in
amounts necessary for compliance with the funding standards established by the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The retirement plans for Pilots, Flight Attendants and Dispatchers provide
benefits determined from career average earnings, with Pilots having minimum
benefits after ten years of service. Employees (other than Passenger Service
Employees) represented by the IAM earn retirement plan benefits of stated
amounts for each year of service. The Retirement Plan for U.S. Noncontract
Employees (including Passenger Service Employees) provides pension benefits
that are based on the employee's compensation during the last five years prior
to retirement, with compensation subsequent to 1988 frozen at the 1988 pay
level. Foreign plans provide benefits that meet or exceed local requirements.
Normal retirement is age 60 for Pilots and Flight Attendants, and age 65 for
nonflight personnel. The age at which employees can receive supplemental
benefits for early retirement varies by labor group, but ranges from age 45 to
age 64.
As noted above, in January 1993, TWA's defined benefit plans covering
domestic employees (the "Pension Plans") were frozen and Pichin Corporation, a
Delaware corporation formed by the Icahn Entities, assumed sponsorship of the
Pension Plans and is now responsible for management and control of the Pension
Plans. Pursuant to an agreement (the "Comprehensive Settlement Agreement")
among the Company, the Icahn Entities, the Pension Benefit Guarantee
Corporation (the "PBGC") and unions representing TWA employees, TWA retains
only specified obligations and liabilities in respect of the Pension Plans,
which include (i) payment obligations under the PBGC Notes, and (ii) the
obligation to continue to act as the benefits administrator responsible for,
among other things, determining and administering the payment of Pension Plan
benefits (also see Note 8-Debt).
Pichin Corporation is obligated to make the required minimum funding
payments to each of the Pension Plans, subject to reduction for any payments
made under the PBGC Notes. The PBGC may not terminate the Pension Plans,
except under section 4042(a)(2) of ERISA or at the request of Pichin
Corporation, so long as the Icahn Entities and Pichin Corporation have
complied with all terms of the Comprehensive Settlement Agreement relating to
the PBGC. Upon the occurrence of certain significant events (as defined)
including, but not limited to, a sale of substantially all of TWA's assets, a
merger involving TWA or a liquidation under Chapter 7 under the Bankruptcy
Code, and at the request of Pichin Corporation, the Pension Plans will be
terminated. After such a termination, the liability of Pichin Corporation and
all members of its controlled group will be limited to an obligation to make
annual payments of $30 million to the PBGC for a period of eight years. Mr.
Icahn has
F-20
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
advised TWA that Pichin Corporation is entitled to terminate the Pension Plans
in a non-standard termination at any time after January 1, 1995.
In connection with the Comprehensive Settlement Agreement, Mr. Icahn and
each of the Icahn Entities surrendered all of the equity and debt securities
of TWA and its affiliates owned beneficially or of record by them. Pursuant to
the Comprehensive Settlement Agreement, each of the parties to the agreement
mutually released the various claims of the other parties to the agreement.
The net periodic pension expense recorded for TWA's foreign defined benefit
retirement plans is presented below.
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost............................................................. $ 577 $ 274 $ 493 $ 1,190
Interest cost............................................................ 992 583 1,040 3,053
Actual return on assets.................................................. (505) (100) (200) (864)
Net amortization and deferral............................................ (355) -- -- --
- - --------------------------------------------------
----- ----- ------- -------
Net pension expense..................................................... $ 709 $ 757 $ 1,333 $ 3,379
</TABLE>
Actuarial assumptions used for determining pension costs were:
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Discount rate for interest
cost...................... 7.50% 7.00% 8.50% 8.50%
Rate of increase in future
compensation levels....... 5.50% 5.50% 5.50% 7.50%
Expected long-term rate of
return on plan assets..... 9.00% 11.00% 11.00% 11.00%
</TABLE>
F-21
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status (with benefit obligations determined using the current
estimated discount rate of 7.5% and 7.0% at December 31, 1996 and 1995
respectively) and amounts recognized in the Consolidated Balance Sheets at
December 31, 1996 and 1995, for defined benefit plans covering foreign
employees, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995
------------------------------ ----------------------
PLANS IN WHICH PLANS IN WHICH
------------------------------ ------------------------------
ASSETS ACCUMULATED ASSETS
EXCEED BENEFITS EXCEED ACCUMULATED
ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS
BENEFITS ASSETS BENEFITS ASSETS
----------- ------------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value
of benefit obligations:
Vested benefit
obligation........... $ 44,200 $ 7,153 $ 23,986 $ 13,958
Nonvested benefit
obligation........... -- 1,198 14 2,338
-------- -------- --------- --------
Accumulated benefit
obligation........... 44,200 8,351 24,000 16,296
Projected benefit
obligation more than
accumulated benefit
obligation........... 3,983 5,882 1,327 8,273
-------- -------- --------- --------
Projected benefit
obligation........... 48,183 14,233 25,327 24,569
Plan assets at fair
value (a).............. 50,703 -- 47,814 -
-------- -------- --------- --------
Projected benefit
obligation more
(less) than plan
assets at fair value. (2,520) 14,233 (22,487) 24,569
Unrecognized net gain
(loss)................. 7,307 11,696 -- 949
-------- -------- --------- --------
Pension liability
(asset) before
adjustment............. 4,787 25,929 (22,487) 25,518
Adjustment to reduce
pension assets to
estimated recoverable
amount................. -- -- 18,222 (b) -
-------- -------- --------- --------
Pension liability
(asset) recognized in
Consolidated Balance
Sheets............... $ 4,787 $ 25,929 $ (4,265) $ 25,518
======== ======== ========= ========
</TABLE>
- - --------
(a) Plan assets are invested in cash equivalents, international stocks, fixed
income securities and real estate.
(b) The adjustment at December 31, 1995 represented the amount by which the
net pension asset exceeded the amount estimated to be recoverable pursuant
to a planned termination of a pension plan covering certain foreign
employees. United Kingdom law requires the reduction of retirement plan
assets when such assets exceed 105% of plan liabilities. In 1996, assets
in TWA's United Kingdom Pension Plan exceeded liabilities by approximately
$20 million. This surplus was eliminated by terminating the existing UK
Pension Plan and establishing a new pension plan for UK employees. The
surplus assets were split between TWA and the participants of the UK Plan,
with plan participants receiving their share in enhanced pension benefits,
and TWA receiving, in December 1996, a reversion from the original plan of
$9.7 million.
TWA has several defined contribution plans covering most of its employees.
Total pension expense for these plans was $58.0 million, $14.1 million, $26.8
million, $46.0 million, for the year ended December 31, 1996, the four months
ended December 31, 1995, the eight months ended August 31, 1995 and the year
ended December 31, 1994, respectively. Such defined contribution plans
include: (a) trust plans established pursuant to collective bargaining
agreements with certain employee groups providing for defined Company
contributions generally
F-22
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
determined as a percentage, ranging from 2% to 11%, of pay; and (b) retirement
savings plan for Noncontract Employees to which the Company contributes
amounts equal to 25% of voluntary employee after-tax contributions up to a
maximum of 10% of the employee's pay. Pursuant to the '92 Labor Agreements,
Company contributions were suspended for certain defined contribution plans
for the period September 1, 1992 through August 31, 1995. Such suspension has
been extended through August 31, 1997. In connection with the Comprehensive
Settlement Agreement, TWA agreed to make contributions to defined contribution
plans aggregating 2% of eligible wages for 1993 through 1995, and 3.3%
thereafter. The Company made the 1994 contribution payment on June 20, 1995.
Commencing on July 1, 1995, TWA is required to make such contributions on a
monthly basis.
In addition to providing retirement benefits, TWA provides certain health
care and life insurance benefits for retired employees, their spouses and
qualified dependents. Substantially all employees may become eligible for
these benefits if they reach specific retirement age criteria while still
actively employed by TWA. SFAS No. 106 requires that the expected cost of
providing postretirement benefits other than pensions be accrued over the
years that the employee renders service, in a manner similar to the accounting
for pension benefits.
The following table sets forth a reconciliation of the accrued
postretirement benefit cost as of December 31, 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Actives fully eligible......................... $ 163 $ 165
Other actives.................................. 144 150
Retirees....................................... 225 208
----- -----
Total APBO................................... 532 523
Unrecognized cumulative loss..................... (29) (30)
----- -----
Accrued postretirement benefit cost.............. $ 503 $ 493
===== =====
</TABLE>
The components of net periodic postretirement benefit cost are as follows
(in millions):
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost............ $10.0 $ 3.0 $ 5.4 $ 9.5
Interest cost........... 35.4 11.0 25.5 34.5
----- ----- ----- -----
Total................. $45.4 $14.0 $30.9 $44.0
===== ===== ===== =====
</TABLE>
The discount rate used to determine the APBO was 7.5% at December 31, 1996
and 7.0% at December 31, 1995. The discount rate used to determine net
periodic postretirement benefit costs was 7.0% for the year ended December 31,
1996, 7.0% for the four months ended December 31, 1995, 8.5% for the eight
months ended August 31, 1995 and 7.0% for the year ended December 31, 1994.
The assumed health care cost trend rate used in measuring the APBO was 8.0% in
1997 declining by 1% per year to an ultimate rate of 5%. If the assumed health
care cost trend rate was increased by 1 percentage point, the APBO at December
31, 1996 would be increased by approximately 10% and 1996 periodic
postretirement benefit cost would increase approximately 10%.
F-23
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CONTINGENCIES:
On July 17, 1996, TWA Flight 800 crashed shortly after departure from JFK en
route to Paris, France. There were no survivors among the 230 passengers and
crew members aboard the Boeing 747 aircraft. The Company is cooperating fully
with all federal, state and local regulatory and investigatory agencies to
ascertain the cause of the crash, but to date a cause has not been determined.
While TWA is currently the defendant in a number of lawsuits, TWA is unable to
predict the amount of claims relating to the crash which may ultimately be
made against the Company and how those claims might be resolved. TWA maintains
substantial insurance coverage and, at this time, management has no reason to
believe that such insurance coverage will not be sufficient to cover the
claims arising from the crash. Therefore, TWA believes that the resolution of
such claims will not have a material adverse effect on its financial condition
or results of operations. The Company is unable to identify or predict the
extent of any adverse effect on its revenues, yields, or results of operations
which has resulted or may result from the public perception of the crash.
During 1992, TWA and several other major airlines agreed to settle certain
class action antitrust litigation. Pursuant to the settlement agreement, which
was approved by the United States District Court for the Northern District of
Georgia in 1994, TWA paid $1 million and, together with five other carriers,
issued approximately $400 million in face amount of certificates for discounts
of approximately 10% on future domestic air travel on any of the six carriers.
TWA will reflect the certificates that are redeemed for travel on TWA as a
reduction in revenue as the transportation is provided. While TWA presently
does not have any reason to expect that the face amount of the discount
coupons that will be redeemed for travel on TWA in the future will not
reasonably approximate the face amount of discount coupons that TWA
contributed to the settlement, it is reasonably possible that the actual face
amount of discount coupons redeemed by TWA could be substantially different,
considering the interchangeability of the discount coupons and that the face
amount of the discount coupons contributed by all of the participating
carriers and distributed to claimants aggregated approximately $400 million.
Therefore, while the settlement agreement could have the effect of reducing
TWA's future revenues and cash flows from levels that might otherwise be
realized, because of the uncertainties as to the face amount of the discount
coupons that will ultimately be redeemed by TWA and uncertainties as to the
impact that the distribution of discount coupons will have on traffic levels,
TWA is unable to reasonably estimate any such effects.
On October 22, 1991, a judgment in the amount of $12,336,127 was entered
against TWA in an action in the New York District Court by Travellers
International A.G. and its parent company, Windsor, Inc. (collectively,
"Travellers"). On November 4, 1991, TWA posted a cash undertaking of
$13,693,101, which was charged to expense, for a stay of execution of the
judgment pending the appeal. On March 10, 1992, the Company commenced an
adversary proceeding against Travellers in the Bankruptcy Court seeking to
avoid the cash undertaking on the grounds that it constitutes a preferential
transfer or, in the alternative, to find that the cash undertaking constitutes
property of the estate. In March 1993, Travellers filed a petition for a writ
of certiorari in the United States Supreme Court seeking to require TWA to
litigate its claims against Travellers in the New York District Court and not
the Bankruptcy Court. The petition was denied by the United States Supreme
Court in April 1993. A trial of the adversary proceeding took place in
Bankruptcy Court in February 1994 and in December of 1994, the Bankruptcy
Court reached a decision in this proceeding which is favorable to the Company.
Upon appeal, the District Court affirmed in part and reversed in part the
bankruptcy courts decision. Both parties have appealed the matter to the Third
Circuit Court of Appeals. The Company believes that in the event the District
Court's decision is affirmed, the ultimate result will not be materially
different than the decision of the bankruptcy court. Pursuant to the Icahn
Financing Facilities, amounts received pursuant to these proceedings must be
used to repay, in part, TWA's obligations thereunder.
TWA is subject to numerous environmental laws and regulations administered
by various state and federal agencies. Although the Company believes adequate
reserves have been provided for all known environmental
F-24
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contingencies, it is possible that additional reserves might be required in
the future which could have a material effect on the results of operations or
financial condition of the Company. However, the Company believes that the
ultimate resolution of known environmental contingencies should not have a
material adverse effect on the financial position or results of operations
based on the Company's knowledge of similar environmental sites.
Since May 1991, TWA's employees in Israel have claimed that the Company
should be required to collateralize its contingent payment of termination
indemnities. This matter deals only with collateralization of a contingent
payment obligation. The employees have asserted that the amount necessary to
collateralize the contingent payment of termination indemnities could be as
much as $25 million. The Company denies any obligation to collateralize and
asserts that any obligation to collateralize any termination indemnity is not
a current obligation.
In February 1995, a number of actions were commenced in various federal
district courts against TWA and six other major airlines alleging that the
companies conspired and agreed to fix, lower and maintain travel agent
commissions on the sale of tickets for domestic air travel in violation of the
United States antitrust laws. Generally the complaints in these actions seek
treble damages and injunctive relief on behalf of a nationwide class of travel
agents. Certain of these actions also claim violations of various state laws.
On May 9, 1995 TWA announced settlement, subject to court approval, of the
referenced actions and reinstated the traditional 10 percent commission on
domestic air fares. A final court order has not yet been entered; however,
there has been entered an interim order approving the settlement.
On November 9, 1995, ValuJet Air Lines, Inc. ("ValuJet") instituted a
lawsuit against TWA and Delta Air Lines ("Delta") in the United States
District Court for the Northern District of Georgia, alleging breach of
contract and violations of certain antitrust laws with respect to the
Company's lease of certain takeoff and landing slots at LaGuardia
International Airport in New York. On November 17, 1995, the court denied
ValuJet's motion to temporarily enjoin the lease transaction and the Company
and Delta consummated the lease of the slots. ValuJet subsequently amended its
original complaint. On July 12, 1996, the Federal Court in Atlanta granted
summary judgment in TWA' s favor in the ValuJet litigation on all claims and
counts raised in the ValuJet amended complaint. The order granting summary
judgment to TWA was not a final order and was not directly appealable due to
an outstanding claim against Delta. While ValuJet's counsel has stated that an
appeal will be filed at a later date, the Company intends to vigorously defend
itself in any future action and believes all of the allegations that have been
made to date are without merit.
In addition, based on certain written grievances or complaints filed by
ValuJet, the Company was informed that the United States Department of Justice
("DOJ"), Antitrust Division, was investigating the circumstances of the slot
lease transaction to determine whether an antitrust violation has occurred.
During the course of its investigation, the DOT was informed of the summary
judgment described above. Since the date of the judgment, TWA is unaware of
whether the DOJ has undertaken further investigative efforts, the status of
the investigation or any future plans of the DOJ or other regulatory bodies
with respect to the ValuJet lawsuit. While TWA is hopeful the summary judgment
will be persuasive to the various regulatory bodies petitioned by ValueJet, it
will cooperate with any further investigations and strongly believes that the
slot lease transaction was not in violation of antitrust laws.
On September 6, 1995 TWA announced that the operations of its wholly owned
subsidiary, Trans World Express, Inc. ("TWE"), would be discontinued on
November 6, 1995. TWA has entered into an agreement with an unaffiliated
entity, Trans States Airlines, Inc., to provide feeder service into TWA's JFK
hub, which commenced on November 7, 1995. TWA does not currently expect that
the liquidation of TWE will have a material adverse impact on the financial
position or results of operations of TWA.
