As filed with the Securities and Exchange Commission on June 30, 1998
Registration No. 333-51581
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
Trans World Airlines, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 4512 43-1145889
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
One City Centre, 515 N. Sixth Street
St. Louis, Missouri 63101
(314) 589-3000
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
Gerald L. Gitner
Chairman and Chief Executive Officer
Trans World Airlines, Inc.
One City Centre, 515 N. Sixth Street
St. Louis, Missouri 63101
(314) 589-3000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
-----------------------
Copies to:
Joseph P. Hadley, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
</TABLE>
-------------------------
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the Registration Statement becomes
effective.
-------------------------
If the securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration number of the earliest effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
-------------------------
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
==============================================================================
$150,000,000
PROSPECTUS
TRANS WORLD AIRLINES, INC.
OFFER TO EXCHANGE 11 3/8% SENIOR NOTES DUE 2006 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY
AND ALL OUTSTANDING 11 3/8% SENIOR NOTES 2006
-------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON JULY 31, 1998, UNLESS EXTENDED.
Trans World Airlines, Inc., a Delaware corporation (the
"Company" or "TWA"), hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal" and, together with this Prospectus,
the "Exchange Offer"), to exchange its 11 3/8% Senior Notes due 2006 (the
"Exchange Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
of which this Prospectus is a part (including all amendments, including
post-effective amendments, and exhibits thereto, the "Registration
Statement"), for an equal principal amount at maturity of its outstanding 11
3/8% Senior Notes due 2006 (the "Old Notes," and together with the Exchange
Notes, the "Notes"), of which $150 million aggregate principal amount at
maturity is outstanding as of the date hereof.
The Company will accept for exchange any and all Old Notes that
are validly tendered and not withdrawn on or prior to 5:00 P.M., New York City
time, on the date the Exchange Offer expires (the "Expiration Date"), which
will be July 31, 1998 (30 days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended. Tenders of Old Notes may be
withdrawn at any time prior to 5:00 P.M., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange Old Notes may be
tendered only in integral multiples at maturity of $1,000. See "The Exchange
Offer."
The Exchange Notes will bear interest at the rate of 11 3/8%
per annum, payable semi-annually in arrears on each March 1 and September 1,
commencing on September 1, 1998. The Exchange Notes will mature on March 1,
2006. The Exchange Notes will be redeemable, in whole or in part, at the
option of TWA, at any time on or after March 1, 2002 at the redemption prices
set forth herein, plus accrued and unpaid interest and Special Interest, if
any, to the redemption date. In addition, prior to March 1, 2001, TWA may, at
its option, use the Net Cash Proceeds from one or more Public Equity Offerings
to redeem up to $52.5 million aggregate principal amount of the Notes at a
price equal to 111.375% of the principal amount thereof, plus accrued and
unpaid interest and Special Interest, if any, to the redemption date;
provided, that at least $97.5 million aggregate principal amount of the Notes
is outstanding immediately following each such redemption. Upon entering into
certain merger or acquisition agreements, TWA shall have the right, without
the consent of holders of the Exchange Notes, to redeem the Exchange Notes in
whole, but not in part, at a redemption price equal to 100% of the outstanding
principal amount of the Exchange Notes plus Applicable Premium and accrued and
unpaid interest and Special Interest, if any. Upon a Change in Control, each
holder of Exchange Notes shall have the right to require TWA to purchase all,
or any part of, such holder's Exchange Notes at a purchase price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest and Special
Interest, if any, to the purchase date. There can be no assurance that the
Company will have sufficient funds available at the time of any Change in
Control to make any debt payment (including repurchases of Notes) required by
the foregoing. Upon the incurrence of Acquired Indebtedness, each holder of
Exchange Notes shall have the right to require TWA to purchase all, or any
part of, such holder's Exchange Notes at a purchase price equal to 100% of the
principal amount thereof, plus Applicable Premium and accrued and unpaid
interest and Special Interest, if any, to the purchase date. In addition, upon
the occurrence of an Asset Disposition, the Company will, under certain
circumstances, make an Offer to Purchase the Exchange Notes at 100% of their
principal amount plus accrued and unpaid interest and Special Interest, if
any. See "Description of Notes."
The Exchange Notes will represent senior unsecured obligations
of the Company and will rank senior in right of payment to all existing and
future subordinated indebtedness of the Company and will rank pari passu in
right of payment with all other senior obligations of the Company. The Notes
are not secured and, therefore, will be effectively subordinated to all
existing and future secured indebtedness of the Company to the extent of the
value of the assets securing such indebtedness.
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING
MAILED TO HOLDERS OF OLD NOTES ON OR ABOUT JULY 1 , 1998.
The Exchange Notes will be obligations of the Company
evidencing the same indebtedness as the Old Notes. The Exchange Notes will be
issued under and entitled to the benefits of the same Indenture (as defined)
pursuant to which the Old Notes were issued such that the Exchange Notes and
Old Notes will be treated as a single class of debt securities under the
Indenture. The form and terms of the Exchange Notes are generally the same as
the form and terms of the Old Notes, except that (i) the exchange will be
registered under the Securities Act and, therefore, the Exchange Notes will
not bear legends restricting the transfer thereof, and (ii) holders of the
Exchange Notes will not be entitled to any of the registration rights of
holders of Old Notes under the Registration Rights Agreement (as defined),
which rights will terminate upon the consummation of the Exchange Offer. See
"Description of the Notes."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE PAGE 18, "RISK
FACTORS," FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 1, 1998.
Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action letters
issued to Exxon Capital Holdings Corporation (available May 13, 1988), Morgan
Stanley & Co. Incorporated (available June 5, 1991), Mary Kay Cosmetics, Inc.
(available June 5, 1991) and Warnaco, Inc. (available October 11, 1991), the
Company believes that a holder who exchanges Old Notes for Exchange Notes
pursuant to the Exchange Offer may offer for resale, resell and otherwise
transfer such Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided, that (i)
such Exchange Notes are acquired in the ordinary course of such holder's
business, (ii) such holder is not engaged in, and does not intend to engage
in, a distribution of such Exchange Notes and has no arrangement with any
person to participate in the distribution of such Exchange Notes, and (iii)
such holder is not an affiliate of the Company (as defined under Rule 405 of
the Securities Act). However, the staff of the Commission has not considered
the Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. A holder
who exchanges Old Notes for Exchange Notes pursuant to the Exchange Offer with
the intention to participate in a distribution of the Exchange Notes may not
rely on the staff's position enunciated in the Exxon Capital Letter, the
Morgan Stanley Letter or similar letters and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction.
Each broker-dealer that receives Exchange Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Old Notes where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS
MAY NOT BE USED FOR ANY OFFER, SALE OR OTHER TRANSFER OF EXCHANGE NOTES.
Prior to this Exchange Offer, there has been no public market
for the Old Notes or Exchange Notes. The Old Notes have traded in the National
Association of Securities Dealers, Inc. Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") market. If a public market were to
develop, the Exchange Notes could trade at prices that may be higher or lower
than their principal amount at maturity. The Company intends to apply for
listing of the Exchange Notes on the American Stock Exchange. However, there
can be no assurance that an active public market for the Exchange Notes will
develop. See "Risk Factors--Risk Factors Relating to the Notes and the
Exchange Offer--Absence of Public Trading Market."
THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THIS EXCHANGE
OFFER. THE COMPANY HAS AGREED TO PAY THE EXPENSES OF THE EXCHANGE OFFER. NO
UNDERWRITER IS BEING USED IN CONNECTION WITH THIS EXCHANGE OFFER.
No person has been authorized to give any information or to
make any representations not contained in this Prospectus in connection with
the offer of securities made by this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or by any underwriter, dealer or agent. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such
jurisdiction. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than those to which it
relates. Neither the delivery of this Prospectus nor any sale of, or offer to
sell, the securities offered hereby shall, under any circumstances, create an
implication that there has been no change in the affairs of the Company since
the date hereof or that the information herein is correct as of any time
subsequent to its date.