F-25
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the '92 Labor Agreements, the Company agreed to pay to employees
represented by the IAM a cash "bonus' for the amount by which overtime
incurred by the IAM from September of 1992 through August 1995 was reduced
below specified thresholds. This amount was to be offset by the amount by
which medical savings during the period for the same employees did not meet
certain specified levels of savings. The obligation is payable in three equal
annual installments beginning in 1998. The Company has estimated the net
overtime bonus owed to the IAM to be approximately $26.3 million and has
reflected this amount as a noncurrent liability in the accompanying balance
sheets. Such amount reflects a reduction of approximately $10.0 million
pursuant to the final calculation of the liability and an agreement to reduce
proportionately the obligation based upon the size of the reduction of
indebtedness achieved by the '95 Reorganization. The IAM, while not providing
a calculation of its own, has disputed the method by which management has
computed the net overtime bonus and has indicated that they believe the amount
due to the IAM is much greater than the amount which has been estimated by
management.
In connection with certain wage increases afforded to non-contract
employees, employees represented by the IFFA have asserted and won an
arbitration ruling that, if sustained, would require that the Company provide
additional compensation to IFFA represented employees. The Company estimates
that at December 31, 1996 such additional compensation would aggregate
approximately $6 million. The Company denies any such obligation and has filed
an appeal of the arbitration ruling. As such, no liability has been recorded
by the Company at December 31, 1996.
In connection with the '95 Reorganization, the Company entered into a letter
agreement with employees represented by the ALPA whereby if the Company's
flight schedule, as measured by block hours, does not exceed certain
thresholds a defined cash payment would be made to the ALPA. The defined
thresholds were exceeded during the measurement periods through December 31,
1996 and no amount was therefore owed to the ALPA as of that date. The
Company, however, anticipates that a liability will be incurred during 1997 as
a result of the Company's planned reductions in capacity. The amount of the
liability, if any, will be dependent on the amount by which the targeted block
hours flown during the year exceed the actual block hours flown. Based upon
current plans, the Company estimates its obligation under this agreement will
not exceed $12.0 million in 1997.
The Company is also defending a number of other actions which have arisen in
the ordinary course of business, and are insured or the likely outcome of
which the management of the Company does not believe may be reasonably be
expected to be materially adverse to the Company's financial condition or
results of operations.
F-26
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT:
Substantially all of TWA's assets are subject to liens and security
interests relating to long-term debt and other agreements.
Long-term debt (net of unamortized discounts) outstanding at each balance
sheet date was:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
12% Senior Secured Reset Notes due 1998 (a)............. $ 111,799 $ 145,184
12% Contingent Payment Rights due 1996 (b).............. -- 11,265
8% IAM Backpay Notes (c)................................ 12,090 11,037
PBGC Notes (d).......................................... 198,672 201,164
Icahn Financing Facilities (e).......................... 125,102 187,977
Equipment Trust Certificates (f)........................ 8,963 17,929
Various Secured Notes, 4.0% to 12.4, due 1997-2001 (g).. 75,478 103,847
Installment Purchase Agreements, 10.0% to 10.53%, due
1997--2003 (h)......................................... 109,034 111,033
Predelivery Financing Agreement (i)..................... 19,862 --
IRS Deferral Note (j)................................... 8,708 10,937
WORLDSPAN Note (k)...................................... 31,224 31,224
----------- ----------
Total long-term debt.................................. 700,932 831,597
Less current maturities............................... 92,447 67,566
----------- ----------
Long-term debt, less current maturities............... $ 608,485 $ 764,031
=========== ==========
</TABLE>
- - --------
(a) The 12% Senior Secured Reset Notes due 1998 pay interest semi-annually,
payable either in cash or, as to the first four interest payments, at the
Company's option, in whole or in part, in Common Stock, beginning August
1, 1995, subject to certain conditions. The Company elected to pay
interest due and payable for the first two periods and one-half of the
interest due and payable February 1, 1997 (fourth period) in common stock.
The outstanding notes have a stated principal amount of $124.8 million and
$170.0 million at December 31, 1996 and 1995, respectively, and are
reflected net of the unamortized discount of $13.0 million and $24.8
million at December 31, 1996 and 1995. The notes are secured by a first
lien on certain slots, equipment and spare parts.
During 1996, the Company consummated a series of privately negotiated
exchanges with a significant holder of the 12% Senior Secured Reset Notes
which resulted in the return to the Company of approximately $45.3 million
principal amount of 12% Senior Secured Reset Notes and $1.5 million in
accrued interest thereon in exchange for the issuance of approximately 4.5
million shares of Company Common Stock (See Note 14).
(b) The Contingent Payment Rights, arising under the terms of the '95
Reorganization, were paid in 1996.
(c) The 8% IAM Backpay Notes have a stated principal amount of $22.0 million
and $22.9 million at December 31, 1996 and 1995, respectively. The notes
are reflected net of the unamortized discount of $9.9 million and $11.9
million at December 31, 1996 and 1995, respectively, which reflects an
effective interest rate of approximately 24.4% at December 31, 1996. The
notes mature in 2001 and pay interest semi-annually. The notes are secured
by a subordinate lien on TWA's interest in Worldspan and a lien on
approximately $2.2 million in proceeds from the sale of Midcoast Aviation.
During December 1996, ownership of the notes was transferred from the
Indenture Trustee to current and former IAM union members who participated
in the 1992 labor agreement.
F-27
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) The PBGC Notes have a stated unpaid principal balance of $232.9 million
and $244.3 million at December 31, 1996 and 1995, respectively. The notes
are reflected net of unamortized discounts of $34.3 million and $43.2
million at December 31, 1996 and 1995, respectively, to reflect an
effective interest rate of approximately 13.0%. Interest on the PBGC Notes
is payable semi-annually at an average stated rate of 8.19% per annum.
Principal payments are due in semi-annual installments beginning in 1999
through 2003, however, due to certain note provisions mandatory
prepayments are required. Additional prepayments could arise from the
election of Karabu to apply the purchase price for tickets purchased under
the Ticket Agreement to a reduction of the PBGC Notes (see Note 3). The
Notes are non-recourse notes secured by first liens on TWA's international
routes and TWA's leasehold interest in the Kansas City maintenance
facility and certain fixtures and equipment.
(e) The Icahn Financing Facilities include a $75 million Asset Based Facility
and a $125 million Receivables Facility, which had principal balances of
$46.9 million and $78.2 million, respectively, at December 31, 1996. The
loans are due in January 2001 and interest is payable monthly at a rate of
prime plus 1.75% per annum. Collateral for the Icahn Loans include a
number of aircraft, engines, and related equipment, along with
substantially all of the Company's receivables. The notes evidencing the
Icahn Loans are security for certain obligations of the Icahn Entities to
the PBGC. Prepayments of the Icahn Loans could arise from the election of
Karabu to apply the purchase price for tickets purchased under the Ticket
Agreement to a reduction of the Icahn Loans (see Note 3).
(f) The Equipment Trust Certificates pay interest semi-annually at a rate of
11% per annum and are subject to mandatory redemptions beginning in April
1994 and continuing until September 1997. The certificates are secured by
certain aircraft, engines and other equipment.
(g) Various Secured Notes represent borrowings to finance the purchase or
lease of certain flight equipment and other property.
(h) Installment Purchase Agreements represent borrowings to finance the
purchase of four Boeing 767-231 and one Boeing 747-238 aircraft. The
borrowings mature in monthly installments through 2003, and require
interest at rates ranging from 10.0% to 10.53% per annum.
(i) The Predelivery Financing Agreements represent borrowings from the engine
manufacturer to finance prepayments on the purchase of five Boeing 757
aircraft. The borrowings mature upon delivery of the aircraft beginning in
February 1997 and continuing through October 1997. Interest is payable
quarterly at a rate of LIBOR plus 3.5%.
(j) The IRS Deferral Note represents unpaid amounts due under the terms of a
settlement reached in 1993 for taxes and interest owed to the IRS. The
note requires payment of interest quarterly at a rate of 7% per annum and
matures in 1999.
(k) The Worldspan Note represents amounts owed to Worldspan, a 25% owned
affiliate of TWA, for prior services and advances. The note pays interest
at maturity at a rate of prime plus 1% per annum and matures in 1999. The
note is secured by a pledge of TWA's partnership interest in Worldspan.
(l) At December 31, 1996, aggregate principal payments due for long-term debt
for the succeeding five years were as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
YEAR THOUSANDS)
---- -----------
<S> <C>
1997............................................ $92,447
1998............................................ 181,915
1999............................................ 95,990
2000............................................ 73,347
2001............................................ 201,558
</TABLE>
F-28
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TWA discontinued, effective June 30, 1995, the accrual of interest on
prepetition debt that was unsecured or estimated to be undersecured through
the '95 Effective Date. Contractual interest expense for the eight months
ended August 31, 1995 was approximately $18.7 million in excess of reported
interest expense.
9. LEASES AND RELATED GUARANTEES:
Eighteen of the aircraft in the Company's fleet at December 31, 1996 were
leased under capital leases. The remaining lease periods for these aircraft
range from one to ten years. The Company has options and/or rights of first
refusal to purchase or re-lease most of such aircraft at market terms upon
termination of the lease. The Company has guaranteed repayment of certain of
the debt issued by the owner/lessor to finance some of the aircraft under
capital lease to the Company; however, the scheduled rental payments will
exceed the principal and interest payments required of the owner/lessor.
Aggregate annual rentals in 1997 will be approximately $42.3 million for the
18 aircraft held under capital leases.
One hundred twenty nine of the aircraft in TWA's fleet at December 31, 1996
were leased under operating leases. Other than seven leases on a month-to-
month basis, the remaining lease periods range from three months to 15 years.
Upon expiration of the current leases, TWA has the option to re-lease most of
such aircraft for specific terms and/or rentals with some of the renewal
options being subject to fair market rental rates.
Buildings and facilities leased under capital and operating leases are
primarily for airport terminals and air transportation support facilities.
Leases of equipment, other than flight equipment, include some of the
equipment at airports and maintenance facilities, flight simulators, computers
and other properties.
Pursuant to an agreement between the City of St. Louis and TWA in November
1993 (the "Asset Purchase Agreement"), the City of St. Louis waived a $5.3
million pre-petition claim and provided TWA with two installments of $24.7
million and $40 million pursuant to sale/leaseback transactions involving
certain of TWA's assets located at Lambert-St. Louis Airport and other
property and assets located in St. Louis including gates, terminal support
facilities at the airport, hangar/St. Louis Ground Operations Center complex,
Flight Training Center and equipment and tenant improvements at these various
St. Louis facilities.
Under the Asset Purchase Agreement, TWA leased back the properties involved
under a month-to-month agreement subject to automatic renewal so long as TWA
is not in default thereunder, such agreement having a term otherwise expiring
December 31, 2005. Such term is subject to early termination in the event of
certain events of default, including non-payment of rents, cessation of
service, or failure to relocate and maintain its corporate headquarters within
the City or County of St. Louis, or relocate and maintain a reservations
office within the City of St. Louis. Under the Asset Purchase Agreement, TWA
has the right to use 57 gates and terminal support facilities at Lambert-St.
Louis Airport. The City has certain rights of redesignation of TWA's gates in
the event TWA's flight activity at St. Louis is reduced below a threshold
level of 190 daily flight departures during any given monthly period. The
related leases are classified as capital leases for financial reporting
purposes.
The Company's acquisition of 11 new aircraft during 1982 and 1983, one
Lockheed L-1011 and ten Boeing 767s, created certain tax benefits that were
not of immediate value in the Company's federal income tax returns and,
therefore, such tax benefits were sold to outside parties under so-called
"Safe Harbor Leases" as permitted by IRS regulations. Pursuant to the sales
agreements, the Company is required to indemnify the several purchasers if the
tax benefits cannot be used because of circumstances within the control of the
Company. As of December 31, 1996, the Company's contingent indemnification
obligations in connection with the tax benefit transfers were collateralized
by bank letters of credit aggregating $11,510,000 for which the Company has
posted $11,510,000 in cash collateral to secure its reimbursement obligations
and the bank letters of credit. In addition, the Company has pledged
$7,413,000 in cash collateral to secure its obligation with respect to four of
the tax
F-29
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
benefit transfers and has pledged flight equipment having a net book value of
$23,359,000 to secure its obligation with respect to two of the tax benefit
transfers.
At December 31, 1996 future minimum lease payments for capital leases and
future minimum lease payments, net of sublease rentals of immaterial amounts,
for long-term leases, were as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE PAYMENTS
-----------------------
CAPITAL OPERATING
LEASES LEASES
---------- ------------
YEAR
---- (AMOUNTS IN THOUSANDS)
<S> <C> <C>
1997................................................ $ 64,601 $ 302,811
1998................................................ 56,416 304,226
1999................................................ 52,664 303,802
2000................................................ 49,249 284,538
2001................................................ 45,008 265,714
Subsequent.......................................... 87,173 1,704,364
---------- ------------
Total............................................. 355,111 $ 3,165,455
============
Less imputed interest............................... 91,820
----------
Present value of capital leases..................... 263,291
Less current portion................................ 42,501
----------
Obligations under capital leases, less current
portion............................................ $ 220,790
==========
</TABLE>
Included in the Minimum Lease Payments for Operating Leases are increased
rental rates related to lessor financing of engine hush-kits for 21 aircraft
plus estimates of increased rentals for nine additional aircraft yet to be
financed. The estimated amounts assume an eight year extension of the
respective aircraft leases from date of hush-kit installation. Also included
in the Minimum Lease Payments for Operating Leases are rentals related to an
agreement entered into in 1996 providing for the lease of ten Boeing 757
aircraft, with delivery of the first aircraft in July 1996 and the final
aircraft in July 1997, as well as estimated rentals related to an agreement
entered into in 1996 for the lease of fifteen new and three used McDonnell
Douglas MD-83 aircraft, with delivery of the aircraft between February 1997
and April 1999.
10. MANDATORILY REDEEMABLE 12% PREFERRED STOCK:
Pursuant to the '95 Reorganization the Company issued 1,089,991 shares of
the 1,510,000 authorized shares of Mandatorily Redeemable 12% Preferred Stock
to the holders of the 8% Senior Secured Notes. The Mandatorily Redeemable 12%
Preferred Stock had an aggregate redemption value of approximately $109.0
million, was cumulative, and had an initial liquidation preference of $100 per
share. Commencing November 1995, dividends accrued at the rate of 12% of the
liquidation preference per share per annum, payable quarterly in arrears on
the first day of each February, May, August and November. Subject to certain
limitations, the dividends could be paid in Common Stock at the option of the
Company, and the Company elected to pay the February 1, 1996 dividend in
Common Stock and subsequently issued 317,145 shares. For purposes of
determining the number of shares of Common Stock to distribute, such Common
Stock was valued at 90% of the fair market value, based upon trading prices
for the twenty days prior to the record date for the dividend payment.
On March 22, 1996, the Company announced a call for redemption on April 26,
1996 (the "Redemption Date") of all of its issued and outstanding 12%
Preferred Stock at a redemption price per share equal to $75.00, plus accrued
dividends to and including the Redemption Date of $2.8667 per share. On April
26, 1996, the
F-30
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company paid an aggregate of $84.9 million in redemption of the 12% Preferred
Stock and payment of accrued dividends.
11. CAPITAL STOCK:
The Company has the authority to issue 300 million shares of capital stock,
consisting of 150 million shares of Common Stock, 12.5 million shares of
cumulative preferred stock and 137.5 million additional shares of preferred
stock. On the '95 Effective Date of the '95 Reorganization, TWA issued
approximately 17.2 million shares of Common Stock, 6.4 million shares of
Employee Preferred Stock (including approximately 1.7 million shares which are
attributable to ALPA represented employees, see Note 12), Equity Rights for
the purchase of approximately 13.2 million shares of Common Stock, warrants
for the purchase of approximately 1.7 million shares of Common Stock
exercisable over a seven year period at $14.40 per share (the "Seven Year
Warrants"), warrants for the purchase of up to 1.15 million shares of Common
Stock (for nominal consideration), and $109.0 million aggregate liquidation
value of Mandatorily Redeemable 12% Preferred Stock (the "12% Preferred
Stock"). In addition, each of the 12.5 million shares of the then existing
preferred stock were converted into, and holders received, 0.1024 shares of
Common Stock, 0.0512 Equity Rights and 0.1180 Seven Year Warrants. Holders of
then existing common stock, other than shares held by trusts for employees,
received 0.0213 shares of Common Stock, 0.0107 Equity Rights and 0.0246 Seven
Year Warrants.
In October 1995, TWA received approximately $55.3 million in gross proceeds
from the exercise of 13,206,247 Equity Rights and issued 13,206,247 shares of
Common Stock. The Company paid a fee of approximately $3.4 million in
September to certain standby purchasers of shares covered by the Equity
Rights.
TWA subsequently issued 2.07 million additional shares of Common Stock to
previous holders of TWA's 10% Senior Secured Notes based upon the trading
prices of securities distributed pursuant to the '95 Reorganization.
The Employee Preferred Stock is the functional equivalent of Common Stock
except for an exclusive right to elect a certain number of directors to the
Board of Directors and its liquidation preference of $0.01 per share. Employee
Preferred Stock does not have redemption rights. Each share will automatically
convert into one share of Common Stock upon the withdrawal of such share from
the employee stock trust in which such share is held.
There were 1,742,922 and 1,746,874 Seven Year Warrants outstanding at
December 31, 1996 and 1995, respectively. All warrants to purchase shares of
Common stock for nominal consideration had been exercised at December 31,
1996.
In March 1996, the Company completed an offering, pursuant to Rule 144A of
the Securities Act of 1933 (the "Act"), of 3,869,000 shares of its 8%
Preferred Stock, with a liquidation preference of $50 per share. Each share of
the 8% Preferred Stock may be converted at any time, at the option of the
holder, unless previously redeemed or exchanged, into shares of Common Stock
at a conversion price of $20.269 per share (equivalent to a conversion rate of
approximately 2.467 shares of Common Stock for each share of 8% Preferred
Stock), subject to adjustment.
The 8% Preferred Stock may not be redeemed prior to March 15, 1999. On or
after March 15, 1999, the 8% Preferred Stock may be redeemed, in whole or in
part, at the option of the Company, at specified redemption prices. The 8%
Preferred Stock may be exchanged, in whole but not in part, at the option of
the Company, for the Company's 8% Convertible Subordinated Debentures Due 2006
(the "Debentures") on any dividend payment date beginning March 15, 1998 at
the rate of $50 principal amount of Debentures for each share of 8% Preferred
Stock outstanding at the time of exchange; provided that all accrued and
unpaid dividends, whether or not earned or declared, on the 8% Preferred Stock
to the date of exchange have been paid or set aside for payment
F-31
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and certain other conditions are met. Pursuant to the registration rights
agreement between the Company and the initial purchases of the 8% Preferred
Stock, the Company was obligated to register resales of the 8% Preferred
Stock, the Debentures, and the underlying shares of Common Stock issuable upon
conversion thereof. In addition, the Company must use its best efforts to keep
the shelf registration effective until March 22, 1999. If the shelf
registration does not remain effective until such date, the Company may be
required to pay liquidated damages in amounts of up to $0.0125 per week per
share of 8% Preferred Stock.
In December 1995, the Company adopted a Shareholders Rights Plan. Each
holder of Common Stock or Employee Preferred Stock received a dividend of one
right for each share, entitling the holder to buy one one- hundredth of a
share of a new series of preferred stock at a purchase price of $47.50. The
rights may become exercisable only under certain conditions whereby certain
persons (as defined) become the owner of or commence a tender offer for
certain specified percentages of TWA's voting stock and may be redeemed by TWA
at $0.01 per right prior to such time. In the event the rights become
exercisable, holders would be entitled to receive, without payment of a
purchase price, additional shares of Common Stock or be entitled to purchase
Common Stock having a market value of twice the purchase price.
12. EARNED STOCK COMPENSATION:
Pursuant to the '94 Labor Agreements and '95 Reorganization, on the '95
Effective Date, approximately 4.7 million shares of Employee Preferred Stock
and 1.0 million shares of Common Stock were distributed and allocated to
employees through employee stock ownership plans for the benefit of union
(other than the ALPA represented employees) and noncontract employees,
respectively. The distribution of these shares resulted in a charge to
operations in the eight months ended August 31, 1995 of $43.2 million, based
upon the market price of TWA's Common Stock at the time.
Additionally, a "Rabbi Trust" was established to receive the distribution of
approximately 1.7 million shares of Employee Preferred Stock attributable to
ALPA represented employees. The Rabbi Trust will distribute to an employee
benefit plan (the "ESOP") one-third of the shares annually beginning August
1995, subject to certain conditions. Accordingly, operating results for 1996,
the four months ended December 31, 1995 and the eight months ended August 31,
1995 include charges of approximately $6.9 million, $2.0 million and $5.1
million, respectively, representing the value of shares allocated and shares
earned, but unallocated, for such periods, based upon the market price of
TWA's Common Stock. The charge to earnings for shares to be allocated to ALPA
represented employees in the future will be based upon the value of the shares
at that time. Accordingly, material changes in this non-cash charge may occur
in periods prior to the allocation of the shares and such changes may be
unrelated to the Company's operating performance during such periods.
Operating results for the eight months ended August 31, 1995 include a non-
cash charge of approximately $8.0 million, representing the excess of the fair
market value of the shares distributed to employees over the purchase price
paid for shares which were sold to employees pursuant to the Equity Rights
offering.
Also pursuant to the '94 Labor Agreements and the '95 Reorganization, the
Company has adopted a seven year employee stock incentive program (the "ESIP")
pursuant to which TWA will grant its union and non- union employees additional
shares of Employee Preferred Stock and Common Stock (the "Incentive Shares"),
respectively, and such employees will be entitled to purchase additional
shares of such stock under certain circumstances through an employee stock
purchase arrangement. The ESIP has been designed to enable TWA's employees to
increase their level of ownership from 30% to 40% of the combined total number
of outstanding Common Stock and Employee Preferred Stock over the seven year
period.
The first stock grant under the ESIP is to be made on July 15, 1997 in an
amount that would increase the level of employee ownership by 2% of the
combined total number of then outstanding shares of Common Stock
F-32
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and Employee Preferred if the closing price of the Common Stock exceeds a
target price of $11.00 per share following January 1, 1997 or would be made on
any date thereafter if the price of the Common Stock exceeds such target
price. In subsequent years through the end of the seven year term of the ESIP,
the increase in the number of shares of Employee Preferred Stock to be granted
under this program would be equivalent to 1.5% in 1998, 1.5% in 1999, 1.0% in
2000, 1.0% in 2001 and 1.0% in 2002 of the combined total number of shares of
Common Stock and Employee Preferred Stock, and the target prices would
increase to $12.10 in 1998, $13.31 in 1999, $14.64 in 2000, $16.11 in 2001 and
$17.72 in 2002. If TWA issues additional shares of Common Stock with an
aggregate value of more then $20 million to third parties for cash or a
reduction in debt at a price equal to or greater then $11.00 per share, the
last two scheduled installments of the ESIP would be aggregated and these
shares allocated equally to the remaining installments in the program. In
addition, pursuant to the ESIP, employees would have the right after July 15,
1997, to purchase over the seven year term of the ESIP additional shares of
Employee Preferred Stock in amounts up to an aggregate of 2% of the combined
total number of outstanding Common Stock and Employee Preferred Stock at a
discount of 20% from the market price. The employees' right to purchase
additional shares of Employee Preferred Stock would be accelerated and become
immediately exercisable if there is a merger, sale or consolidation of TWA
(where TWA is not the surviving entity) at a merger, sale or consolidation
price equivalent to or in excess of $17.72 per share of Common Stock at a 20%
discount from the merger, sale or consolidation price relating to such a
transaction.
The percentage of employee ownership could decline below 30% in the event
the Company issues additional Common Stock to third parties for cash or
property or in lieu of cash payments on the 12% Senior Secured Reset Notes. To
the extent that as a result of the sale for cash of additional capital stock,
the percentage of employee ownership of the combined total number of shares of
Common Stock and Employee Preferred Stock declines below a level equal to the
Adjusted Maximum Percentage (as defined below) minus eight percentage points
plus the percentage equivalent to any Incentive Shares already issued, one-
quarter of the difference between the new percentage of employee ownership and
the level just determined (but in no event greater than 1% in each year) times
the combined total number of shares of Common Stock and Employee Preferred
Stock outstanding would be added to the amount of Employee Preferred Stock to
union employees and Common Stock to non-union employees to be issued under the
ESIP in each of the years 1999 through 2002 assuming the target prices are met
in each of such years.
In the event of a merger, sale or consolidation of TWA where TWA is not the
surviving entity, TWA would issue to employees at or prior to the consummation
of such a transaction: (i) a number of shares of Employee Preferred Stock and
Common Stock to which the employees would have otherwise been entitled under
the ESIP during its seven year term assuming the trading price of the Common
Stock during such term was the merger, sale or consolidation price, provided,
that if the merger, sale or consolidation price falls between two target
prices, the number of shares to be issued will be based on an interpolation
between the target prices, (ii) if the employee ownership percentage is less
than 35% of the combined total number of outstanding shares of Common Stock
and Employee Preferred Stock, a number of shares of Employee Preferred Stock
and Common Stock equal to the difference between the number of shares already
distributed under the ESIP and a number of shares equivalent to 2.0%, 3.5% or
5.0%, respectively, of the then combined total number of outstanding Common
Stock and Employee Preferred Stock depending on the merger, sale or
consolidation price, but in no event shall shares issued pursuant to this
paragraph increase the employee ownership percentage above 35%, or (iii) if,
following the issuance by the Company of additional shares of Common Stock to
third parties for cash or property equal to 1% of the number of shares of
Common Stock outstanding immediately following the Restructuring and the
employee ownership percentage is below the lesser of 35% and the Adjusted
Maximum Percentage, TWA shall at the option of each employee effect an
immediate cash contribution to the employee's respective pension plan or make
an immediate cash payment to each employee equal to an amount determined as
the number of shares necessary to increase the employee ownership percentage
to the lesser of 35% and the Adjusted Maximum Percentage of the merger, sale
or consolidation price. The Adjusted Maximum Percentage is
F-33
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
defined to mean a level of the percentage of employee ownership following a
reduction below 38% but to no lower than 30% in a manner proportionate to the
aggregate proceeds, if any, received from the issuance of additional Common
Stock to third parties for cash or property up to $200 million.
The ESIP also provides that if additional shares are distributed following
the '95 Effective Date in respect of the '95 Reorganization, employees will be
entitled to receive an additional number of shares of Common Stock and
Employee Preferred Stock such that the employees will retain the same level of
ownership. Pursuant to the '95 Reorganization, TWA issued 2,069,898 shares of
common stock as conditional consideration to the 12% Senior Secured Notes.
Union representatives and the Company have tentatively agreed that the number
of "Fill-Up Shares" to be issued pursuant to the ESIP is approximately
932,000. Under the agreement, approximately 526,000 shares will be distributed
immediately (the "Initial Fill-Up Shares") and the remaining shares (the
"Credit Shares") will be issued in July of 1997 if the 1997 target price is
not met. If the 1997 ESIP target price is not met, the Credit Shares
distributed may be used as a credit against future grants under the ESIP. TWA
will record a charge in 1997 for the fair value of the Initial Fill-Up Shares
as of the date those shares are distributed. The Company's Board of Directors
approved the issue of the Fill-up shares on March 27, 1997. The number of
shares of Employee Preferred Stock outstanding at December 31, 1996 does not
reflect any such additional shares. Shares granted or purchased at a discount
under the ESIP will generally result in a charge equal to the fair value of
shares granted and the discount for shares purchased a the time when such
shares are earned. If the ESIP's target prices for the Common Stock are
realized, the minimum aggregate charge for the years 1997 to 2002, based on
the number of Common Stock and Employee Preferred Stock outstanding at
December 31, 1996 (including Initial Fill-Up Shares) and excluding the impact
of any merger, sale or consolidation of TWA, would be approximately $58
million. The charge for any year, however, could be substantially higher if
the market prices of the Common Stock exceed the respective yearly target
prices.
13. STOCK OPTION PLANS:
The Company's 1994 Key Employee Incentive Stock Plan (the "KESIP"), as
amended, provides for the award of incentive and nonqualified stock options
for up to 7% of the Common Stock and Employee Preferred Stock outstanding as
of the start of each fiscal year (approximately 3.4 million shares at January
1, 1997). Options granted under the KESIP have a five year life after the
final vesting period and vest at the rate of 34% upon the first anniversary of
the award date, 33% upon the second and 33% upon the third anniversary of the
award date. Unvested shares are subject to forfeiture under certain
circumstances.
A summary of the Company's outstanding stock options as of December 31, 1996
and 1995, and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995
------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 2,228,000 $4.68 1,398,576 $4.64
Granted..................... 453,000 11.65 829,424 4.74
Exercised................... (191,316) 4.64 -- --
Forfeited................... (463,300) 7.43 -- --
--------- ---------
Outstanding at end of year 2,026,384 $5.61 2,228,000 $4.68
========= =========
Options exercisable at year-
end........................ 1,307,530 475,516
Weighted average fair value
of options granted during
the year................... $ 6.79 $ 3.03
</TABLE>
F-34
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The per share weighted average fair value of options granted during 1996 and
1995 were estimated using the Black Scholes option pricing model assuming
risk-free interest rates of 6.6% and 6.0% in 1996 and 1995, respectively, an
expected volatility factor of 85% and an expected life of three years.
The following table summarizes information about fixed stock options at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
RANGE NUMBER WEIGHTED-AVERAGE NUMBER
OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4.64 to 6.78......... 1,757,184 3.0 years $4.64 1,255,850 $4.64
7.06 to 8.12......... 20,000 3.8 years 7.95 6,800 7.95
10.62 to 15.81......... 238,100 7.4 years 11.97 39,780 10.64
16.25 to 18.37......... 11,100 4.3 years 17.85 5,100 18.37
--------- ---------
$ 4.64 to 18.37......... 2,026,384 1,307,530
========= =========
</TABLE>
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies
APB Opinion No. 25 and related Interpretations in accounting for its plans.
However, pro forma disclosures as if the Company adopted the fair value based
method of measurement for stock-based compensation plans under SFAS 123 in
1996 and 1995 are presented below.
Had compensation cost for the Company's grants for stock-based compensation
plans been determined using the fair value method under SFAS No. 123, the
Company's net loss pro forma, and net loss per common share for 1996 and 1995
would approximate the amounts below (in millions except per share data):
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss........................... (284,815) (285,716) (30,138) (30,350)
Net loss per common share.......... (7.27) (7.30) (1.05) (1.06)
</TABLE>
The pro forma amounts do not give any effect to options granted prior to
January 1, 1995.
Operating results include charges of $2.2 million, $0.2 million and $0.2
million for the year ended December 31, 1996, the eight months ended August
31, 1995 and the four months ended December 31, 1995, respectively, to reflect
the excess of the market price of TWA's common stock on the date of grant over
the exercise price, over the vesting period. The 1996 charge includes $1.8
million in respect to the accelerated vesting of certain awards in connection
with the severance of certain officers.
14. EXTRAORDINARY ITEMS:
In 1996, the Company consummated a series of privately negotiated exchanges
with a significant holder of the 12% Senior Secured Reset Notes which resulted
in the return to the Company of approximately $45.3 million in 12% Senior
Secured Reset Notes and approximately $1.5 million in accrued interest thereon
in exchange for the issuance of approximately 4.5 million shares of Company
Common Stock. As a result of the exchange of the 12% Senior Secured Notes, the
Company recorded an extraordinary non-cash charge of $8.2 million representing
the difference between the fair value of the common stock issued (based upon
the trading price of the Company's common stock on the dates of exchanges) and
the carrying value of the Senior Secured Reset Notes retired.
F-35
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Company recorded an extraordinary charge of approximately
$1.6 million due to the early extinguishment of a portion of the PBGC Notes as
a result of Karabu applying approximately $6.4 million in ticket proceeds as
prepayments on the PBGC Notes.
The extraordinary gain recorded in the four months ended December 31, 1995
was due to the cancellation of debt as a result of a settlement between Trans
World Express, Inc. ("TWE"), a subsidiary, and an aircraft lessor. The
extraordinary gain recorded in the eight months ended August 31, 1995 was for
the discharge of indebtedness pursuant to the Company's '95 Reorganization.