AVAILABLE INFORMATION
TWA is currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Commission. Reports, proxy statements and other information filed by
the Company with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at Room 1400, 75 Park Place, New York, New York 10007 and Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, NW, Washington, D.C.
20549 at prescribed rates, and such reports, proxy statements and other
information regarding the Company can also be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 1006-1881, on
which the Company's Common Stock, $.01 par value per share (the "Common
Stock") is listed. The Commission maintains a Web site that contains reports,
proxy and information statements and other materials that are filed through
the Commission's Electronic Data Gathering, Analysis and Retrieval System.
This Web site can be accessed at http://www.sec.gov.
This Prospectus contains summaries, believed to be accurate in
all material respects, of certain terms of certain agreements, however, in
each such case, reference is made to the actual agreements (copies of which
will be made available upon request to the Company) for complete information
with respect thereto, and all such summaries are qualified in their entirety
by this reference.
This Prospectus forms a part of the Registration Statement
which the Company has filed under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all the
information otherwise set forth in the Registration Statement, certain parts
of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and the exhibits filed as part thereof. The Registration Statement
may be inspected at the public reference facilities maintained by the
Commission at the addresses set forth above. Statements contained herein
concerning any document filed as an exhibit are not necessarily complete and,
in each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus
the following documents filed with the Commission pursuant to the requirements
of the Exchange Act (File No. 001-07815): (i) the Company's Annual Report on
Form 10-K (the "1997 10-K") for the fiscal year ended December 31, 1997; (ii)
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1998; (iii) the description of the Common Stock contained in the Company's
Form 8-A dated August 1, 1995 filed under the Exchange Act, including any
amendment or reports filed for the purpose of updating such description; and
(iv) the Company's Proxy Statement and Notice of Meeting relating to the
Annual Meeting of Stockholders held on May 19, 1998.
All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus and
prior to the termination of the offering of the securities offered hereby
shall be deemed to be incorporated by reference in this Prospectus and to be a
part hereof from the respective dates of filing such document. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
This prospectus incorporates documents by reference which are
not presented herein or delivered herewith. These documents are available
without charge upon the written or oral request of each person, including any
beneficial owner, to whom this Prospectus is delivered. Requests should be
made to the Corporate Secretary of Trans World Airlines, Inc., One City
Centre, 515 N. Sixth Street, St. Louis, Missouri 63101, telephone (314)
589-3285. In order to ensure timely delivery of the documents, any request
should be made at least five business days before the Expiration Date of the
Exchange Offer.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER
"PROSPECTUS SUMMARY", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS", IN ADDITION TO CERTAIN
STATEMENTS CONTAINED ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 AND ARE THUS PROSPECTIVE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THE MOST SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES
AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "RISK FACTORS" IN THIS
PROSPECTUS AND HOLDERS OF THE OLD NOTES AND PROSPECTIVE INVESTORS IN THE
EXCHANGE NOTES ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS.
PROSPECTUS SUMMARY
This summary does not purport to be complete and is qualified
by reference to the detailed information and financial statements appearing
elsewhere in this Prospectus or incorporated by reference herein. Terms not
defined in this summary are defined elsewhere herein.
The Company
TWA is the eighth largest U.S. air carrier (based on revenue
passenger miles ("RPMs") for the full year 1997), whose primary business is
transporting passengers, cargo and mail. During 1997, the Company carried
approximately 23.4 million passengers and flew approximately 25.1 billion
RPMs. As of March 31, 1998, TWA provided regularly scheduled jet service to 89
cities in the United States, Mexico, Europe, the Middle East, Canada and the
Caribbean. As of March 31, 1998, the Company operated a fleet of 181 jet
aircraft.
TWA's North American operations have a primarily domestic hub
in St. Louis at Lambert International Airport ("St. Louis") and a
domestic-international hub at New York's John F. Kennedy International Airport
("JFK"). TWA is the predominant carrier at St. Louis, with approximately 360
scheduled daily departures as of March 31, 1998 and approximately a 74.5%
share of airline passenger enplanements in St. Louis for the full year 1997.
Given its location in the center of the country, St. Louis is well-suited to
function as an omni-directional hub for both north-south and east-west
transcontinental traffic. Therefore, TWA believes it can offer more
frequencies and connecting opportunities to many travelers in its key
Midwestern markets than competing airlines.
TWA's international operations are concentrated at JFK, from
which TWA currently serves 26 domestic and international cities with
approximately 40 daily departures. JFK is both the Company's and the
industry's largest international gateway from North America. As of March 31,
1998, the Company offered non-stop flights from JFK to 8 cities in Europe and
the Middle East as well as 17 destinations in the U.S. and the Caribbean. As
described below, during 1997, the Company implemented certain steps to refocus
and improve the operating and financial performance of its JFK operations.
TWA 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.
Recent Financial and Operating Results
On April 22, 1998, the Company reported financial results for
the first quarter 1998 reflecting an operating loss of $68.7 million and a net
loss before extraordinary items of $54.1 million for the three months ended
March 31, 1998, including a non-cash operating expense of $26.5 million
relating to the distribution in July 1998 of Common Stock to employee stock
plans. These results compare with an operating loss of $99.5 million and a
net loss before extraordinary items of $70.0 million in the first quarter
1997. Excluding the effect of non-cash expense associated with earned stock
compensation, the first quarter 1998 operating loss was $42.2 million compared
to the first quarter 1997 operating loss of $98.2 million. Similarly
calculated, the net loss before extraordinary items for the first quarter 1998
and 1997 were $38.0 million and $69.3 million, respectively. Operating
revenue for the first quarter 1998 was $765.4 million versus $762.3 million in
the first quarter 1997 despite a slight reduction in capacity from the first
quarter 1997 to 1998 resulting from the replacement of B747 and L-1011
aircraft with smaller B767, B757 and MD-80 aircraft.
The Company's operating statistics, for scheduled passengers
only and excluding TWE, for the three month periods ended March 31, 1998 and
1997 and for the years ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------------------- --------------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue passenger miles (millions)................ 5,764 5,673 25,100 27,111
Available seat miles (millions)................... 8,467 8,539 36,464 40,594
Passenger load factor............................. 68.1% 66.4% 68.8% 66.8%
Passenger yield (cents)........................... 11.74 Cents 11.84 Cents 11.65 Cents 11.35 Cents
Passenger revenue per available seat mile (cents). 7.99 Cents 7.87 Cents 8.02 Cents 7.58 Cents
Operating cost per available seat mile (cents).... 9.36 Cents 9.88 Cents 8.97 Cents 8.76 Cents
</TABLE>
For definitions of the above items see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
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. 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 capital sources or from the sale of assets.
TWA has significantly enhanced its operational reliability and
schedule integrity since the first quarter of 1997. According to statistics
reported to the U.S. Department of Transportation (the "DOT"), TWA improved
from tenth among the 10 largest U.S. scheduled commercial airlines in
domestic on-time performance in 1996 to second in 1997. TWA also canceled
5,413 fewer flights in 1997 than in 1996, improving its percentage of
scheduled flights completed to 98.0% compared to 96.2% for 1996. In the first
quarter 1998, TWA completed 96.7% of its scheduled flights, compared to 96.4%
in the first quarter 1997.
Recent Strategic Initiatives
Management believes that certain strategic initiatives
undertaken by the Company beginning in late 1996 have contributed to the
improved financial and operating results described above. TWA's management
began to implement such strategic initiatives in response to a significant
deterioration in the Company's operating performance and financial condition
during the second half of 1996. This deterioration was primarily caused by (i)
an overly aggressive expansion of TWA's capacity and planned flight schedule,
particularly during the 1996 summer season, which forced the Company to rely
disproportionately on lower-yield 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 operations
during the summer of 1996; 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 and
adversely affected the Company's yields and unit costs. 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. The Company also
experienced a 27.6% increase in fuel costs in 1996 versus 1995, primarily due
to a 22.3% increase in the average fuel price paid per gallon during the year.