The extraordinary charge recorded in 1994 was for a prepayment premium of
approximately $2.0 million related to the sale and lease back of four
McDonnell Douglas MD-80 aircraft.
15. DISPOSITION OF ASSETS:
Disposition of assets resulted in net losses of approximately $1,135,000 and
$206,000 during 1996 and for the eight months ended August 31, 1995,
respectively, and net gains of $3,330,000 and $1,072,000 for the four months
ended December 31, 1995 and during 1994, respectively.
In 1996, TWA recorded a gain of approximately $8.0 million in connection
with the hull insurance settlement for the aircraft destroyed in the Flight
800 incident. The gain was offset by a loss of $8.3 million on the sale of
expendable aircraft parts and losses on other miscellaneous dispositions.
In November 1995, TWA entered into an agreement to sublease certain of TWA's
leased commissary facilities in Los Angeles. As part of this agreement, TWA
sold its commissary furnishings and equipment, resulting in a gain of $2.0
million.
The 1994 net gain included a gain of approximately $1.3 million on the
divestiture of three subsidiaries, Midcoast Aviation, Inc., Travel Marketing
Services, Inc. and World Marketing Services, Inc.
16. SPECIAL CHARGES AND OTHER NONRECURRING ITEMS:
The 1996 operating loss includes an aggregate of approximately $85.9 million
in special charges and nonrecurring items, primarily as follows: (i)
approximately $26.7 million to reflect the write-off of the carrying value of
TWA's New York-Athens route authority over which TWA has elected to
discontinue service, (ii) approximately $53.7 million to reflect the reduction
in carrying value of TWA's owned L-1011 and B-747 aircraft and related spare
parts which are expected to be retired from service over the next year and
(iii) approximately $5.5 million for employee severance liabilities related to
the termination of service to Athens and Frankfurt. The write-down of owned
aircraft and related spare parts was based upon managements estimates of the
net proceeds to be received upon the disposition of these assets.
Additionally, the Company has obligations under operating leases for B-747
aircraft aggregating approximately $50 million over the next seven years.
Management currently estimates that it will be able to recover substantially
all of these costs pursuant to subleases of these aircraft and, accordingly,
no provision has been made for any such costs at this time. Management's
estimates relative to the costs of the retirement of the L-1011 and B-747
fleets and related spare parts are based upon current market conditions,
preliminary discussions with interested parties and other factors. The actual
costs could differ materially from the current estimates.
The operating income for the eight months ended August 31, 1995, includes a
special charge of $1.7 million for shut-down related expenses of TWE.
The 1994 operating loss includes an aggregate of $175.1 million in costs
associated with special charges and nonrecurring items as further described
below.
F-36
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the fourth quarter of 1994, TWA recorded a charge of $36.3 million to
salaries, wages and benefits to reflect the estimated portion of the
obligation earned to date for payments due to employees represented by the IAM
for overtime savings in excess of certain targeted levels established in the
'92 Labor Agreement (see Note 7).
During 1994, TWA undertook several strategic operational initiatives to
improve its competitiveness and reduce its cost structure. Special charges
recorded in 1994 include the following principal components: (i) approximately
$61 million to reflect the write-off of the carrying value of certain
international route authorities which were no longer expected to be utilized
in connection with the restructuring of such operations, (ii) approximately
$34 million to reflect the write-off of pre-delivery payments and related
capitalized interest for certain aircraft on order (also see Note 18--Aircraft
Commitments), (iii) approximately $24 million to reflect the reduction in the
carrying value of certain owned aircraft and spare parts which, under the
Company's fleet plan, were expected to be retired and sold and (iv)
approximately $15 million for furlough pay and severance costs related to
reduction in the number of employees.
17. OTHER CHARGES AND CREDITS:
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Expenses associated with the restructuring of debt and flight equipment
leases.................................................................. -- 3,000 11,000 11,100
Provisions for losses resulting from claims and litigation judgments
against TWA............................................................. 235 26 351 200
Foreign currency transaction (gains) losses-net.......................... (642) 1,156 384 (1,941)
Finance charge income earned on receivables carried by TWA............... (8,030) (2,662) (6,198) (9,557)
Credits related to settlement of various contract disputes, litigation
and other matters....................................................... (2,500) -- -- --
Equity in (earnings)/losses of TWA's investment in Worldspan............. (11,919) 11,535 (3,607) 3,616
Miscellaneous other nonoperating charges (credits)-net (a)............... (7,742) (5,444) (4,309) (32,265)
-------- ------ ------- --------
Total Other Charges and Credits.......................................... $(30,598) $7,611 $(2,379) $(28,847)
- - --------------------------------------------------
======== ====== ======= ========
</TABLE>
- - --------
(a) The amount for 1994 includes certain nonrecurring income amounts
aggregating approximately $21.1 million relating to the reduction of
certain liabilities established on the '93 Effective Date (also see Note
20-Supplemental Financial Information (Unaudited)).
18. AIRCRAFT COMMITMENTS:
TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce plc
relating to the purchase of ten A330-300 twin-engine wide body aircraft and
related engines, spare parts and equipment for an aggregate purchase price of
approximately $1.1 billion. The agreements, as amended, require the delivery
of the aircraft in 1999 and 2000 and provide for the purchase of up to ten
additional aircraft. TWA has not yet made arrangements
F-37
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for the permanent financing of the purchases subject to the agreements. In the
event of cancellation, predelivery payments of approximately $18 million would
be subject to forfeiture.
During 1996 TWA entered into a purchase agreement with the Boeing Company
relating to the purchase of ten Boeing Model 757-231 aircraft and related
engines, spare parts and equipment for an aggregate purchase price of
approximately $500 million. The agreement requires the delivery of the
aircraft in 1997, 1998 and 1999, and provides for the purchase of up to ten
additional aircraft. Furthermore, to the extent TWA exercises its options for
additional aircraft, the Company will have the right to an equal number of
additional option aircraft. TWA has obtained commitments for debt financing
for approximately 80% of the total costs associated with the acquisition of
eight of the original ten aircraft and obtained commitments for 100% of the
total costs of the remaining two original aircraft. Such commitments are
subject to the lender's and lessor's ongoing evaluation of the financial
condition of TWA.
Required future expenditures under the purchase agreements described above,
including an estimate of price escalation as defined in the subject agreements
and exclusive of secured financing, are as follows (amounts in millions):
<TABLE>
<CAPTION>
AVSA BOEING
----- ------
<S> <C> <C>
1997.......................................................... 49.1 248.5
1998.......................................................... 49.8 97.0
1999.......................................................... 515.4 143.0
2000.......................................................... 532.5 --
</TABLE>
19. FRESH START REPORTING:
Pursuant to SOP 90-7, TWA adopted fresh start reporting which has resulted
in the creation of a new reporting entity and the Company's assets and
liabilities being adjusted to reflect fair values on the '95 Effective Date.
For accounting purposes, the '95 Effective Date was deemed to be September 1,
1995. In the fresh start reporting, an aggregate value of $270 million was
assigned to TWA's Common Stock and Employee Preferred Stock. These values were
established by management with the assistance of its financial advisors. These
valuations considered TWA's expected future performance, relevant industry and
economic conditions, and analyses and comparisons with comparable companies.
The reorganization value of TWA has been allocated to the Reorganized
Company's assets and liabilities in a manner similar to the purchase method of
accounting for a business combination. Management obtained valuations from
independent third parties which, along with other market and related
information and analyses, were utilized in assigning fair values to assets and
liabilities. A summary of the impact of the '95 Reorganization and the related
fresh start adjustments is presented below. The fresh start adjustments
resulted in, among other things, the allocation of substantial amounts to
reorganization value in excess of amounts allocable to identifiable assets,
the amortization of which, while not requiring the use of cash, will
significantly affect future operating results.
F-38
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the impact of the '95 Reorganization Plan and the related fresh
start adjustments is presented below (amounts in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 1, 1995
-------------------------------------------------------------------
PREDECESSOR DEBT FRESH START OTHER REORGANIZED
COMPANY DISCHARGE(A) ADJUSTMENTS(B) ADJUSTMENTS(C) COMPANY
----------- ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents........... $ 239,796 $ -- $ -- $ -- $ 239,796
Receivables............ 297,022 (1,449) -- -- 295,573
Spare parts, materials
and supplies.......... 146,191 -- -- -- 146,191
Prepaid expenses and
other................. 60,947 -- -- -- 60,947
---------- --------- ---------- --------- ----------
Total Current Assets.. 743,956 (1,449) -- -- 742,507
---------- --------- ---------- --------- ----------
Property and Equipment.. 631,087 -- (24,239) -- 606,848
---------- --------- ---------- --------- ----------
Other Assets:
Investment in
affiliated companies.. 110,325 -- -- -- 110,325
Other investments and
receivables........... 163,715 -- -- -- 163,715
Routes, gates and
slots................. 737,171 -- (278,722) -- 458,449
Reorganization value in
excess of amounts
allocable to
identifiable assets... 153,840 -- -- 685,224 839,064
Other assets........... 28,531 -- ( 9,392) -- 19,139
---------- --------- ---------- --------- ----------
Total Other............ 1,193,582 -- (288,114) 685,224 1,590,692
---------- --------- ---------- --------- ----------
Total................... $2,568,625 $ (1,449) $ (312,353) $ 685,224 $2,940,047
========== ========= ========== ========= ==========
Current Liabilities:
Current maturities of
long-term debt........ $ 472,510 $(404,665) $ -- $ -- $ 67,845
Current obligations
under capital leases.. 42,643 -- (647) -- 41,996
Advance ticket sales... 253,642 -- -- -- 253,642
Accounts payable and
other accrued
expenses.............. 518,030 24,466 3,739 -- 546,235
---------- --------- ---------- --------- ----------
Total.................. 1,286,825 (380,199) 3,092 -- 909,718
---------- --------- ---------- --------- ----------
Liabilities Subject To
Chapter 11
Reorganization
Proceedings............ 748,855 (748,855) -- -- --
---------- --------- ---------- --------- ----------
Noncurrent Liabilities
and Deferred Credits:
Long-term debt, less
current maturities.... -- 765,435 -- -- 765,435
Obligations under
capital leases, less
current obligations... 317,196 -- (42,440) -- 274,756
Other noncurrent
liabilities and
deferred credits...... 673,428 18,612 (30,762) -- 661,278
---------- --------- ---------- --------- ----------
Total.................. 990,624 784,047 (73,202) -- 1,701,469
---------- --------- ---------- --------- ----------
Redeemable Preferred
Stock.................. -- 58,860 -- -- 58,860
---------- --------- ---------- --------- ----------
Shareholders' Equity
(Deficiency):
Old Preferred Stock.... 125 -- -- (125) --
Old Common Stock....... 200 -- -- (200) --
Employee Preferred
Stock................. -- -- -- 53 53
New Common Stock....... -- -- -- 172 172
Additional paid-in
capital............... 161,692 143,800 -- (35,717) 269,775
Accumulated Deficit.... (619,696) 140,898 (242,243) 721,041 --
---------- --------- ---------- --------- ----------
Total.................. (457,679) 284,698 (242,243) 685,224 270,000
---------- --------- ---------- --------- ----------
Total................... $2,568,625 $ (1,449) $ (312,353) $ 685,224 $2,940,047
========== ========= ========== ========= ==========
</TABLE>
- - --------
(a) To record the discharge of indebtedness pursuant to the '95 Reorganization
and reclassification of debt between current and non-current based upon
its revised terms. Debt securities, Mandatorily Redeemable 12% Preferred
Stock, Ticket Vouchers and Contingent Payment Rights issued pursuant to
the '95 Reorganization have been recorded at their estimated fair values.
The excess of indebtedness eliminated
F-39
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
over the fair value of securities issued in settlement of those claims,
approximately $140.9 million, is reflected as an extraordinary item in the
eight months ended August 31, 1995.
(b) To record adjustments to reflect assets and liabilities at fair values.
The adjustments to record the fair values of assets and liabilities
resulted in a nonrecurring charge to reorganization items of approximately
$228.8 million in the eight months ended August 31, 1995. Charges to
reorganization items were recorded for various fees and expenses related
to the consummation of the '95 Plan aggregating approximately $13.4
million. Significant elements of the adjustments to record the fair value
of assets and liabilities are summarized below:
--Adjustments to reflect the fair value of owned property and equipment
under capital leases.
--Adjustments to reflect the fair value of TWA's international route
authorities, take-off and landing time slots and airport gate leaseholds.
--Adjustments to record the present value of the liabilities for
postretirement medical and life insurance benefits and certain foreign
pension plans to reflect the current postretirement benefit obligation and
projected benefit obligation, respectively, utilizing current discount
rates.
--An adjustment to reduce deferred income taxes to reflect the impact of
the preceding adjustments.
(c) To record adjustments to reflect the elimination of the remaining deficit
in shareholders' equity after the adjustments arising from (a) and (b)
above and to reflect the associated reorganization value in excess of
amounts allocable to identifiable assets.
F-40
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED):
Selected consolidated financial data (unaudited) for each quarter within 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- ---------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
REORGANIZED COMPANY
YEAR ENDED DECEMBER 31, 1996
Operating revenues.............. $ 782,433 $965,808 $1,002,867 $ 803,299
========= ======== ========== =========
Special charges (note 16)....... $ -- $ -- $ -- $ 85,915
========= ======== ========== =========
Operating income (loss)......... $ (54,191) $ 62,028 $ 26,019 $(232,383)
========= ======== ========== =========
Disposition of assets, gains
(losses)--net.................. $ (214) $ 239 $ (87) $ (1,073)
========= ======== ========== =========
Income (loss) before
extraordinary item............. $ (37,107) $ 25,262 $ (6,905) $(256,277)
========= ======== ========== =========
Extraordinary items............. $ -- $ -- $ (7,420) $ (2,368)
========= ======== ========== =========
Net income (loss)............... $ (37,107) $ 25,262 $ (14,325) $(258,645)
========= ======== ========== =========
Per share amounts:
Earnings (loss) before
extraordinary items and
special dividend requirements. $ (.98) $ .46 $ (.24) $ (5.51)
========= ======== ========== =========
Extraordinary items and special
dividend requirements......... $ (.48) $ -- $ (.16) $ (.05)
========= ======== ========== =========
Net income (loss).............. $ (1.46) $ .46 $ (.40) $ (5.56)
========= ======== ========== =========
REORGANIZED COMPANY
FOUR MONTHS ENDED DECEMBER 31,
1995
Operating revenues.............. $ -- $ -- $ 293,890 (a) $ 804,584
========= ======== ========== =========
Operating income................ $ -- $ -- $ 9,308 (a) $ 1,138
========= ======== ========== =========
Disposition of assets, gains
(losses)--net.................. $ -- $ -- $ (50)(a) $ 3,380
========= ======== ========== =========
Loss before extraordinary item.. $ -- $ -- $ (2,347)(a) $ (31,291)
========= ======== ========== =========
Extraordinary items............. $ -- $ -- $ -- (a) $ 3,500
========= ======== ========== =========
Net loss........................ $ -- $ -- $ (2,347)(a) $ (27,791)
========= ======== ========== =========
Per share amounts:
Loss before extraordinary
items......................... $ -- $ -- $ (.16)(a) $ (.93)
========= ======== ========== =========
Extraordinary item............. $ -- $ -- $ -- (a) $ .09
========= ======== ========== =========
Net loss....................... $ -- $ -- $ (.16)(a) $ (.84)
========= ======== ========== =========
PREDECESSOR COMPANY
EIGHT MONTHS ENDED AUGUST 31,
1995
Operating revenues.............. $ 692,320 $860,506 $ 665,529 (b) $ --
========= ======== ========== =========
Special charges (note 16)....... $ -- $ -- $ 1,730 (b) $ --
========= ======== ========== =========
Operating income (loss)......... $ (76,261) $ 54,382 $ 36,521 (b) $ --
========= ======== ========== =========
Reorganization items............ $ -- $ -- $ 242,243 (b) $ --
========= ======== ========== =========
Disposition of assets, gains
(losses)--net.................. $ (271) $ (67) $ 132 (b) $ --
========= ======== ========== =========
Income (loss) before
extraordinary item............. $(122,795) $ 5,168 $ (220,586)(b) $ --
========= ======== ========== =========
Extraordinary items............. $ -- $ -- $ 140,898 (b) $ --
========= ======== ========== =========
Net income (loss)............... $(122,795) $ 5,168 $ (79,688)(b) $ --
========= ======== ========== =========
</TABLE>
- - --------
(a) One month ended September 30, 1995
(b) Two months ended August 31, 1995
F-41
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The results for each period include all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods.