The primary focus of the Company's new strategic initiatives is
to reestablish TWA's operational reliability and schedule integrity and
overall product quality in order to attract higher-yield passengers and
enhance overall productivity, which should improve the Company's financial
results. As the initial steps in implementing this strategy, the Company
temporarily reduced its flight schedule during the first quarter of 1997 to
more closely match aircraft available for active service and worked to reduce
the number of aircraft in maintenance backlog by increasing overtime and
utilizing maintenance capacity made available by the termination of an
unprofitable aircraft maintenance contract with the U.S. government.
Other new strategic initiatives being pursued by TWA are:
Accelerated Fleet Renewal. In the first quarter of 1997, as
part of its efforts to improve near-term operational performance, TWA
announced plans to accelerate the retirement of the 14 747s and 11 L-1011s
remaining in its fleet. As a result, TWA's last L-1011 was retired in
September 1997 and its last three 747s were retired in February 1998. Under
its fleet renewal plan, the Company has replaced these older, less reliable
and less efficient wide-body aircraft with new or later-model used 757, 767
and MD-80 aircraft. Management believes that these smaller aircraft are more
appropriately sized to the routes served, and, by reducing the Company's
reliance on lower-yield feed traffic to fill capacity, have resulted in
higher load factors and improved yields. Further, these newer, twin-engine,
two-pilot aircraft are expected to provide efficiencies in fuel, flight crew
and maintenance expenses, while reducing long-term pilot training costs by
enabling TWA to have fewer aircraft types in the fleet. TWA also expects to
retire eight 727s during 1998. As of March 31, 1998, TWA had retired two of
the eight 727s. As a result of this fleet restructuring, the Company's mix of
narrow-body and wide-body aircraft shifted to approximately 90%/10% as of
December 31, 1997 versus approximately 80%/20% as of year-end 1996, and the
average number of seats per aircraft declined to 141 from 161 over the same
period. As of December 31, 1997, the average age of the Company's fleet had
decreased to 16.9 years from 19.0 years at year-end 1996. In April 1998, the
Company entered into an agreement to purchase from the manufacturer 24 new
MD-83 aircraft with deliveries in 1999. The Company has obtained financing
commitments for long-term debt and lease financing for such aircraft. If TWA
takes delivery of all of these aircraft, and assuming no other changes in the
composition of the Company's fleet, the average age of its fleet as of
December 31, 1999 would decrease to 12.4 years. TWA also entered into an
agreement with a third-party aircraft lessor for the sale and leaseback of 15
Boeing 727-200A aircraft owned by the Company. The aircraft were delivered on
March 31 and April 1, 1998 and leased to TWA under leases which expire in 1999
and 2000.
The Company believes that this rationalization of fleet size,
together with the decrease in international operations described below, will
help deseasonalize TWA's business, with the difference between TWA's seasonal
average daily peak and trough capacities anticipated to be approximately 4.2%
in 1998, versus 16.9% in 1997 and 20.5% in 1996. As a result, the Company
expects the seasonal variability of its financial performance will be reduced;
however, there can be no assurance that such deseasonalization will occur.
Restructuring of JFK Operations. As part of its efforts to
position the Company for sustained profitability, TWA restructured its
operations at JFK during 1997 by eliminating certain unprofitable
international destinations (such as Frankfurt and Athens), as well as certain
low-yield domestic feed service into JFK. The Company also consolidated 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. In addition to enhancing yields and load
factors, the substitution of 757s and 767s for 747s and L-1011s on
international routes also has increased operating efficiencies at JFK, since
these smaller aircraft are better suited to the physical limitations of TWA's
terminals. As a result of these changes, TWA's international scheduled
capacity (as measured by ASMs) decreased 32.3% in 1997 compared to 1996 and
represented 19.5% of total scheduled capacity for the full year 1997 versus
25.6% for the full year 1996.
Productivity Enhancements. The Company has sought to improve
its financial performance through productivity enhancements. During 1997, TWA
realized cost efficiencies in maintenance, reflecting the elimination of TWA's
maintenance backlog during the first quarter of 1997, as well as the reduced
maintenance requirements for the newer aircraft added to TWA's fleet. In
addition, as described above, the Company's fleet renewal plan is expected to
provide efficiencies in fuel, flight crew and training expenses, while the
JFK restructuring has eliminated certain unprofitable routes and reduced
certain operating costs. TWA's average number of employees per aircraft has
decreased from 131.0 as of December 31, 1996 to 120.7 as of December 31,
1997, which is generally consistent with industry standards.
Marketing Initiatives. The Company has also begun to introduce
a series of marketing initiatives designed, in combination with its enhanced
operational reliability and schedule integrity, to attract a greater
percentage of higher-yield business passengers. These initiatives include
branded service products such as an improved international business class,
Trans World One[SM] ("Trans World One"), expanded first class cabins in the
domestic narrow-body fleet (launched with an enhanced service package as
Trans World First in January 1998), and a branded short-haul business market
service, TWQ, launched in March 1998. The Company has also enhanced its
frequent flier program by introducing a Platinum level for its highest
mileage customers and, for certain travelers, a system for recognizing dollar
amounts paid as well as miles flown, and by joining the American Express
Membership Rewards Program, which allows members to earn additional frequent
flier miles on TWA. The Company is also in the early phases of a series of
facilities upgrades, including a newly opened Ambassadors Club in St. Louis, a
renovated club at LaGuardia, a completely refurbished club in its JFK
terminal and improved new check-in counters and backwalls. The Company's
advertising features the improved on-time and operational performance, new
aircraft, and the programs outlined above.
Employee Initiatives. Through certain programs, TWA has sought
to institutionalize throughout all levels of its organization the importance
of running an airline with operational reliability. These programs provide
certain operating and procedural guidelines for enhancing performance and
improving overall product quality. In addition, in 1996 the Company introduced
Flight Plan 97, which paid eligible employees a $65 bonus for each month that
TWA finished in the top five in all three performance categories tracked by
the DOT (on-time performance, customer complaints and baggage handling) and a
total of $100 if TWA also ranked first in at least one of such categories.
Based on the Company's performance in September 1997, eligible employees
earned their first bonus under this program, a $100 payment for ranking first
in on-time performance, fourth in customer complaints and fifth in baggage
handling. This program has been enhanced as Flight Plan 98 and now provides
that in any quarter where the Company places first in the DOT-tracked on-time
performance category for the entire quarter (and assuming that no bonus over
$100 was paid to employees during that quarter) the eligible employees would
receive a $100 bonus.
Changes to Management Team
On February 12, 1997, the Company's Board of Directors (the
"Board of Directors" or the "Board") named Gerald L. Gitner, a member of the
Board since 1993, as Chairman and Chief Executive Officer of the Company. Mr.
Gitner, who had been named acting Chief Executive Officer in December 1996,
replaced Jeffrey H. Erickson, who on October 24, 1996 announced his intention
to leave as the Company's President and Chief Executive Officer. On December 3,
1997, the Board named William F. Compton, a TWA pilot and a director of the
Company since November 1993, as President and Chief Operating Officer of the
Company. Mr. Compton had been appointed Executive Vice President, Operations
in March 1997. He had been acting in such position since December 14, 1996.
On May 29, 1997 the Board elected Donald M. Casey as Executive Vice President,
Marketing. On October 29, 1997 James F. Martin was elected as Senior Vice
President, Human Resources. On December 31, 1997, Roden A. Brandt resigned as
Senior Vice President, Planning, but will remain as a consultant to the
Company through April 30, 1998. On January 28, 1998, the Board appointed
Kathleen A. Soled, Esq. to serve as the Company's Senior Vice President and
General Counsel replacing Richard P. Magurno, Esq. who resigned on January 28,
1998. Ms. Soled had been the Company's Vice President, Legal and Corporate
Secretary. See "Risk Factors--Risk Factors Related to the Company--Changes to
Management Team."
Labor Matters
On March 6, 1997, the International Association of Machinists
and Aerospace Workers (the "IAM") was certified to replace the Independent
Federation of Flight Attendants ("IFFA") as the bargaining representative for
the Company's flight attendants. Negotiations on a new collective bargaining
agreement with the IAM with regard to the flight attendants commenced in July
1997 and are currently ongoing. At the request of the IAM, a mediator was
appointed on March 27, 1998 in connection with the negotiation on the
collective bargaining agreement covering the flight attendants. Negotiations
regarding the Company's ground employees represented by the IAM commenced in
February 1997 and are also currently ongoing. At the request of the IAM, a
mediator was appointed on August 6, 1997 in connection with the negotiation on
the collective bargaining agreement covering the ground employees. Negotiations
on a new collective bargaining agreement with the Air Line Pilots Association
("ALPA") commenced in June 1997 and are currently ongoing. While wage rates
currently in effect will likely increase, the Company believes that it is
essential that its labor costs remain favorable in comparison to its major
competitors. See "The Company--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. See "Certain
Provisions of the Certificate of Incorporation, the By-laws and Delaware
Law--Board of Directors" and "Risk Factors--Risk Factors Related to the
Company--'94 Labor Agreements."
Recent Securities Offerings
On December 2, 1997, the Company consummated a Rule
144A/Regulation S private placement offering of 1,725,000 shares of 9 1/4%
Cumulative Convertible Exchangeable Preferred Stock (the "1997 Preferred
Stock") which raised net proceeds of approximately $82.2 million (the "1997
Preferred Stock Offering"). On December 9, 1997, the Company consummated a
Rule 144A/Regulation S offering of $140.0 million aggregate principal amount
of 11 1/2% Senior Secured Notes due 2004 (the "11 1/2% Notes") which raised
net proceeds of approximately $133.5 million (the "11 1/2% Notes Offering").
On December 30, 1997, a wholly-owned, bankruptcy remote subsidiary of the
Company consummated a Rule 144A/Regulation S private placement offering of
$100.0 million aggregate principal amount of 9.80% Airline Receivable Asset
Backed Notes due 2001 (the "Receivables Securitization Notes") which raised net
proceeds of approximately $97.0 million (the "Receivables Securitization
Offering"). A portion of the net proceeds from the 11 1/2% Notes Offering and
the Receivables Securitization Offering was used to repay existing
indebtedness. On March 3, 1998 the Company consummated a Rule 144A/Regulation
S offering of $150.0 million aggregate principal amount of Old Notes which
raised net proceeds of approximately $144.9 million (the "11 3/8% Notes
Offering"). On April 21, 1998, the Company consummated a private placement of
$43.2 million aggregate principal amount of 11 3/8% Senior Secured Notes due
2003 (the "11 3/8% Secured Notes") and $31.8 million principal amount of
Mandatory Conversion Equity Notes due 1999 (the "Equity Notes"). On June 26,
1998, the Company consummated a private placement of $14.5 million aggregate
principal amount of 10 1/4% Senior Secured Notes due 2003 and $13.0 million
principal amont of 10 1/4% Mandatory Conversion Equity Notes due 1999 (the
"New Equity Notes"). See "Capitalization."
The Old Note Offering
Old Notes........................... On March 3, 1998, the Company issued
and sold $150,000,000 aggregate
principal amount of its Old Notes to
Lazard Freres & Co. LLC as initial
purchaser (the "Initial Purchaser").
The Initial Purchaser subsequently
offered and resold the Old Notes to
Qualified Institutional Buyers (as
defined in Rule 144A under the
Securities Act) pursuant to Rule 144A
under the Securities Act, to a limited
number of institutional investors that
are Accredited Investors (as defined in
Rule 501(a)(1), (2), (3) or (7) under
the Securities Act) and in offshore
transactions complying with Rule 903 or
Rule 904 of Regulation S under the
Securities Act (the "Old Note
Offering").
Exchange Offer
Exchange Notes...................... Up to $150,000,000 aggregate principal
amount of 11 3/8% Senior Notes due 2006
(the "Exchange Notes") of the Company.
The terms of the Exchange Notes and the
Old Notes are identical in all
respects, except that the offer of the
Exchange Notes will have been
registered under the Securities Act and
therefore, the Exchange Notes will not
be subject to certain transfer
restrictions and registration rights
and related provisions for an increase
in the interest rate payable on the Old
Notes under certain circumstances if
the Company defaults with respect to
its registration requirements under the
Registration Rights Agreement
applicable to the Old Notes.
Exchange Offer...................... The Company is offering, upon the terms
and subject to the conditions of the
Exchange Offer, to exchange $1,000
principal amount of Exchange Notes for
each $1,000 principal amount of Old
Notes. See "The Exchange Offer" for a
description of the procedures for
tendering Old Notes. In connection with
the Old Note Offering, the Company
entered into the Registration Rights
Agreement (the "Registration Rights
Agreement") dated as of March 3, 1998
among the Company and the Initial
Purchaser, which grants holders of the
Old Notes certain exchange and
registration rights. The Exchange Offer
is intended to satisfy obligations of
the Company under the Registration
Rights Agreement. The date of
acceptance for exchange of the Exchange
Notes will be the first business day
following the Expiration Date.
Tenders, Expiration Date;
Withdrawal.......................... The Exchange Offer will expire at 5:00
p.m., New York City time, on July 31,
1998, or such later date and time to
which it is extended. The tender of Old
Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to
the Expiration Date. Any Old Notes not
accepted for exchange for any reasons
will be returned without expense to the
tendering Holder thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer.
Accounting Treatment................ No gain or loss for accounting purposes
will be recognized by the Company upon
the consummation of the Exchange Offer.
See "The Exchange Offer--Accounting
Treatment."
Federal Income Tax Consequences..... The exchange pursuant to the Exchange
Offer will not result in any income,
gain or loss to the Holders of the
Notes or the Company for federal income
tax purposes. See "Certain Federal
Income Tax Considerations -- Tax
Consequences to U.S. Holders --
Exchange Offer."
Use of Proceeds..................... There will be no proceeds to the
Company from the issuance of the
Exchange Notes pursuant to the Exchange
Offer.
Exchange Agent...................... The First Security Bank, National
Association is serving as exchange
agent (the "Exchange Agent") in
connection with the Exchange Offer.
Consequences of Exchanging Old Notes Pursuant to the Exchange Offer
The Company has not requested, and does not intend to request,
an interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Based on interpretations by the staff of the Commission
set forth in no-action letters issued to third parties, the Company believes
that Exchange Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by any
holder of such Exchange Notes, other than broker-dealers which must sell in
accordance with the provisions set forth below and other than any holder that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's business and such holder
has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
or who is an affiliate of the Company may not rely on such interpretations by
the staff of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction. Each broker-dealer (whether or not it is also an
"affiliate" of the Company) that receives Exchange Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
By executing the Letter of Transmittal, each holder of Old
Notes will represent to the Company that, among other things, (i) the Exchange
Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such Exchange Notes,
whether or not such person is such holder, (ii) neither the holder of Old
Notes, nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes, (iii) if the
holder is not a broker-dealer, or is a broker-dealer but will not receive
Exchange Notes for its own account in exchange for Old Notes, neither the
holder nor any such other person is engaged in or intends to participate in
the distribution of such Exchange Notes and (iv) neither the holder nor any
such other person is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or, if such Holder is an "affiliate," that such
Holder will comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable. If the tendering Holder is a
broker-dealer (whether or not it is also an "affiliate") that will receive
Exchange Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities,
it will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of
Distribution". To comply with the securities laws of certain jurisdictions,
it may be necessary to qualify for sale or register the Exchange Notes prior
to offering or selling such Exchange Notes. The Company does not currently
intend to take any action to register or qualify the Exchange Notes for resale
in any such jurisdictions.