The consolidated financial results on an interim basis are not necessarily
indicative of future financial results on either an interim or annual basis.
TWA's air transportation business is highly seasonal with the second and third
quarters of the calendar year historically producing substantially better
operating results than the first and fourth quarters.
The results for the fourth quarter of 1996 includes an adjustment to reduce
aircraft fuel and oil costs by approximately $8.8 million, as a result of
federal fuel excise taxes paid which are expected to be refunded to the
Company.
The results for the fourth quarter of 1995 include several adjustments to
operating expenses to reflect changes in estimates, including a reduction in
passenger sales commissions of approximately $6.7 million and a reduction in
employee benefits and workers compensation costs of $6.2 million.
21. FOREIGN OPERATIONS:
TWA conducts operations in various foreign countries, principally in Europe
and the Middle East. Operating revenues from foreign operations were
approximately $719.2 million in the year ended December 31, 1996, $228.7
million in the four months ended December 31, 1995, $474.4 million in the
eight months ended August 31, 1995 and $794.1 million in the year ended
December 31, 1994.
22. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires disclosures with regards to fair values of all financial instruments,
whether recognized or not recognized in the balance sheet, subject to certain
exceptions. Solely for purposes of complying with this accounting standard,
the Company has estimated the fair value of certain of its financial
instruments, as further described below. Because no market exists for a
significant portion of TWA's financial instruments, fair value estimates
provided below are based on judgments regarding current economic conditions,
risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. The
discussion of financial instruments below conforms with the presentation in
the Consolidated Balance Sheet and relates to the amounts at December 31, 1996
and 1995.
(a) Cash, cash equivalents and receivables: The carrying amounts of these
assets is estimated to approximate fair value due to the generally short
maturities of these instruments.
(b) Other investments and receivables: The carrying amount of these assets are
estimated to approximate fair value due to the generally short maturities
of the underlying instruments which are, however, classified as long-term
assets because TWA's ability to access these amounts is generally
restricted by contractual provisions.
(c) Accounts payable and other accrued liabilities: The carrying amount of
these liabilities are estimated to approximate fair value due to the
generally short maturities of these instruments.
(d) Debt: At December 31, 1996 and December 31, 1995, approximately $111.8
million and $145.2 million, respectively, of the carrying value of TWA's
debt was traded publicly. The aggregate market value of such debt was
approximately $126.0 million and $160.4 million on those dates,
respectively. The Company
F-42
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
believes the fair value of the remaining debt which had an aggregate
carrying value of approximately $589.1 million and $686.4 million at
December 31, 1996 and 1995, respectively, was approximately $466.4 million
and $644.5 million on those dates.
(e) Mandatorily Redeemable 12% Preferred Stock: At December 31, 1995 the
carrying value of TWA's Mandatorily Redeemable 12% Preferred Stock was
$61.4 million. The aggregate market value of such stock was approximately
$74.1 million on that date.
F-43
<PAGE>
SCHEDULE II
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995,
AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------- ---------- ----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS & END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Reserves deducted from assets
to which they apply:
Allowance for doubtful ac-
counts..................... $13,517 $ 8,037 $ 8,615(a) $ 12,939
======= ======= ======= ========
Allowance for obsolescence.. $ 2,201 $10,989 $ 1,627 $ 11,563
======= ======= ======= ========
Four Months Ended December 31,
1995 Reserves deducted from
assets to which they apply:
Allowance for doubtful ac-
counts..................... $16,155 $ 700 $ 3,338(a) $ 13,517
======= ======= ======= ========
Allowance for obsolescence.. $ -- $ 2,308 $ 107 $ 2,201
======= ======= ======= ========
Eight Months Ended August 31,
1995 Reserves deducted from
assets to which they apply:
Allowance for doubtful ac-
counts..................... $14,832 $ 6,781 $ 5,458(a) $ 16,155
======= ======= ======= ========
Allowance for obsolescence.. $20,928 $ 4,604 $25,532(b) $ --
======= ======= ======= ========
Year Ended December 31, 1994
Reserves deducted from assets
to which they apply:
Allowance for doubtful ac-
counts..................... $11,159 $16,267 $12,594(a) $ 14,832
======= ======= ======= ========
Allowance for obsolescence.. $ 1,470 $19,837 $ 379 $ 20,928
======= ======= ======= ========
</TABLE>
- - --------
(a) Accounts written off, less recoveries.
(b) Includes adjustment to eliminate allowance for obsolescence in the amount
of $25,146 in connection with fresh start reporting.
(c) Includes adjustment to eliminate allowance for obsolescence in the amount
of $61,252, in connection with fresh start reporting.
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
March 31, 1997 TRANS WORLD AIRLINES, INC.
By: /s/ Gerald L. Gitner
---------------------
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gerald L. Gitner Director, Chairman of the March 31, 1997
- - ------------------------------------ Board and Chief Executive
Officer (Principal Executive
Officer)
Gerald L. Gitner
/s/ Michael J. Palumbo Senior Vice President and March 31, 1997
- - ------------------------------------ Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
Michael J. Palumbo
John W. Bachmann* Director March 31, 1997
- - ------------------------------------
John W. Bachmann
William F. Compton* Director March 31, 1997
- - ------------------------------------
William F. Compton
Eugene P. Conese* Director March 31, 1997
- - ------------------------------------
Eugene P. Conese
Gerald L. Gitner* Director March 31, 1997
- - ------------------------------------
Gerald L. Gitner
William M. Hoffman* Director March 31, 1997
- - ------------------------------------
William M. Hoffman
Thomas H. Jacobsen* Director March 31, 1997
- - ------------------------------------
Thomas H. Jacobsen
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Myron Kaplan* Director March 31, 1997
- - ------------------------------------
Myron Kaplan
David M. Kennedy* Director March 31, 1997
- - ------------------------------------
David M. Kennedy
Jewel Lafontant-Mankarious* Director March 31, 1997
- - ------------------------------------
Jewel Lafontant-Mankarious
Thomas F. Meagher* Director March 31, 1997
- - ------------------------------------
Thomas F. Meagher
William O'Driscoll* Director March 31, 1997
- - ------------------------------------
William O'Driscoll
G. Joseph Reddington* Director March 31, 1997
- - ------------------------------------
G. Joseph Reddington
Lawrence K. Roos* Director March 31, 1997
- - ------------------------------------
Lawrence K. Roos
Director March , 1997
- - ------------------------------------
Stephen M. Tumblin
William W. Winpisinger* Director March 31, 1997
- - ------------------------------------
William W. Winpisinger
*By: /s/_____Richard P. Majurno_____ March 31, 1997
Attorney-in-fact
</TABLE>
D-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
*2.1 Joint Plan of Reorganization, dated May 12, 1995 (Appendix B to the
Company's Registration Statement on Form S-4, Registration Number 33-
84944, as amended.)
*2.2 Modifications to Joint Plan of Reorganization, dated July 14, 1995
and Supplemental Modifications to Joint Plan of Reorganization dated
August 2, 1995 (Exhibit 2.5 to 6/95 10-Q)
*2.3 Findings of Fact, Conclusions of Law and Order Confirming Modified
Joint Plan of Reorganization, dated August 4, 1995, with Exhibits A-B
attached (Exhibit 2.6 to 6/95 10-Q)
*2.4 Final Decree, dated December 28, 1995, related to the '95
Reorganization (Exhibit 2.7 to 1995 10-K)
*3(i) Third Amended and Restated Certificate of Incorporation of Trans
World Airlines, Inc. (Exhibit 3(iv) to Company's Registration
Statement on Form S-3, Reg. No. 333-04977)
*3(ii) Amended and Restated By-Laws of Trans World Airlines, Inc., effective
May 24, 1996 (Exhibit 3(ii) to 6/96 10-Q)
*4.1 Voting Trust Agreement, dated November 3, 1993, between TWA and
LaSalle National Trust, N.A., as trustee (Exhibit 4.3 to 9/93 10-Q)
*4.2 IAM TWA Employees' Stock Ownership Plan and related Trust Agreement,
dated August 31, 1993, between TWA, the IAM Plan Trustee Committee
and the IAM Trustee (Exhibit to 9/93 10-Q)
*4.3 IFFA TWA Employees' Stock Ownership Plan and related Trust Agreement,
dated August 31, 1993, between TWA, the IFFA Plan Trustee Committee
and the IFFA Trustee (Exhibit 4.5 to 9/93 10-Q)
*4.4 TWA Employee Stock Ownership Plan, dated August 31, 1993, First
Amendment thereto, dated October 31, 1993, and related Trust
Agreement, dated August 31, 1993, between TWA and the ESOP Trustee
(Exhibit 4.6 to 9/93 10-Q)
*4.5 ALPA Stock Trust, dated August 31, 1993, between TWA and the ALPA
Trustee (Exhibit 4.7 to 9/93 10-Q)
*4.6 Stockholders Agreement, dated November 3, 1993, among TWA, LaSalle
National Trust, N.A., as Voting Trustee and the ALPA Trustee, IAM
Trustee, IFFA Trustee and Other Employee Trustee (each as defined
therein), as amended by the Addendum to Stockholders dated November
3, 1993 (Exhibit 4.8 to 9/93 10-Q)
*4.7 Indenture between TWA and Shawmut Bank, National Association, dated
November 3, 1993 relating to TWA's 10% Senior Secured Notes Due 1998
(Exhibit 4.10 to 9/93 10-Q)
*4.8 Indenture between TWA and American National Bank and Trust Company of
Chicago, N.A., dated November 3, 1993 relating to TWA's 8% Secured
Notes Due 2001 (Exhibit 4.12 to 9/93 10-Q)
*4.9 Indenture between TWA and Shawmut Bank Connecticut, National
Association, dated November 3, 1993 relating to TWA's 11% Senior
Secured Notes Due 1997 (Exhibit 4.13 to 9/93 10-Q)
*4.10 The TWA Air Line Pilots 1995 Employee Stock Ownership Plan, effective
as of January 1, 1995 (Exhibit 4.12 to 9/95 10-Q)
*4.11 TWA Air Line Pilots Supplemental Stock Plan, effective September 1,
1994 (Exhibit 4.13 to 9/95 10-Q)
*4.12 TWA Air Line Pilots Supplemental Stock Plan Trust, effective August
23, 1995 (Exhibit 4.14 to 9/95 10-Q)
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
*4.13 TWA Air Line Pilots Supplemental Stock Plan Custodial Agreement,
effective August 23, 1995 (Exhibit 4.15 to 9/95 10-Q)
*4.14 Form of Indenture relating to TWA's 8% Convertible Subordinated
Debentures Due 2006 (Exhibit 4.16 to Registrant's Registration
Statement on Form S-3, Registration No. 333-04977)
*10.1.1 Icahn Asset-Based Facility Loan documents, dated January 5, 1993
(Exhibit 10(iv)(4) to '92 10-K)
*10.1.2 Icahn Asset-Based Facility Loan documents, dated January 5, 1993
(Exhibit 10(iv)(5) to '92 10-K)
*10.2.1 Asset Purchase Agreement, dated as of November 4, 1993, between TWA
and St. Louis (Exhibit 10.2 to 9/93 10-Q)
*10.2.2 Equipment Operating Lease Agreement, dated November 4, 1993, between
TWA and St. Louis (Exhibit 10.2 to 9/93 10-Q)
*10.2.3 Cargo Use Amendment, dated November 4, 1993 between TWA and St. Louis
(Exhibit F to the Asset Purchase Agreement) (Exhibit 10.2 to 9/93 10-
Q)
*10.2.4 Use Amendment 1993, dated November 4, 1993, between TWA and St. Louis
(Exhibit E to the Asset Purchase Agreement) (Exhibit 10.2 to 9/93 10-
Q)
*10.3.1 Amendment Number One to the Note Purchase and Security Agreement,
dated October 26, 1993, between TWA and Rolls-Royce (Exhibit 10.3 to
9/93 10-Q)
*10.3.2 Amendment Number One to the Equipment Purchase Contract, dated
October 26, 1993, between TWA and Rolls-Royce (Exhibit 10.3 to 9/93
10-Q)
*10.4 Amendment Number Two to the AVSA Agreement dated June 1, 1989 between
TWA and AVSA, dated August 25, 1993 (Exhibit 10.4 to 9/93 10-Q)
*10.5.1 First Amendment to Aircraft Installment Sale Agreement, dated
November 1, 1993, among TWA, the Vendors, and ITOCHU with respect to
aircraft N605TW (Exhibit 10.5 to 9/93 10-Q)
*10.5.2 First Amendment to Aircraft Installment Sale Agreement, dated
November 1, 1993, among TWA, the Vendors, and ITOCHU with respect to
aircraft N603TW (Exhibit 10.5 to 9/93 10-Q)
*10.5.3 First Amendment to Security Agreement and Chattel Mortgage, dated
November 1, 1993, among TWA, the Vendors, and ITOCHU, as to ITOCHU
Amendment No. 1 (Exhibit 10.5 to 9/93 10-Q)
*10.5.4 First Amendment to Security Agreement and Chattel Mortgage, dated
November 1, 1993, among TWA, the Vendors, and ITOCHU, as to ITOCHU
Amendment No. 2 (Exhibit 10.5 to 9/93 10-Q)
*10.6.1 Deferral Agreement and First Amendment to Aircraft Installment Sale
Agreement No. 1, dated November 1, 1993, among TWA, the Vendors, and
ORIX with respect to aircraft N601TW (Exhibit 10.6 to 9/93 10-Q)
*10.6.2 Deferral Agreement and First Amendment to Aircraft Installment Sale
Agreement, dated November 1, 1993, among TWA, the Vendors, and ORIX
with respect to aircraft N603TW (Exhibit 10.6 to 9/93 10-Q)
*10.6.3 First Amendment to Security Agreement and Chattel Mortgage, dated
November 1, 1993, among TWA, the Vendors, and ORIX, as to ORIX
Amendment No. 1 (Exhibit 10.6 to 9/93 10-Q)
*10.6.4 First Amendment to Security Agreement and Chattel Mortgage, dated
November 1, 1993, among TWA, the Vendors, and ORIX, as to ORIX
Amendment No. 2 (Exhibit 10.6 to 9/93 10-Q)
*10.7.1 Purchase Agreement, dated October 5, 1993, between TWA and Pacific
AirCorp 747, Inc. with respect to aircraft N93107 and N93108 (Exhibit
10.7 to 9/93 10-Q)
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
*10.7.2 Lease Agreement 107, dated October 5, 1993, between Pacific AirCorp
747, Inc. and TWA with respect to aircraft N93107 (Exhibit 10.7 to
9/93 10-Q)
*10.7.3 Lease Agreement 108, dated October 5, 1993, between Pacific AirCorp
747, Inc. and TWA with respect to aircraft N93107 (Exhibit 10.7 to
9/93 10-Q)
*10.8 Comprehensive Settlement Agreement, dated January 5, 1993 (Exhibit
10(iv)(1) to '92 10-K)
10.8.1 Omnibus Amendment and Supplement to Agreements between TWA and Karabu
Corp. dated as of March 28, 1994(1)
*10.9 Letter Agreement, dated April 15, 1994, between TWA and Richard P.