Following the consummation of the Exchange Offer, holders of
Old Notes not tendered will not have any further registration rights and the
Old Notes will continue to be subject to certain restrictions on transfer. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. Failure
to comply with such requirements in such instance may result in such Holder
incurring liability under the Securities Act for which such Holder is not
indemnified by the Company. See "The Exchange Offer--Consequences of Failure
to Exchange."
Summary Description of the Notes
The terms of the Exchange Notes and the Old Notes are identical
in all respects, except that the offer of the Exchange Notes is registered
under the Securities Act and, therefore, the Exchange Notes will not be
subject to certain transfer restrictions, registration rights and related
provisions requiring an increase in the interest rate on the Old Notes under
certain circumstances if the Company defaults with respect to its registration
requirements under the Registration Rights Agreement applicable to the Old
Notes.
Exchange Notes Offered.............. Up to $150,000,000 aggregate principal
amount of Exchange Notes of the Company.
Maturity Date....................... March 1, 2006.
Interest Payment Dates.............. March 1 and September 1, beginning
September 1, 1998. The Exchange Notes
will bear interest from March 3, 1998.
Holders of Old Notes whose Old Notes
are accepted for exchange will be
deemed to have waived the right to
receive any payment in respect of
interest on such Old Notes accrued from
March 3, 1998 to the date of the
issuance of the Exchange Notes.
Consequently, holders who exchange
their Old Notes for Exchange Notes will
receive the same interest payment on
September 1, 1998 (the first interest
payment date with respect to the Old
Notes and the Exchange Notes) that they
would have received had they not
accepted the Exchange Offer.
Mandatory Repurchases............... The Company will be required to make an
Offer to Purchase the Notes in the case
of (i) the incurrence of certain
acquired indebtedness or (ii) certain
disposition of assets. See "Description
of Notes--Repurchase of Notes in
Connection with Incurrence of Acquired
Indebtedness" and "--Certain Covenants
--Limitation on Sales of Assets and
Subsidiary Stock."
Optional Redemption................. The Notes will be redeemable prior to
March 1, 2002 only in the event that on
or before March 1, 2001 the Company
uses the net cash proceeds of one or
more underwritten primary public
offerings of common stock of the Company
to redeem up to $52.5 million aggregate
principal amount of the Notes at a
price equal to 111.375% of the principal
amount thereof, plus accrued and unpaid
interest and Special Interest, if any,
to the redemption date. On or after
March 1, 2002, the Notes will be
redeemable on at least 30 days' prior
notice to the Holders, in whole or in
part, at any time, at the applicable
redemption price as set forth herein,
in each case together with accrued and
unpaid interest and Special Interest,
if any, to the redemption date. See
"Description of Notes--Redemptions."
The Notes will also be redeemable in
whole, but not in part, in the event the
Company enters into any merger or
acquisition agreement which is
prohibited by the terms of the
indenture governing the Notes (the
"Indenture"). See "Description of
Notes--Certain Covenants--Merger and
Consolidation."
Change in Control................... Upon a Change in Control, each holder
of Notes shall have the right for a
limited period to require the Company to
repurchase all or any part of such
holder's Notes at a price, in cash,
equal to 101% of the principal amount
thereof, plus accrued and unpaid
interest and Special Interest, if any,
to the date fixed for repurchase.
There can be no assurance that the
Company will have sufficient funds
available at the time of any Change in
Control to make any debt payment
(including repurchases of Notes)
required by the foregoing. In the
event the Company fails to repurchase
the Notes upon a Change in Control, it
would be in default under the Indenture
and the maturity of substantially all
of its long-term debt could be
accelerated. See "Description of
Notes--Repurchase of Notes Upon a
Change in Control."
Ranking............................. The Notes will represent senior
unsecured obligations of the Company.
The notes will rank senior in right of
payment to all existing and future
subordinated indebtedness of the
Company and will rank pari passu in
right of payment with all other senior
obligations of the Company. The Notes
are not secured and, therefore, will be
effectively subordinated to all
existing and future secured
indebtedness of the Company to the
extent of the value of the assets such
indebtedness.
Certain Covenants................... The Indenture contains certain
covenants, which, among other things,
limit (i) the incurrence of additional
indebtedness by the Company and its
Restricted Subsidiaries (as defined)
and the issuance of preferred stock by
the Company's Restricted Subsidiaries,
(ii) the payment of dividends on
capital stock of the Company and the
purchase, redemption or retirement of
capital stock or subordinated
indebtedness, (iii) certain
investments, (iv) certain transactions
with affiliates, (v) the incurrence of
liens and sale and leaseback
transactions, (vi) sale of assets,
including the capital stock of
subsidiaries, (vii) certain
consolidations and mergers and certain
guarantees by Restricted Subsidiaries
and (viii) distributions from
Restricted Subsidiaries. These
limitations are subject to a number of
important qualifications. See
"Description of Notes--Certain
Covenants."
Exchange Offer; Registration Rights. In the event that applicable law or
interpretations of the staff of the
Commission do not permit the Company to
effect this Exchange Offer or if
certain holders of the Old Notes notify
the Company that they are not permitted
to participate in, or would not receive
freely transferable Exchange Notes
pursuant to, the Exchange Offer, or upon
the request of the Initial Purchaser
under certain circumstances, the
Company will use its best efforts to
cause to become effective a
registration statement (the "Shelf
Registration Statement") with respect
to the resale of the Old Notes and to
keep the Shelf Registration Statement
effective for a period of two years
from the date of original issuance of
the Old Notes or such shorter period
that will terminate when Old Notes
covered by the Shelf Registration
Statement have been sold pursuant
thereto or can be sold pursuant to Rule
144(k). The interest rate on the Old
Notes is subject to increase under
certain circumstances if the Company
defaults with respect to its
registration obligations under the
Registration Rights Agreement. See "The
Exchange Offer."
Notes Held by Initial Purchaser..... Lazard Freres & Co. LLC, as Initial
Purchaser, sold all of the Old Notes it
originally purchased pursuant to the
Purchase Agreement between the Initial
Purchaser and the Company dated
February 25, 1998; however, the Initial
Purchaser has been making and continues
to make a market in the Notes and may
hold some Notes for such purpose.
Lack of Prior Market for the Exchange
Notes............................... The Exchange Notes are being offered to
holders of the Old Notes. The Old Notes
were resold by the Initial Purchaser
to Qualified Institutional Buyers (as
defined in Rule 144A of the Securities
Act), to a limited number of
institutional accredited investors
within the meaning of Rule 501(a)(1),
(2), (3) or (7) of the Securities Act
and in offshore transactions, complying
with Rule 903 or Rule 904 of Regulation
S under the Securities Act and are
eligible for trading in the PORTAL
Market. The Exchange Notes will be new
securities for which there is currently
no established trading market, and none
may develop. Although the Initial
Purchaser is making a market in the Old
Notes and has indicated to the Company
that it currently intends to make a
market in the Exchange Notes, as
permitted by applicable laws and
regulations, it is under no obligation
to do so; and such market-making could
be discontinued at any time without
notice, at the sole discretion of the
Initial Purchaser. In addition, such
market making activities may be limited
during the Exchange Offer and the
pendency of a Shelf Registration
Statement. Accordingly, no assurance
can be given that an active trading
market for the Exchange Notes will
develop or, if such a market develops,
as to the liquidity of such market. The
Company intends to apply for listing of
the Exchange Notes on the American Stock
Exchange. If the Exchange Notes, are
traded after their initial issuance,
they may trade at a discount from their
initial offering price, depending upon
prevailing interest rates, the market
for similar securities, the performance
of the Company and certain other
factors.
Risk Factors
See "Risk Factors" for a discussion of certain factors which
should be considered in connection with the Exchange Offer or an investment in
the Exchange Notes.
Summary Consolidated Financial and Operating Data
The summary consolidated financial and operating data presented
below relates to periods in the three months ended March 31, 1998 and 1997,
the years ended December 31, 1997 and 1996, the four months ended December 31,
1995, the eight months ended August 31, 1995, the year ended December 31,
1994, the two months ended December 31, 1993 and the ten months ended October
31, 1993. This data should be read in conjunction with "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 1997.
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> Prior
Predecessor
Reorganized Company Predecessor Company Company
------------------------------------------------------------ ------------------------------------- ----------
Four Eights
Three Months Ended Months Months Two Months Ten Months
March 31, Year Ended December 31, Ended Ended Year Ended Ended Ended
------------------- ------------------------- December 31, August 31, December 31, December 31, October 31,
1998 1997 1997 1996 1995 1995 1994 1993 1993
-------- -------- ---------- ----------- ------------ ---------- ------------ ------------ -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Operating revenues. $765,389 $762,306 $3,327,952 $3,554,407 $1,098,474 $2,218,355 $3,407,702 $520,821 $2,633,937
Operating income
(loss)(1)........ (68,707) (99,486) (29,260) (198,527) 10,446 14,642 (279,494) (58,251) (225,729)
Loss before income
taxes and
extraordinary
items(2)........ (79,558) (105,193) (89,335) (274,577) (32,268) (338,309) (432,869) (88,140) (362,620)
Provision (credit)
for income
taxes........... (25,418) (35,161) 527 450 1,370 (96) 960 (248) 1,312
Loss before
extraordinary
items........... (54,140) (70,032) (89,862) (275,027) (33,638) (338,213) (433,829) (87,892) (363,932)
Extraordinary
items, net
of income
taxes(3)......... (1,380) (1,532) (20,973) (9,788) 3,500 140,898 (2,005) -- 1,075,581
Net income (loss).. (55,520) (71,564) (110,835) (284,815) (30,138) (197,315) (435,834) (87,892) 711,649
Ratio of earnings
to fixed
charges (4)...... -- -- -- -- -- -- -- -- --
Per share amounts(5):
Loss before
extraordinary
items............ $(1.04) $(1.51) $(1.98) $(6.60) $(1.15)
Net loss......... (1.06) (1.54) (2.37) (7.27) (1.05)
</TABLE>
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------------------------------------------- --------------------------
December 31,
March 31, ---------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- -------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Cash and cash equivalents(6). $346,134 $237,765 $181,586 $304,340 $138,531 $187,717
Current assets............... 860,591 632,957 625,745 737,301 603,806 728,303
Net working capital
(deficiency)................ (211,471) (303,988) (336,416) (81,913) (1,238,216) (106,703)
Flight equipment, net........ 594,399 626,382 472,495 455,434 508,625 660,797
Total property and
equipment, net.............. 706,718 741,765 614,207 600,066 693,045 886,116
Intangible assets, net....... 1,103,034 1,118,864 1,184,786 1,275,995 921,659 1,024,846
Total assets................. 2,974,701 2,773,848 2,681,939 2,868,211 2,512,435 2,958,862
Current maturities of long-
term debt and capital
leases(7)...................... 85,779 88,460 134,948 110,401 1,149,739 108,345
Long-term debt, less current
maturities(7)............... 855,771 736,540 608,485 764,031 -- 1,053,644
Long-term obligations under
capital leases, less current
maturities.................. 174,520 182,922 220,790 259,630 339,895 376,646
Shareholders' equity
(deficiency)(8)............. 207,151 268,284 238,105 302,855 (417,476) 18,358
</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.
(3) The extraordinary items in 1997 and 1996 are the result of 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) For purposes of determining the ratio of earnings to fixed charges,
"earnings" consist of earnings before income taxes, extraordinary items and
fixed charges (excluding capitalized interest) and "fixed charges" consist
of interest (including capitalized interest) on all debt and that portion
of rental expense that management believes to be representative of
interest. Earnings were not sufficient to cover fixed charges as follows
(in millions): for the three months ended March 31, 1998 and 1997, $80.6
and $105.7, respectively; for the years ended December 31, 1997 and 1996,
$94.1 and $280.0, respectively; for the four months ended December 31,
1995, $32.3; for the eight months ended August 31, 1995, $338.3; for the
year ended December 31, 1994, $435.0; for the two months ended December 31,
1993, $88.4; and for the ten months ended October 31, 1993, $364.7.
(5) No effect has been given to stock options, warrants, convertible preferred
stock or potential issuances of additional Employee Preferred Stock as the
impact would have been anti-dilutive.
(6) Includes cash and cash equivalents held in international operations and by
subsidiaries which, based upon foreign monetary regulations and other
factors, might not be immediately available to the Company.
(7) Long-term debt in 1994 was reclassified to current maturities as a result
of certain alleged defaults and payment defaults.
(8) No dividends were paid on the Company's outstanding common stock during
the periods presented above.
RISK FACTORS
In addition to the other information appearing in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before participating in the Exchange
Offer or investing in the Exchange Notes.
Risk Factors Related to the Company
Substantial Indebtedness
The Company is highly leveraged and has and will continue to
have significant debt service obligations. As of March 31, 1998, the Company's
ratio of long-term debt and capital leases (including current maturities) to
shareholders' equity was 5.39 to 1. As of March 31, 1998, after giving effect
to the issuance of the 11 3/8% Secured Notes and the Equity Notes, the
aggregate principal amount of the Company's total outstanding indebtedness
would be approximately $1,222.2 million, and the ratio of such long-term debt
and capital leases (including current maturities) to shareholders' equity
would have been 5.75 to 1. TWA's estimated minimum payment obligations under
noncancellable operating leases in effect at March 31, 1998 were approximately
$284.1 million for 1998 and approximately $3,346.0 million for periods
thereafter. These amounts exclude payment obligations of the Company that will
arise from financing arrangements relating to the 24 MD-83 aircraft that are
more fully described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital
Resources--Commitments." Over the last several years, the Company's earnings
have not been sufficient to cover fixed charges. The Company's earnings were
not sufficient to cover fixed charges by $80.6 million and $105.7 million for
the three months ended March 31, 1998 and 1997, respectively, $94.1 million
for the year ended December 31, 1997, $280.0 million for the year ended
December 31, 1996, $32.3 million for the four months ended December 31, 1995,
$338.3 million for the eight months ended August 31, 1995, $435.0 million for
the year ended December 31, 1994, $88.4 million for the two months ended
December 31, 1993 and $364.7 million for the ten months ended October 31,
1993. See "Capitalization," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General" and the Consolidated Financial Statements.
The degree to which the Company is leveraged could have
important consequences to holders of the Exchange Notes offered hereby,
including the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired;
(ii) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on the Company's existing
indebtedness; (iii) the Company is placed at a relative competitive
disadvantage to its less highly leveraged competitors and is more vulnerable
to economic downturns; and (iv) such indebtedness contains restrictive and
other covenants, which, if not complied with, may result in an event of
default which, if not cured or waived, could have a material adverse effect on
the Company (including, under certain circumstances, a cross-default of other
debt).
Capital Expenditure Requirements
The Company's capital expenditures for 1998 are currently
anticipated to total approximately $90.4 million compared to capital
expenditures totaling approximately $100.1 million for 1997. The Company's
capital expenditures budget for 1998 includes $60.0 million for flight
equipment related expenditures (including pre-delivery deposits for aircraft
and the purchase of aircraft engines and spare parts). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Certain Other Capital
Requirements" for a discussion of the potential additional expenditures that
may be required by the Company in order to address the year 2000-related
technology issues. 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 have a material adverse effect on the
ability of the Company to continue to implement its strategic plan.