Magurno relating to employment by TWA (Exhibit 10.14 to 3/94 10-Q)
*10.10 Form of Indemnification Agreement between TWA and individual members
of the TWA Board of Directors relating to indemnification of director
(Exhibit 10.16 to 6/94 10-Q)
10.11.1 Purchase Agreement, dated as of December 15, 1993 between TWA and
Pacific AirCorp DC9, Inc. with respect to aircraft N927L and N928L(1)
10.11.2 Lease Agreement 927, dated as of December 15, 1993, between Pacific
AirCorp DC9, Inc. and TWA with respect to aircraft N927L(1)
10.11.3 Lease Agreement 928, dated as of December 1, 1993, between Pacific
AirCorp DC9, Inc. and TWA with respect to aircraft N928L(1)
10.12.1 Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.),
Inc. dated March 31, 1994, with respect to aircraft N950U(1)
10.12.2 Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.),
Inc., dated March 31, 1994, with respect to aircraft N953U(1)
10.12.3 Lease Agreement, dated as of March 31, 1994 between Mitsui & Co.
(U.S.A.), Inc. and TWA with respect to aircraft N950U and N953U(1)
10.12.4 Aircraft Purchase Agreement between TWA and McDonnell Douglas Finance
Corporation, dated March 31, 1994, with respect to aircraft N951U(1)
10.12.5 Aircraft Purchase Agreement between TWA and McDonnell Douglas Finance
Corporation, dated March 31, 1994, with respect to aircraft N952U(1)
10.12.6 Lease Agreement, dated as of March 31, 1994 between McDonnell Douglas
Finance Corporation and TWA with respect to aircraft N951U and
N952U(1)
10.13.1 Aircraft Purchase Agreement, dated March 31, 1994, between McDonnell
Douglas Finance Corporation and TWA with respect to aircraft N306TW
(formerly N534AW)(1)
10.13.2 Purchase Money Chattel Mortgage, dated as of March 31, 1994, by TWA,
as Mortgagor, and McDonnell Douglas Finance Corporation, as
Mortgagee, with respect to N306TW (formerly N534AW)(1)
10.13.3 Chattel Mortgage, dated as of March 31, 1994 by TWA as Mortgagor, in
favor of McDonnell Douglas Finance Corporation, as Mortgagee, with
respect to aircraft N306TW (formerly N534AW)(1)
10.14 Commuter Air Service Agreement dated October 27, 1993, between TWA
and Alpha Air(1)
10.15 Air Service Agreement dated October 1, 1994, between TWA and Trans
States Airlines, Inc.(1)
10.16 Consulting Agreement between TWA and Fieldstone, Private Capital
Group, L.P. dated July 11, 1994(1)
10.17 Consulting Agreement dated July 15, 1994, between TWA and Simat,
Helliesen & Eichner, Inc.(1)
10.17.1 Agreement for Purchase and Sale dated as of August 29, 1994, between
TWA and Browsh & Associates, Inc.(1)
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.17.2 Agreement for Purchase and Sale dated as of August 29, 1994, between
TWA and Travel Marketing Holding Corporation(1)
*10.18.1 Addendum to Stock Purchase Agreement (identified in 10.29.2) dated
October 31, 1994 (Exhibit 10.29.3 to 9/94 10-Q)
*10.18.2 Addendum to Stock Purchase Agreement (identified in 10.29.2) dated
November 2, 1994 (Exhibit 10.29.4 to 9/94 10-Q)
10.19.1 Form of Agreement dated as of August 31, 1994, between TWA and Air
Line Pilots Association, International(1)
10.19.2 Form of Agreement dated as of September 1, 1994, between TWA and the
International Association of Machinists and Aerospace Workers (1)
10.19.3 Form of Agreement dated as of September 1, 1994, between TWA and the
Independent Federation of Flight Attendants(1)
*10.19.4 Form of Agreement dated as of September 1, 1994, between TWA and the
Transport Workers Union of America (Exhibit 10.31.4 to 9/94 10-Q)
10.20.1 Trust Agreement dated as of August 29, 1994 between and among TWA,
the International Association of Machinists and Aerospace Workers,
the Independent Federation of Flight Attendants, the Air Line Pilots
Association, International, United States Trust Company of New
York(1)
10.20.2 Stock Pledge and Intermediator Agreement dated as of August 24, 1994
among TWA, TWA Stock Holding Company, Inc. and United States Trust
Company of New York(1)
10.21.1 Key Employee Stock Incentive Plan(1)
10.21.2 Form of Opinion Agreements for options issued pursuant to the 1994
Key Employee Stock Incentive Plan(1)
*10.22 Extension, Refinancing and Consent Agreement between TWA, Karabu
Corp, Pichin Corp and Carl C. Icahn and the "Icahn Entities" dated as
of June 14, 1995 (Exhibit 10.37 to 9/95 10-Q)
*10.22.1 Karabu Ticket Program Agreement between TWA and Karabu Corp. dated as
of June 14, 1995
*10.23 Trans World Airlines, Inc. Stock Purchase Warrant to Purchase Shares
of Common Stock, dated August 23, 1995 (Exhibit 10.38 to 9/95 10-Q)
*10.24 Stand-By Purchase Agreement dated as of August 8, 1995 between Trans
World Airlines, Inc., M.D. Sass Re/Enterprise Partners L.P., a
Delaware limited partnership and M.D. Sass Re/Enterprise
International Ltd. a British Virgin Islands Company (Exhibit 10.39 to
9/95 10-Q)
*10.25 Voucher Purchase Agreement dated as of October 18, 1995 between TWA
and M.D. Sass Re/Enterprise Partners L.P., a Delaware limited
partnership and M.D. Sass Re/Enterprise International Ltd. a British
Virgin Islands Company (Exhibit 10.40 to 9/95 10-Q)
*10.26 Purchase Agreement, dated February 9, 1996 between The Boeing Company
and TWA relating to Boeing Model 757-231 Aircraft (Purchase Agreement
Number 1910) (Exhibit 10.48 to 1995 10-K)
*10.27 Employee Stock Incentive Program dated as of August 23, 1995 by TWA
(Exhibit 10.49 to 1995 10-K)
*10.28 Letter Agreement dated July 26, 1996 between Trans World Airlines,
Inc. and Robert A. Peiser (Exhibit 10.52 to Pre-effective Amendment
No. 2 to Registrant's Registration Statement on Form S-3,
Registration No. 333-04977)
*10.29 Letter Agreement dated July 26, 1996 between Trans World Airlines,
Inc. and Mark J. Coleman (Exhibit 10.53 to Pre-effective Amendment
No. 2 to Registrant's Registration Statement on Form S-3,
Registration No. 333-04977)
</TABLE>
E-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
*10.30 Exchange Agreement dated as of June 10, 1996 between Trans World
Airlines, Inc. and Elliott Associates, L.P., as amended (Exhibit 10.1
to 9/20/96 8-K)
*10.31 Exchange Agreement dated as of June 10, 1996 between Trans World
Airlines, Inc. and Westgate International, L.P., as amended (Exhibit
10.2 to 9/20/96 8-K)
*10.32 Agreement dated as of September 3, 1996 between Trans World Airlines,
Inc. and Roden A. Brandt relating to employment by TWA (Exhibit 10.6
to 9/96 10-Q)
10.33 Letter Agreement dated January 6, 1997, between the Company and
Edward Soule.
10.34 Agreement dated as of October 1, 1996, between the Company and
Michael J. Palumbo.
10.35 Agreement dated as of November 11, 1996, between the Company and
Jeffrey H. Erickson.
11 Statement re Computation of Per Share Earnings
21 Subsidiaries of TWA
23.1 Consent of KPMG Peat Marwick LLP
24 Powers of Attorney
27 Financial Data Schedule (submitted only in electronic format)
</TABLE>
- - --------
*Incorporated by reference
(1) Incorporated herein by reference to the exhibit of the same number in
TWA's Registration Statement on Form S-4, Registration Number 33-849444.
(2) Incorporated herein by reference to Exhibit 3.1.3 to TWA's Registration
STatement on Form S-4, Registration Number 33-84944.
REPORTS ON FORM 8-K
Current Report on Form 8-K filed October 25, 1996.
Current Report on Form 8-K filed December 16, 1996.
E-5
<PAGE>
EXHIBIT 10.33
[LETTERHEAD OF TRANS WORLD AIRLINES, INC. APPEARS HERE]
January 6, 1997
Mr. Edward Soule
7370 Kingsbury
University City, MO 63130
Dear Mr. Soule:
This will confirm our agreement concerning the termination of your
employment with Trans World Airlines, Inc. ("TWA"). In this connection, TWA and
you have agreed as follows:
1. Your employment by TWA terminated as of December 19, 1996.
2. On or about the first week of January, 1997, you will receive: (a)
severance pay in the aggregate amount of $100,000.00, which will be paid to
you in a lump sum (less any applicable federal and state income and
employment tax withholdings and less any excess payment made in advance
pursuant to the Company's policy of paying executive officers on the 15th
day of each month); and (b) all accrued vacation, generally payable to
employees on termination, in the aggregate amount of $4,467.25 (less any
applicable federal and state income and employment tax withholdings).
3. 39,100 of the non-qualified stock options issued to you under TWA's Key
Employee Stock Incentive Program ("KESIP") will be treated as vested
options and such vested options will be exercisable by you in accordance
with the terms of the KESIP until their expiration on August 19, 2004.
All remaining unvested options lapsed as of December 19, 1996.
4. You will be entitled to Class 1 pass privileges for you and your spouse and
your dependent children for a period for six months from the effective date
of your termination. A non-ID Term Pass will be issued to you, and when you
receive it you will promptly return your current ID term pass to the
undersigned on behalf of TWA. Use of the above pass will be subject to
TWA's pass policy and applicable restrictions published in its Management
Policy and Procedure Manual, as the same may be in effect from time to
time. You will promptly return to the undersigned on behalf of TWA all term
passes issued to you by other air carriers.
5. All retirement benefits to which you are entitled under TWA"s Retirement
Savings Plan for Non-Contract Employees are vested.
6. All TWA group medical and dental insurance currently provided to you and
your spouse and dependent children by TWA will be maintained in force and
effect by TWA under the
<PAGE>
Mr. Edward Soule
December 30, 1996
Page 2
same terms and conditions currently in effect (provided that any generally
applicable changes in such terms and conditions as are hereafter made shall
apply to you) including but not limited to the payment by you of fees for
additional life insurance and ADD coverage, for the period until the
earlier of (i) the date you are re-employed full time and become covered by
your new employer's comparable benefit plans, or (ii) the expiration of six
(6) months after December 19, 1996. Any generally applicable changes in the
terms and conditions of such coverage which may hereafter be made shall
also apply to you and your spouse during the period specified.
7. You will continue to be entitled, with respect to claims by third parties
against you in your capacity as an officer of TWA or an officer or director
of any of its subsidiaries relating to periods which you were employed by
TWA, to be indemnified under the provisions of TWA's bylaws and under the
terms of that certain Indemnification Agreement dated as of the 17th day of
September, 1996 (a copy of which is attached) and you are entitled to be
covered by such officers' and directors' liability insurance coverage as
shall be maintained by TWA from time to time.
8. You will upon execution of this letter agreement return to the undersigned
on behalf of TWA any computers and all accessories, software and
appurtenances thereto, or pages, which are the property of or leased by TWA
and in your possession, and all other TWA property, documents or material
that may be in your possession.
9. You agree that for a period of two (2) years after the termination of your
employment with TWA you will not for any reason solicit (or assist or
encourage the solicitation of) any employee of TWA or any of its
subsidiaries or affiliated companies to be employed by you or any entity
in which you own or expect to own an equity interest in excess of five (5)
percent of any class of the outstanding securities thereof, or by which
you are employed or for which you serve or expect to serve in any capacity.
For purposes of this paragraph, the term "solicit" shall mean your
contacting or providing information to others who may be expected to
contact, any employee of TWA or of any of its subsidiaries or affiliated
companies regarding their employment status, job satisfaction, interest in
seeking employment with you, any person affiliated with you or by whom you
are employed or any other person or concerning any related matter, but
shall not include general print advertising for personnel or responding to
an unsolicited request for a personal recommendation for or evaluation of
an employee of TWA or any of its subsidiaries or affiliated companies.
10. You agree to make yourself reasonably available (taking into consideration
your then current employment circumstances) and to cooperate with TWA as
may be reasonably necessary in connection with any litigation or other
proceedings which have arisen or may
<PAGE>
Mr. Edward Soule
December 30, 1996
Page 3
arise, directly or indirectly, out of or in connection with the
performance of your duties while you were employed by TWA. TWA will
compensate you for said services pursuant to its standard compensation
of an hourly rate based upon your last salary while still employed by
TWA or, if greater your then current salary. You agree not to serve as
an expert witness or otherwise testify against TWA in any litigation
against TWA brought by any third parties unless you are under a court
order or subpoena to do so. You will promptly notify TWA if you are so
subpoenaed or ordered by any court to so testify in any litigation
against TWA.
11. You agree:
a) That you will not disclose or make public to anyone, or release to
the media any nonpublic TWA commercial, operational or financial
information, including costs, strategies, forecasts or trade
secrets for a period of twelve (12) months after your signing this
Agreement, unless you are under a court order or subpoena to do
so.
b) That you will not discuss or disclose to the media the
circumstances or terms of your termination of employment from TWA
for a period of two (2) years after your signing this Agreement and
you will not publicly disparage or denigrate the Company or any of
its officers, directors or practices.
c) With the exception of claims arising out of any breach of this
Agreement, you irrevocably and unconditionally release, remise,
acquit and forever discharge TWA, its past and present
shareholders, subsidiaries, divisions, controlling parties,
officers, directors, agents, employees, successors and assigns
(separately and collectively "TWA Releases") jointly and
individually, of and from any and all claims, demands, causes of
action, obligations, damages or liabilities in law or in equity,
arising from all bases, however denominated, known or unknown,
directly or indirectly arising out of or relating to your
employment by TWA and the termination thereof, including but not
limited to any claims of employment discrimination under any
federal, state or local law, rule or regulation. This release
extends to any relief, no matter how denominated, including but not
limited to back pay, front pay, reinstatement, compensatory
damages, punitive damages, or damages from pain and suffering. you
further agree that you will not file nor permit to be filed on your
behalf any such claim, will not permit yourself to be a member of
any class seeking relief against TWA Releases, and will not counsel
or assist in the prosecution of any claims against the TWA Releases
whether those claims are on behalf of yourself or others, unless
you are under a subpoena court order compelling you to do so.
<PAGE>
Mr. Edward Soule
December 30, 1996
Page 4
d) This Agreement is intended to be a total accord, settlement and
satisfaction of any and all claims which you have or may have had
against the TWA Releases, including but not limited to any and all
contract, tort, and statutory claims, including but not limited to
claims arising under Title VII of the Civil Rights Act of 1964, the
Age Discrimination in Employment Act, 29 U.S.C. (S) 621 et. seq., the
-- ---
Civil Rights Act of 1991, or under state or federal statute or law.
e) You further acknowledge that the only consideration for signing this
Agreement and all that you are ever to receive from the TWA Releases
are the terms stated in this Agreement and that, except as set forth
herein, no other promises or agreements of any kind have been made to
you or with you by any person or entity whatsoever to cause you to
sign this Agreement, and that you have signed this Agreement as your
free and voluntary act. You further acknowledge that pursuant to the
terms of this Agreement you are and will be receiving benefits from
TWA which are above and beyond those benefits normally provided under
TWA's corporate policies and procedures governing termination of
employment; that you have had a full, fair and adequate opportunity
to reflect upon and consider the terms of this Agreement, to
negotiate with TWA and its representatives concerning the same, and
to discuss the same if desired with legal counsel of your choice;
that no duress or pressure of any kind has been applied to you with
respect to your entering into this Agreement; and that you are
satisfied with the terms and provisions of this Agreement.
f) The execution of this Agreement, including the general release set
forth above, is knowing and voluntary and that you understand this
Agreement and the general release set forth in (c) above. You
acknowledge that you have been advised by TWA in writing to consult
with an attorney prior to executing this Agreement, you have in fact
consulted with an attorney prior to executing this Agreement, and you
have twenty-one (21) days from tender of this Agreement within which
to consider this Agreement.
For a period of seven (7) days following execution of this Agreement,
you may revoke this Agreement and this Agreement will not become
effective or enforceable until after the revocation period has
expired. Said revocation must be delivered in writing on or before
5:00 PM on the 7th day after execution of this Agreement to the
undersigned.
12. This Agreement shall be binding upon and inure to the benefit of TWA and
you, to the successors and assigns of TWA and to your heirs and personal
representatives.
<PAGE>
Mr. Edward Soule
December 30, 1996
Page 5
13. This Agreement contains the entire agreement between the parties regarding
its subject matter and supersedes all prior agreements between the parties.
This Agreement may only be modified in writing signed by the parties.
If this Agreement accurately reflects our understanding, please sign the
enclosed copy of this letter in the space provided and return same to me.
Sincerely,
TRANS WORLD AIRLINES, INC.
By: /s/ Richard P. Magurno
-------------------------
Richard P. Magurno
Senior Vice President &
General Counsel
Read, Acknowledged and Agreed to
this 6th day of January, 1997.
/s/ Edward Soule
- - ------------------
Edward Soule
<PAGE>
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of the 17th day of
September, 1996, by and between Trans World Airlines, Inc., a Delaware
corporation, having its principal offices at One City Centre, 515 N. Sixth
Street, St. Louis, MO 063101 ("TWA" or the "Company"), and Edward Soule,
residing at 7370 Kingsbury, University City 63130 (the "Indemnitee").
WHEREAS, it is essential for TWA, a corporation recently reorganized and
emerged from bankruptcy protection, to retain and attract as directors and
officers the most capable persons available; and
WHEREAS, Indemnitee is an executive officer of the Company; and
WHEREAS, both TWA and Indemnitee recognize the increased risk of litigation
and other claims being asserted against directors and officers of public
companies; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to maintain Indemnitee's continued service
to the Company in an effective manner and to provide Indemnitee with specific
contractual assurance that the protection included in the Company's Third
Amended and Restated Certificate on Incorporation and Restated By-Laws will be
available to Indemnitee, the Company desires to provide in this Agreement for
the indemnification and the advance of expenses to Indemnitee as set forth in
this Agreement and, to the extent officers' and directors' liability insurance
is maintained by the Company, to provide for the continued coverage of
Indemnitee under the Company's officers' and directors' liability insurance
policies;
NOW THEREFORE, in consideration of the covenants contained in this
Agreement and of Indemnitee's continuing service to the Company directly or, at
its request, through other enterprises, and intending to be legally bound, the
parties agree as follows:
1. The Company hereby irrevocably, absolutely and unconditionally
indemnifies and holds harmless the Indemnitie from and against any claim
against the Indemnitee, other than as identified in Paragraph 2 below, based
upon any act, omission, neglect, or breach of duty that the Indemnitee may
commit, omit or suffer while acting in his capacity as a director/officer of the
Company, and agrees to reimburse the Indemnitee, upon ten (20) days written
notice, for any payments made or losses which the Indemnitee becomes legally
obligated to pay in connection with any such claim (the "Indemnified Claim").
2. As used in this Indemnity Agreement, the Indemnified Claim shall not
include the following: (i) any claim which is based upon the Indemnitee's
gaining any personal profit or advantage to which he is not legally entitled,
(ii) any claim which is for an accounting of profits made from the purchase or
sales by Indemnitee of securities of the Company within the meaning of Section
18(b) of the Securities Exchange Act of 1934, as amended, or similar provisions
of Delaware Law, or (iii) any
<PAGE>
claim which is based upon the Indemnitee's knowingly fraudulent, deliberately
dishonest or willful misconduct.
3. Subject to the provisions of Paragraph 4 below, the Company
shall reimburse the Indemnitees for all costs and expenses incurred by the
Indemnitee in defending or investigating any Indemnified Claim and all such
costs and expenses shall be paid by the Company in advance of the final
disposition thereof unless the Company, its independent legal counsel, the
stockholders of the Company or a court of competent jurisdiction determines
that: (i) the Indemnitee did not act in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
Company, (ii) in the case of any criminal action or proceeding, the Indemnitee
had reasonable cause to believe his conduct was unlawful; or (iii) the
Indemnitee intentionally breached his duty to the Company or its stockholders.
4. The Indemnitee hereby agrees to repay the Company for any costs
or expenses advanced to the Indemnitee if it shall ultimately be determined by a
court of competent jurisdiction in a final, non-appealable adjudication, that
the Indemnitee is not entitled to indemnification under the terms of this
Indemnity Agreement.
5. If any Indemnified Claim is formally asserted or brought against
the Indemnitee which does or might entitle the Indemnitee to any or all of the
benefits of this Indemnity Agreement, the Indemnitee shall give prompt notice
thereof to the Company, together with true copies of all process, pleadings and
other papers received from the Claimants. The Company shall confirm to the
Indemnitee, by notice within three (3) business day thereafter, that the Company
will negotiate and/or defend (as the case may be) such Indemnified Claim,
advising briefly therein of the action the Company intends to take. The Company
shall promptly commence and proceed with due diligence to negotiate and/or
defend such Indemnified Claim, at the Company's sole expense, by appropriate
procedures and/or proceedings. The Company shall keep the Indemnitee reasonably
and currently apprised through such negotiations and/or defense of the status
thereof and shall promptly pay the amount of all final judgments and agreed
settlements, including attorneys' fees and costs. The Indemnitee shall cooperate
with the Company in all reasonable ways in such negotiations and/or defense, but
at the sole expense of the Company and without incurring or being deemed to have
incurred any obligation or liability of any kind, nature or description by
reason thereof.
6. Except as set forth in Paragraph 4 above, the Company hereby
irrevocably waives any and all rights which it might otherwise have to be
reimbursed for, or require contribution from the Indemnitee on account of all or
any party of any Indemnitee Claim.
7. All notices, demands, request, or other communications
("Notices") required or permitted to be given under or which are given with
respect to this indemnity Agreement shall be in writing and shall be sent by
certified mail, return receipt requested, postage prepaid, addressed to the
party to be notified at its last known address. Notices given as provided
herein shall be deemed received two (2) days after the date so mailed.
8. This indemnity Agreement may not be amended or otherwise
modified except by a writing executed and delivered by both of the parties
hereto.
<PAGE>
9. This indemnity Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Delaware without
giving effect to the principles of conflicts of law.
10. All rights and remedies afforded to the Indemnitee by reason of this
indemnity Agreement and/or by law are separate and cumulative and the exercise
of one shall not in any way limit or prejudice the exercise of any other such
right or remedy. No purported waiver or delay in exercising any of such right or
remedy by the Indemnitee shall be deemed made by the Indemnitee under any
circumstances unless in writing and duly signed by the indemnitee.
11. This Agreement shall inure to the benefit of the Indemnitee and his
successors and assigns and shall be binding upon and enforceable against the
Company.
12. The Company agrees to maintain an insurance policy or policies
providing directors' and officers' liability insurance. Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any director or officer of the
Company.
13. The provisions of this Agreement shall be severable if any of the
provisions hereof (including any provision within a single section, paragraph or
sentence) are held by a court of competent jurisdiction to be invalid, void or
otherwise unenforceable, and the remaining provisions shall remain enforceable
to the fullest extent permitted by law.
Executed as of the 17th day of September, 1996.
TRANS WORLD AIRLINES, INC.
By: /s/ Richard P. Magurno
-----------------------------
Richard P. Magurno
Senior Vice President &
General Counsel
ACCEPTED AND AGREED:
/s/ Edward Soule
- - --------------------------
Edward Soule
<PAGE>
EXHIBIT 10.39
AGREEMENT, dated as of October 1, 1996, between Trans World Airlines, Inc.
("Company"), and Michael J. Palumbo ("Executive");
WHEREAS, the Company's Board of Directors has determined that it is in the
best interest of the Company and its Shareholders, in order to assure continuity
in the management of the Company and to provide certain additional benefits to
the Company pursuant to the additional undertakings by you hereinafter set
forth, to amend and restate your existing employment agreement with the Company
by entering into this Agreement with you pursuant to which you and the Company
give certain contractual undertakings each to the other, and
WHEREAS, the parties desire to set forth the entirety of their agreements and
understandings;
NOW, THEREFORE, in consideration of the mutual promises contained herein
the parties agree as follows:
1. Employment. The Company hereby agrees to continue the employment of
----------
the Executive to render the service hereinafter described and the Executive
hereby accepts such employment and agrees to render such services, upon and
subject to the terms and conditions described in this Agreement.
2. Term. Executive's employment will continue for an indefinite period
----
until terminated at any time by Company or Executive with or without cause.
Nothing in this Agreement or otherwise shall be construed as entitling Executive
to employment for any definite term.
3. Duties.
------
(a) Executive shall serve at the pleasure of the Company in such
executive positions as Executive shall be assigned from time to time by the
President, and shall perform such executive, advisory and/or administrative and
managerial assignments and duties as may be assigned to Executive from time to
time by the President or the President's designee, all according to the
direction and control of the President. Executive will carry out and perform all
such duties and assignments and all directions of any officer to whom Executive
directly or indirectly reports. Executive also will comply with and carry out
all rules and policies of the Company, and will serve, without additional
compensation, as an officer and/or director or any subsidiary, affiliated or
related corporation or business, or of any company in which Company may hold any
interest.
(b) The Executive will, on any exclusive basis, devote his full time
during normal business hours to the business and affairs of the Company and use
his best efforts to promote the interests of the Company and to perform
faithfully and efficiently the responsibilities assigned to Executive in
accordance with the terms of this Agreement.
4. Compensation and Other Terms of Employment. During the period in which
------------------------------------------
Executive is employed by Company, the Executive shall receive the following:
<PAGE>
(a) Salary. The Executive will continue to be paid at his current annual
------
rate of pay on a regular basis, not less frequently than one time per month, on
a regular Company pay day. This rate of pay ("Base Salary") is subject to
adjustment from time to time, and will be reviewed on a regular basis. All such
payments will be subject to withholding for taxes and amounts owed by the
Company, if any.
(b) Stock Incentive Plan. The Executive continues to be eligible to
--------------------
participate in the Company's Key Employee Stock Incentive Plan ("KESIP"). The
Executive's current grant of shares is subject in its entirety to the terms
and conditions set forth in the KESIP Agreement between the Executive and the
Company. To the extent that there is any inconsistency between the terms and
conditions of this Agreement and those of the KESIP, the terms and conditions of
this Agreement shall control.
(c) Passes. The Executive and his eligible family members will be
------
entitled to card-type Class 1 "term" passes on the Company's routes worldwide.
(e) Medical, Dental, Insurance and Accident Insurance. (i) The Executive
-------------------------------------------------
and his eligible dependents will be eligible to participate in the Company-paid
comprehensive Medical and Dental Plan and the Travel Accident Insurance Program
offered by the Company, on the same terms and conditions applicable to other
officers. (ii) The Executive will be eligible for coverage under the Company's
Group Term Life Insurance Plan under the Company currently provides Basic Life
Insurance of $50,000 at no cost to the Executive. Assuming that the Executive is
insurable at standard rates, the Executive will also have the option to purchase
Additional Group Life Insurance in an amount up to three times the Executive's
Base Salary, less the Basic $50,000 coverage. The monthly cost of this
Additional Life Insurance is currently $4.50 per $10,000 and such monthly cost
may increase from time-to-time. (iii) The Executive will be eligible to
participate in the Company's Voluntary Personal Accident Insurance Plan. The
maximum coverage for this plan is currently $150,000 at a monthly cost of $6.60
and such monthly cost may increase from time-to-time. (iv) The Executive will be
covered for Long-Term Disability protection pursuant to plan provisions at
standard rates and subject to standard conditions. Nothing herein shall be
construed to prevent the Company from amending or altering any such plans or
programs set forth herein so long as the Executive continues to have the
opportunity to receive in the aggregate benefits at a level no less favorable
than those set forth herein.
5. Vacation. The Executive will be eligible for 3 weeks vacation.
--------
6. Termination of Employment.
-------------------------
(a) Death. This Agreement shall terminate automatically upon the
-----
Executive's death. All benefits and compensation then accrued hereunder, and
under any related plans, shall be paid when due to the Executive's beneficiaries
or legal representatives, as appropriate.
(b) Termination Without Cause. The Company shall have the right to
-------------------------
terminate the Executive's employment without cause at any time and without
advance notice. In
- 2 -
<PAGE>
such event the Company shall pay to the Executive an amount equal to the
Executive's then rate of annual Base Salary and any accrued, earned unpaid
salary and unused vacation as of the effective date of such termination. Such
payment (other than accrued, earned salary and unused vacation) may be made at
the Company's option in a single lump sum or in equal installments payable over
up to a twelve month period. Upon the making of such payments, the Company
shall have no further obligation to the Executive under this Agreement and
Executive accepts such payments in full satisfaction of all claims against the
Company.
(c) Termination For Cause. The Company shall have the right to
---------------------
terminate the Executive's employment at any time and without advance notice for
Cause. For the purposes of this Agreement, "Cause" shall mean that (i) the
Executive is convicted of or engages in conduct which constitutes a felony, or a
misdemeanor involving moral turpitude; or (ii) the Executive is found by the
Company's Board of Directors to have willfully engaged in conduct which is
demonstrably and materially injurious to the Company; or (iii) the Executive is
found by the Company's Board of Directors to have failed or refused to in any
material respect to competently perform his duties and responsibilities (after
notice and opportunity to cure if such material failure or refusal can be
cured); or (iv) the Executive has breached his duty of loyalty to, or committed
any act of fraud, theft or dishonesty against or involving, the Company or any
of its affiliated companies; or (v) the Executive has breached any provision of
this Agreement. If the Executive's employment is terminated for Cause, the
Company shall pay the Executive his unpaid, accrued salary through the date of
such termination at the rate in effect at the time of such termination and any
accrued, earned or unused vacation through the effective date of such
termination. Upon the making of such payment, the Company shall have no further
obligation to the Executive under this Agreement.
(d) Termination by the Executive. If the Executive voluntarily
----------------------------
terminates his employment, the Executive must give the Company thirty (30)
calendar days advance notice in writing. If the Executive fails to do so, the
Executive shall not be entitled to any accrued rights and benefits to which the
Executive might be entitled under this or any related agreement and the Company
will have no further obligation to the Executive except for unpaid salary earned
by the Executive up to and including the effective date of such termination.
Upon termination of employment and otherwise upon demand, Executive will
turn over to Company all Company property and documents and all computer
passwords, and will (after copying the same to 3.5 disks and returning the disks
to the Company) delete all Company information from any computer which is not
Company property. Upon termination, all benefits and compensation ceases except
as described above.
7. Termination Obligations. The Executive agrees that during his
-----------------------
employment and following his termination under any of the circumstances set
forth herein:
(a) he shall not during his employment or for a period of two years
following the effective date of his termination, directly or indirectly solicit
(or assist or encourage the solicitation of) any employee of the Company or any
of its subsidiaries or affiliated companies to be employed by the Executive or
by any entity in which the Executive owns or expects to own
- 3 -
<PAGE>
any equity interest in excess of five (5) percent of any class of the
outstanding securities thereof, or by any entity by which the Executive is
employed or for which the Executive serves or expects to serve in any capacity;
nor (after his employment ends and during such 2 year period) encourage or
induce any Company employee to terminate his or her Company employment. For the
purposes of this paragraph, the term "solicit" shall mean any contact by the
Executive with or providing information to others who may be expected to contact
any employees of the Company or of any of its subsidiaries or affiliated
companies regarding their employment status, job satisfaction, interest in
seeking employment with the Executive, with any person affiliated with the
Executive or by whom the Executive is employed but shall not include print
advertising for personnel or responding to any unsolicited request for a
personal recommendation for or evaluation of a Company employee or an employee
of any of the Company's subsidiaries or affiliated companies.
(b) he shall hold forever hereafter in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its subsidiaries or affiliated companies,
including but not limited to commercial, operational, marketing, pricing, or
financial information including costs, strategies, forecasts or trade secrets,
acquisition strategies or candidates or personnel acquisition plans
("confidential information") which shall have been obtained by the Executive
during or by reason of his employment by the Company or by any of its
subsidiaries or affiliated companies and which shall not be public knowledge.
During and after the end of the term of employment, the Executive shall not,
without the prior written consent of the Company or unless required to do so by
reason of a court order or subpeona (in which case Executive shall give Company
prompt notice of any such other subpeona or order, or request therefore, so as
to provide Company the maximum opportunity to contest the same), communicate or
divulge any such confidential information to anyone other than the Company or
those designated by it, except that while employed by the Company in the
business of and for the benefit of the Company the Executive may provide
confidential information as appropriate to those persons who in the Executive's
judgment have a need to know such confidential information.
(c) he shall not for a period of two years following the effective
date of his termination discuss or disclose to the media or Company personnel
the circumstances or terms of his termination of employment.
(d) he shall not publicly disparage or denigrate the Company or any
of its officers, directors or practices.
To the extent that any covenant or agreement contained in this Section 7
shall be determined by a Court to be invalid or unenforceable in any respect or
to any extent, the covenant or agreement shall not be rendered void, but instead
shall be automatically amended to such lesser scope or to such lesser extent as
will grant Company the maximum restriction on Executive's conduct and activities
permitted by applicable law in such circumstances.