Liquidity
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. On December 31, 1997, the Company's total cash and cash
equivalents balance was approximately $237.8 million (including amounts held in
TWA's international operations and by subsidiaries which, based upon various
monetary regulations and other factors, might not be immediately available to
the Company). This balance represented an increase of approximately $56.2
million from the Company's corresponding cash balance at December 31, 1996.
This increase in the Company's cash balance resulted primarily from the
proceeds from various capital markets offerings during 1997 and asset
dispositions offset by capital expenditures and debt repayments. Due to
improvements in operating results experienced by the Company, cash used by
operations in 1997 was reduced from the prior year. On March 31, 1998, the
Company had total cash and cash equivalents of $346.1 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Liquidity."
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 capital sources or from the sale of
assets. See "The Company--Business Strategy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Liquidity" for a description of the actions taken by the
Company to improve its liquidity during 1997. As a result of the financings
consummated in the fourth quarter of 1997 and the repayment of certain debt
in connection therewith, assets with an approximate appraised value of $165.0
million were released from collateral liens. Since that time, the Company
has sold and subsequently leased back 15 B-727 aircraft and sold two L-1011
aircraft leaving assets with an approximate appraised value of $100.0 million
free and clear of liens and encumbrances. Further pledging of these
unencumbered assets, however, may be limited by negative pledge restrictions
in outstanding indebtedness. Substantially all of TWA's other strategic
assets, have been pledged to secure various issues of outstanding indebtedness
of the Company. To the extent that pledged assets are sold, the applicable
financing agreements generally require the sale proceeds to be applied to
repay the corresponding indebtedness. To the extent that the Company's access
to capital is constrained, the Company may not be able to make certain capital
expenditures or to continue to implement certain other aspects of its
strategic plan, and the Company may therefore be unable to achieve the full
benefits expected therefrom. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Availability of NOLs" for a discussion of the status of the
Company's net operating loss carryforwards.
The Company's long-term viability as well as its ability to
meet its existing debt and other obligations and future capital commitments
depends upon the Company's financial and operating performance, which in turn
is subject to, among other things, prevailing economic conditions and to
certain other financial, business and other factors beyond the Company's
control. As discussed elsewhere herein, in late 1996 and early 1997, the
Company began implementing certain operational changes which are intended to
improve the Company's financial results through, among other things, improved
operational reliability; higher yields and load factors; increased fuel, pilot
and other aircraft operating efficiencies; and a decrease in
maintenance-related expenditures, employee headcount and JFK-related operating
costs. Although management believes that such operational changes will be
successful and that the Company's cash flow from its operations and financing
activities should therefore be sufficient in the foreseeable future to meet
the Company's debt and other obligations and future capital commitments, the
airline industry in general and the Company in particular are subject to
significant risks and uncertainties referred to in this Prospectus including
under these Risk Factors and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General" and " -- Liquidity
and Capital Resources." Therefore, there can be no assurance that the
Company's operating results and financing activities will be sufficient in the
foreseeable future to meet its debt and other obligations and future capital
commitments.
Prior Operating Losses and Future Uncertainties Relating to
Results of Operations; Results for First Quarter 1998
TWA's long-term viability depends on its ability to achieve and
maintain profitable operations. Although the airline industry has generally
seen strengthened performance in recent years, particularly since 1995 when
many airlines reported record profits, the Company has reported significant
net losses. For example, the Company reported a net loss of $227.5 million
for the combined 12-month period ended December 31, 1995 (including
extraordinary gains related to the '95 Reorganization), while reporting an
operating profit of $25.1 million (including $58.0 million of non-cash expense
relating to the distribution of stock to employees as part of the '95
Reorganization), which represented the Company's first operating profit since
1989. The Company's reported net loss of $284.8 million for 1996 represented
a $57.3 million increase over the 1995 net loss, while the Company reported a
$198.5 million operating loss for 1996 (including special charges of $85.9
million), which represented a $223.6 million decline from its operating profit
in 1995. The Company's 1997 financial results reflected a net loss of $110.8
million, which represented an improvement of $174.0 million over the $284.8
million net loss for the full year 1996, and a $29.3 million operating loss,
which represented a $169.2 million improvement over the $198.5 million
operating loss reported for the full year 1996. For a discussion of such
operating results and the substantial net losses incurred during such periods,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "The Company--Business Strategy." Although the Company has
taken a number of actions which management believes will improve future
results, the Company will incur additional expenses relating to these actions,
including pilot training and aircraft leases, and there can be no assurance
that such actions will make the Company's future operations profitable. See "
- -- Liquidity; Substantial Indebtedness; Capital Expenditure Requirements" and
"The Company--Business Strategy."
On April 22, 1998, the Company reported financial results for
the first quarter 1998 reflecting an operating loss of $68.7 million and a net
loss before extraordinary items of $54.1 million for the three months ended
March 31, 1998, including a non-cash operating expense of $26.5 million
relating to the distribution in July 1998 of Common Stock to employee stock
plans. These results compare with an operating loss of $99.5 million and a
net loss before extraordinary items of $70.0 million in the first quarter
1997. Excluding the effect of non-cash expense associated with earned stock
compensation, the first quarter 1998 operating loss was $42.2 million compared
to the first quarter 1997 operating loss of $98.2 million. Similarly
calculated, the net loss before extraordinary items for the first quarter 1998
and 1997 were $38.0 million and $69.3 million, respectively. Operating
revenue for the first quarter 1998 was $765.4 million versus $762.3 million in
the first quarter 1997 despite a slight reduction in capacity from the first
quarter 1997 to 1998 resulting from the replacement of B747 and L-1011
aircraft with smaller B767, B757 and MD-80 aircraft.
TWA has historically experienced significant variations in
quarterly and annual operating revenues and operating expenses and expects
such variations to continue. Due to the greater demand for air travel during
the summer months, airline industry revenues for the third quarter of the year
are generally significantly greater than revenues in the first and fourth
quarters of the year and moderately greater than revenues in the second
quarter of the year. In the past, given the Company's historical dependence
on summer leisure travel, TWA's results of operations have been particularly
sensitive to such seasonality. While the Company, through an acceleration of
its fleet renewal program and restructuring of its JFK operations, anticipates
that the deseasonalization of operations affected thereby will reduce quarter
to quarter fluctuations in the future, there can be no assurance that such
deseasonalization will occur.
The Company's results of operations have also been impacted by
numerous other factors that are not necessarily seasonal. 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 necessitating additional
capital or operating expenditures; (vii) the outcome of certain ongoing labor
negotiations (see "--'94 Labor Agreements"); and (viii) the reduction in yield
due to the continued implementation of a discount ticket program entered into
by the Company with Karabu Corporation ("Karabu"), a Delaware corporation
controlled by Carl Icahn, in connection with the '95 Reorganization on the
terms currently applied by Karabu (which terms are, in the opinion of the
Company, inconsistent with, and in violation of, the agreement governing such
program) (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" and "Business--Legal Proceedings--Icahn
Litigation"). The Company is unable to predict the potential impact of any
such uncertainties upon its future results of operations.
Crash of Flight 800
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, which to date has
not been determined. The National Transportation Safety Board held hearings
relating to the crash in December 1997 and is continuing its investigation.
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. 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 or from any future findings by the National Transportation Safety
Board. See "Business--Legal Proceedings."
Changes to Management Team
Commencing in June 1996, the Company experienced a substantial
number of changes in its executive management team. Although the Company
believes that a stable executive management team has now been put in place,
there can be no assurance that future changes will not occur or, that if such
changes do occur, that they will not adversely affect future operations.
<TABLE>
<CAPTION>
Current Executives of the Company
----------------------------------
DATE OF
ELECTION OR
APPOINTMENT
NAME CURRENT TITLE AS EXECUTIVE
---- ------------- ------------
<S> <C> <C>
Gerald L. Gitner(1) Chairman & CEO December 1996
William F. Compton(2) President & COO December 1996
Michael J. Palumbo Senior Vice President & CFO December 1996
Donald M. Casey Executive Vice President, Marketing May 1997
James F. Martin Senior Vice President, Human Resources November 1997
Kathleen A. Soled Senior Vice President & General Counsel January 1998
</TABLE>
- ---------------
(1) Mr. Gitner, a director since November 1993, was Vice Chairman and Acting
CEO from December 1996 until February 1997.