8. No Assignment. This Agreement is personal to the Executive and
--------------
without the Company's prior written consent it shall not be assignable by the
Executive other than by will or
- 4 -
<PAGE>
the laws of descent and distribution. This Agreement shall inure to the benefit
of and be enforceable by the legal representatives of Executive's estate, and
otherwise is freely assignable by Company.
9. Assistance. For a period of three (3) years following termination of
----------
employment, Executive will, upon reasonable notice, make himself available for
consultation with Company counsel, to meet with Company counsel and prepare to
testify as a witness or deponent, and to testify as a witness at a trial,
deposition or proceeding, concerning any legal matter involving or affecting the
Company. The Company will pay for all reasonable and necessary out of pocket
travel and telephone costs and expense incurred by Executive in connection with
any such activity.
10. Miscellaneous.
-------------
(a) This Agreement shall be governed by and be construed in
accordance with the internal laws of the State of Missouri, without reference to
principles of conflicts of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. Neither this Agreement
nor any of its terms may be amended, waived, added to or modified other than by
written agreement executed by the parties hereto or their respective successors
and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by regular or
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Michael J. Palumbo
One City Centre
515 North 6th Street
St. Louis, Missouri 63101
If to the Company:
Trans World Airlines, Inc.
One City Centre
515 North 6th Street
St Louis, Missouri 63101
Attn: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
- 5 -
<PAGE>
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) This Agreement contains the entire understanding between the
parties concerning the subject matter hereof and supersedes all prior
agreements, understandings, discussions, negotiations and undertakings, whether
written or oral, among the parties with respect thereto. The terms of any
employee manual, handbook, or any policy of the Company, shall not modify,
alter, or invalidate any term of this Agreement nor alter Employee's at will
status, and in case of any conflict between a term of this Agreement and any
such policy, handbook or manual, the terms of this Agreement control, except for
benefit plans and Stock option awards described herein (to the extent not
otherwise provided in this Agreement).
(e) Executive represents that or he is not a party to any agreement,
or under any legal obligation, which could preclude or in any way impair
Executive's performance of Executive's duties for Company. Executive has not
provided, and will not provide, to Company any trade secret of another person
whose secrecy he is obligated to maintain.
(f) Notwithstanding any provision hereof to the contrary, nothing in
this Agreement shall be deemed to entitle the Executive to employment beyond the
Term hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed in its
corporate name, and the Executive has hereunto set his hand, all as of the day
and year first above written.
/s/ Michael J. Palumbo
- - ---------------------------
MICHAEL J. PALUMBO
/s/ Richard P. Magumo
- - ---------------------------
TRANS WORLD AIRLINES, INC.
By: /s/ Richard P. Magumo
Sr. V.P. Legal
<PAGE>
EXHIBIT 10.35
SEVERANCE AGREEMENT
This agreement is entered into by and between Trans World Airlines,
Inc. ("TWA") and Jeffrey H. Erickson ("Erickson") on this 11th day of November,
1996.
This Agreement is a modification and supplement to the Memorandum of
Understanding dated April 13, 1994 between TWA and Erickson relating to
Erickson's employment by TWA (the "Memorandum"). Except as herein expressly set
forth, the Memorandum shall continue in full force and effect and its provisions
shall apply to and govern this Agreement. In the event of any inconsistency
between this Agreement and the Memorandum, this Agreement shall prevail.
The parties hereto have, in connection with Erickson's termination of
employment with TWA, agreed as follows:
1. Continuing Employment. Erickson will continue as President and
---------------------
Chief Executive Officer of TWA, with all the authority and powers
previously exercised by him, until the first to occur of (i)
January 15, 1997, or (ii) his replacement is approved by TWA's
Board and available to commence his employment by TWA
("Termination Date"). In consideration for Erickson's remaining on
and fulfilling his duties until the Termination Date, Erickson
will continue to be paid his salary and will be entitled to all
benefits through January 15, 1997 (even if the Termination Date
occurs prior thereto). Erickson's resignation as a member of the
Board of Directors of TWA will become effective on the Termination
Date.
2. Salary Continuation. On January 15, 1997, Erickson will be paid a
-------------------
twelve month-period salary continuation, in a lump sum. However,
in the event that his termination of employment is later than
January 15, 1997, the lump sum payment will be deferred until the
actual date of termination of employment.
<PAGE>
3. Stock options. In consideration for Erickson's agreeing to remain
-------------
on and fulfill his duties under the Memorandum until the
Termination Date, the parties have agreed to treat Erickson's
resignation as if it had been an involuntary termination of
employment without cause under the Memorandum (enabling Erickson's
second installation of Stock Options to purchase Common Stock of
TWA to vest), and TWA has further agreed that so long as Erickson
continues to fulfil his obligations under the Memorandum until the
Termination Date, Erickson's final (or third) installment of Stock
Options to purchase Common Stock of TWA will vest upon termination
of his employment (even if such termination in fact occurs before
January 1, 1997.
4. Lifetime Passes. Erickson, his spouse and his children (until a
---------------
certain age) have been granted lifetime Class A travel, that is
unlimited free passes for first class air travel on TWA, on the
same terms and conditions as the other members of TWA's Board of
Directors.
5. Life Insurance, Medical & Dental Benefits. Erickson and his family
-----------------------------------------
will be entitled to the continuation in accordance with TWA's
regular practices and policies of the group life insurance, medical
and dental benefits provided by TWA to it's senior executives until
the first to occur of (i) twelve months following his termination
of employment or (ii) his employment by another company.
6. Outplacement Services. Outplacement services will be provided to
---------------------
Erickson in accordance with TWA's usual practice as to its
departing senior executives for up to a one-year period following
his termination of employment.
7. Other Benefits. Erickson will be entitled to receive other standard
--------------
benefits received by departing TWA senior executives in accordance
with TWA's usual practices and policies.
Trans World Airlines, Inc.
/s/ Jeffrey H. Erickson by /s/ Richard P. Magumo
- - -------------------------------- -----------------------------------
Jeffrey H. Erickson Richard P. Magumo
- 2 -
<PAGE>
EXHIBIT 11
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Amounts in Thousands, Except Per Share Amount)
<TABLE>
<CAPTION>
Reorganized
Company
---------------
Year Ended
December 31,
1996
---------------
<S> <C>
Adjustment to Net Income (loss)
Loss before extraordinary items........................... $ (275,027)
Preferred stock dividend requirements..................... (16,658)
Special dividend requirement relating to redemption
of 12% Preferred Stock.................................. (19,991)
------------
Loss before extraordinary items applicable to common
stock for primary calculation........................... (311,676)
Extraordinary item........................................ (9,788)
------------
Net loss applicable to common stock for primary
calculation............................................. (321,464)
Fully diluted adjustment - dividend requirements on
8% Preferred Stock assumed to be converted.............. 11,994
------------
Net loss applicable to common stock for
fully diluted calculation............................... $ (309,470)
============
Adjustments to Outstanding Shares
Average number of shares of common stock (1)............ 44,189
Primary Adjustments
Incremental shares associated with the assumed
exercise of options and warrants (2)................ 1,121
------------
Total average number of common and common equivalent
shares used for primary calculation................... 45,310
============
Average number of shares of common stock (1)............ 44,189
Fully Diluted Adjustments
Incremental shares associated with the assumed
exercise of options and warrants (2).................. 1,121
Common shares assumed to be issued upon
conversion of 8% Preferred Stock.................... 7,408
------------
Total average number of common and common equivalent
shares for fully diluted calculation.................. 52,718
============
Per share amounts:
Loss before extraordinary item and special
preferred dividend
Average number of shares of Common Stock............. (6.60)
Primary (3).......................................... (6.44)
Fully diluted (3).................................... (5.31)
Net loss
Average number of shares of Common Stock............. (7.27)
Primary (3).......................................... (7.09)
Fully diluted (3).................................... (5.87)
</TABLE>
- - ------------
(1) Includes 5,681 shares of Employee Preferred Stock which, except for a
liquidation preference of $.01 per share and the right to elect a certain
number of directors to the Board of Directors, is the functional
equivalent of Common Stock.
(2) Pursuant to an employee stock incentive plan (ESIP or the Plan), the
Company is required to distribute additional shares of common stock and
Employee Preferred Stock as a result of the distribution of additional
shares following the effective date of the "95 Reorganization. No shares
have as yet been distributed to employees under this provision and
discussions are being held with union representatives to determine the
appropriate number of shares to be distributed. The Company believes that,
based on these discussions, no more than 950,000 additional shares will be
distributed. Additionally, the ESIP provides that, beginning in 1997,
employees may significantly increase their ownership, through grants or
purchases, as set forth in the Plan. The earnings (loss) per share
computations do not give any affect to the potential issuance of these
shares.
(3) As the effects of including the incremental shares associated with options
and warrants and the assumed conversion of the 8% Preferred Stock are
antidilutive, these amounts are not presented in the accompanying
condensed statements of consolidated operations.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF TRANS WORLD AIRLINES, INC.
------------------------------------------
1. Ambassador Fuel Corporation
2. Ambassador Health Systems, Inc.
3. Century Air Rail & Land Insurance Company
4. Getaway Management Services, Inc.
5. International Aviation Security, Inc.
6. International Aviation Security France
7. International Airport Services
8. International Aviation Security Gesellschaft
9. International Aviation Security Italia S.r.l.
10 International Aviation Security S.A.
11. International Aviations Security Ltd.
12. International Aviation Security (UK)
13. International Aviation Security N.V.
14. Mega Advertising, Inc.
15. Northwest 112th Street Corp.
16. Ozark Group, Inc.
17. TWA Getaway Vacations, Inc.
18. The Getaway Group (UK), Inc.
19. The TWA Ambassadors Club, Inc.
20. Transcontinental & Western Air, Inc.
21. Trans World Airlines Services, Inc.
22. Trans World Computer Services, Inc.
23. Trans World Express, Inc.
24. Trans World Pars, Inc./1/
25. TWA America, Inc.
26. TWA Aviation, Inc.
27. TWA de Mexico S.A. de C.V.
28 TWA Employee Services, Inc.
29. TWA Group, Inc.
30. TWA International, Inc.
31. TWA Maintenance Services, Inc.
32. TWA Nippon, Inc.
33. TWA Standards & Controls, Inc.
34. TWA-US Inc.
35. TWA-NY/NJ Gate Company, Inc.
36. TWA-LAX Gate Company, Inc.
37. TWA-San Francisco Gate Company
38. TWA-Logan Gate Company, Inc.
39. TWA-D.C. Gate Company, Inc.
40. TWA-Omnibus Gate Company, Inc.
41. TWA-Hanger 12 Holding Company, Inc.
42. LAX Holding Company, Inc.
43. TWA Stock Holding Company, Inc.
44. TWA Gate Holdings, Inc.
- - -----------------------------------------
1 Holds 25% of Worldspan
<PAGE>
EXHIBIT 23.1
AUDITORS' CONSENT
The Board of Directors
Trans World Airlines, Inc.:
We consent to incorporation by reference in the registration statement
(No. 333-04977) on Form S-3 of Trans World Airlines, Inc. of our report dated
March 24, 1997, relating to the consolidated balance sheets of Trans World
Airlines, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
statements of consolidated operations, cash flows and shareholders' equity
(deficiency) and the related schedule for the year ended December 31, 1996, the
four months ended December 31, 1995, the eight months ended August 31, 1995 and
the year ended December 31, 1994, which report appears in the December 31, 1996
annual report on Form 10-K of Trans World Airlines, Inc.
Our report referred to above, contains an explanatory paragraph that
states that the Company's recurring losses from operations and its limited
sources of additional liquidity raise substantial doubt about the Company's
ability to continue as a going concern. In addition, our report refers to the
application of fresh start reporting as of September 1, 1995.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
March 25, 1997
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, John W. Bachmann, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ John W. Bachmann
---------------------
John W. Bachmann
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, William F. Compton, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ William F. Compton
-----------------------
William F. Compton
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Eugene P. Conese, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 25th day of
March, 1997.
/s/ Eugene P. Conese
------------------------
Eugene P. Conese
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Gerald L. Gitner, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ Gerald L. Gitner
-----------------------
Gerald L. Gitner
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, William M. Hoffman, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ William M. Hoffman
----------------------
William M. Hoffman
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas H. Jacobsen, a Director of TRANS
WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald
L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true
and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of
March, 1997.
/s/ Thomas H. Jacobsen
----------------------
Thomas H. Jacobsen
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Myron Kaplan, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ Myron Kaplan
-----------------
Myron Kaplan
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, David M. Kennedy, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ David M. Kennedy
--------------------
David M. Kennedy
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Jewel Lafontant-Mankarious, a
Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute
and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and
each of them, my true and lawful attorneys-in-fact, with full power of
substitution and resubstitution, for me and in my name, on my behalf and in my
stead, in any and all capacities, to sign, pursuant to the requirements of the
Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission, together
with all exhibits thereto and other documents in connection therewith, and to
sign on my behalf and in my stead, in any and all capacities, any amendments and
supplements to said Annual Report on Form 10-K, incorporating such changes as
any of the said attorneys-in-fact deems appropriate, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ Jewel Lafontant-Mankarious
------------------------------
Jewel Lafontant-Mankarious
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas F. Meagher, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ Thomas F. Meagher
------------------------
Thomas F. Meagher
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, William O'Driscoll, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ William O'Driscoll
---------------------------
William O'Driscoll
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, G. Joseph Reddington, a
Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute
and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and
each of them, my true and lawful attorneys-in-fact, with full power of
substitution and resubstitution, for me and in my name, on my behalf and in my
stead, in any and all capacities, to sign, pursuant to the requirements of the
Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission, together
with all exhibits thereto and other documents in connection therewith, and to
sign on my behalf and in my stead, in any and all capacities, any amendments and
supplements to said Annual Report on Form 10-K, incorporating such changes as
any of the said attorneys-in-fact deems appropriate, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of
March, 1997.
/s/ G. Joseph Reddington
-------------------------
G. Joseph Reddington
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Lawrence K. Roos, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any and
all capacities, to sign, pursuant to the requirements of the Securities Exchange
Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for
the fiscal year ended December 31, 1996, and to file such Annual Report on Form
10-K with the Securities and Exchange Commission, together with all exhibits
thereto and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments and supplements to
said Annual Report on Form 10-K, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 25th day of
March, 1997.
/s/ Lawrence K. Roos
-------------------------
Lawrence K. Roos
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, William W. Winpisinger, a
Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute
and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and
each of them, my true and lawful attorneys-in-fact, with full power of
substitution and resubstitution, for me and in my name, on my behalf and in my
stead, in any and all capacities, to sign, pursuant to the requirements of the
Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission, together
with all exhibits thereto and other documents in connection therewith, and to
sign on my behalf and in my stead, in any and all capacities, any amendments and
supplements to said Annual Report on Form 10-K, incorporating such changes as
any of the said attorneys-in-fact deems appropriate, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
March, 1997.
/s/ William W. Winpisinger
---------------------------
William W. Winpisinger
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TRANS WORLD AIRLINES, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS. OPERATING RESULTS FOR THE REORGANIZED COMPANY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 181,586
<SECURITIES> 0
<RECEIVABLES> 252,435
<ALLOWANCES> 12,939
<INVENTORY> 111,239
<CURRENT-ASSETS> 586,442
<PP&E> 732,994
<DEPRECIATION> 118,787
<TOTAL-ASSETS> 2,681,939
<CURRENT-LIABILITIES> 990,592
<BONDS> 829,275
0
96
<COMMON> 418
<OTHER-SE> 237,591
<TOTAL-LIABILITY-AND-EQUITY> 2,681,939
<SALES> 0
<TOTAL-REVENUES> 3,555,407
<CGS> 0
<TOTAL-COSTS> 3,752,934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,037
<INTEREST-EXPENSE> 126,822
<INCOME-PRETAX> (274,577)
<INCOME-TAX> 450
<INCOME-CONTINUING> (275,027)
<DISCONTINUED> 0
<EXTRAORDINARY> (9,788)
<CHANGES> 0
<NET-INCOME> (284,815)
<EPS-PRIMARY> (7.27)
<EPS-DILUTED> (7.27)
</TABLE>