(2) Mr. Compton, a director since November 1993, was Acting Executive Vice
President, Operations from December 1996 until March 1997 and Executive
Vice President, Operations from March 1997 until December 1997.
In addition, David M. Kennedy, a director, served as Acting Executive Vice
President and Chief Operating Officer from December 1996 until June 1997.
'94 Labor Agreements
As of March 31, 1998, the Company had approximately 22,203
full-time employees (based upon full-time equivalents which include part-time
employees). Of these, approximately 84.6% were represented by ALPA and the
IAM. On March 6, 1997, the IAM was certified to replace IFFA as the
bargaining representative of the Company's flight attendants. The Company's
currently effective collective bargaining agreement with each such union
(collectively the " '94 Labor Agreements") contain more favorable work rules
than in prior contracts and wage levels which the Company believes to be below
many other U.S. airlines. The '94 Labor Agreements are three year agreements
which became amendable as of August 31, 1997. Negotiations on a new
collective bargaining agreement with the IAM with regard to the flight
attendants commenced in July 1997 and are currently ongoing and negotiations
regarding the Company's ground employees represented by the IAM commenced in
February 1997 and are also currently ongoing. Negotiations on a new
collective bargaining agreement with ALPA commenced in June 1997 and are
currently ongoing. Under the Railway Labor Act (the "RLA"), workers whose
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. At the request of the IAM, a
mediator was appointed on August 6, 1997 with respect to ground employees
represented by the IAM. On March 27, 1998, at the request of the IAM, a
mediator was appointed with respect to the flight attendants represented by
the IAM.
In the opinion of management, the Company's financial resources
are not as great as those of most of its competitors, and, therefore,
management believes that 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. See "Business--Employees."
In connection with certain wage scale adjustments afforded to
non-contract employees, employees previously represented by the IFFA have
asserted and won an arbitration ruling with respect to the comparability of
wage concessions made in 1994 that, if sustained, would require that the
Company provide additional compensation to such employees. The Company
estimates that at December 31, 1997 such additional compensation that would be
payable pursuant to the arbitration ruling would be approximately $12.0
million. The Company denies any such obligation and is pursuing an appeal of
the arbitration ruling and a court award affirming the ruling. Effective
September 1, 1997, the Company also reduced the overall compensation and
benefits package for non-contract employees so as to offset, in the Company's
view, any claims by such employees previously represented by IFFA for any
retroactive or prospective wage increases. As such, no liability has been
recorded by the Company.
Age of Fleet; Noise
At March 31, 1998, the average age of TWA's operating aircraft
fleet was 16.5 years, making TWA's fleet one of the oldest of U.S. air
carriers. As a result, TWA has incurred increased overall operating costs due
to the higher maintenance, fuel and other operating costs associated with
older aircraft. During 1997, TWA acquired 27 new or later-model used
aircraft. The Company expects to continue the process of acquiring a number
of new and later-model used aircraft. As of March 31, 1998, TWA's fleet
included 55 aircraft which did not meet the noise reduction requirements under
the Airport Noise and Capacity Act of 1990 (the "Noise Act") and must
therefore be retired or substantially modified by the end of 1999. Although
the Company has plans to meet the Noise Act's noise reduction requirement,
there can be no assurance that such plans will be achieved. In addition, in
1990, the FAA issued several Airworthiness Directives ("ADs") mandating
changes to maintenance programs for older aircraft to ensure that the oldest
portion of the nation's fleet remains airworthy. Many of the Company's
aircraft are currently affected by these aging aircraft ADs. In 1996 and
1997, TWA spent approximately $3.4 million and $4.2 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 an additional approximately $19.8 million through
the year 2001. These cost estimates assume, among other things, that newer
aircraft will replace certain of TWA's existing aircraft and that as a result
certain aircraft will be retired by the Company before TWA would be required
to make certain aging aircraft maintenance expenditures. There can be no
assurance that TWA will be able to implement fully its fleet plan or that the
cost of complying with aging aircraft maintenance requirements will not be
significantly increased. See "--Liquidity; Substantial Indebtedness; Capital
Expenditure Requirements," "Business--Regulatory Matters--Noise Abatement" and
"--Aging Aircraft Maintenance."
Corporate Governance Provisions; Special Voting Arrangements
As a result of provisions of the '94 Labor Agreements, the
Company's Third Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated By-laws (the
"By-laws") contain provisions (the "Blocking Coalition Provisions") which
allow certain corporate actions requiring board approval, including mergers,
consolidations and sale of all or substantially all the assets of the Company,
to be blocked by a vote of six (four union elected directors and two other
directors) of the Company's fifteen directors, which together constitute a
"Blocking Coalition". Actions subject to disapproval by the Blocking Coalition
include: (a) any sale, transfer or disposition, in a single or series of
transactions, of at least 20% of the Company's assets, except for transactions
in the ordinary course of business including aircraft transactions as part of
a fleet management plan; (b) any merger of the Company into or with, or
consolidation of the Company with any other entity; (c) any business
combination within the meaning of Section 203 of the Delaware General
Corporation Law (the "DGCL"); (d) any dissolution or liquidation of the
Company; (e) any filing of a petition for bankruptcy, reorganization or
receivership under any state or federal bankruptcy, reorganization or
insolvency law; (f) any repurchase, retirement or redemption of the Company's
capital stock or other equity securities prior to their scheduled maturity or
expiration, except for redemptions out of the proceeds of any substantially
concurrent offering of comparable or junior securities and mandatory
redemptions of any redeemable preferred stock of the Company; (g) any
acquisition of assets, not related to the Company's current business as an air
carrier, in a single transaction or a series of related transactions exceeding
$50 million adjusted annually by the consumer price index; or (h) any sale of
the Company's capital stock or securities convertible into capital stock of
the Company to any person if (i) at the time of issuance or (ii) assuming
conversion of all outstanding securities of the Company convertible into
capital stock, such person or entity would beneficially own at least 20% of
the capital stock of the Company.
Anti-takeover Provisions in Certificate of Incorporation and
By-laws; Rights Plan
The Certificate of Incorporation and By-laws contain provisions
which authorize the Board of Directors to issue preferred stock without
stockholder approval, prohibit action by written consent of the stockholders,
authorize only the Chairman of the Board of Directors or a majority of the
Board of Directors to call special meetings of the stockholders and require
advance notice for director nominations. These provisions of the Certificate
of Incorporation and By-laws and the Blocking Coalition Provisions, as well as
federal laws limiting foreign ownership of U.S. flag carriers and the
prohibition on certain business combinations contained in Section 203 of the
DGCL, could have the effect of delaying, deferring or preventing a change in
control or the removal of existing management. In addition, the Board of
Directors declared a dividend distribution of one Right for each outstanding
share of Common Stock and Employee Preferred Stock payable to holders of
record as of the close of business on January 12, 1996 and, thereafter all
Common Stock issued by the Company has had an equivalent number of rights
attendant to it. The Rights are intended to protect TWA's shareholders from
certain non-negotiated takeover attempts which present the risk of a change of
control on terms which may be less favorable to TWA's stockholders than would
be available in a transaction negotiated with and approved by the Board of
Directors of the Company. See "Certain Provisions of the Certificate of
Incorporation, the By-laws and Delaware Law" and "Business--Regulatory
Matters--Foreign Ownership of Shares" and "Description of Capital
Stock--Rights Plan."
Certain Potential Future Earnings Charges
There are a number of uncertainties relating to agreements with
employees of the Company, the resolution of which could result in significant
non-cash charges to TWA's future operating results. Shares granted or
purchased at a discount under the employee stock incentive plan (the "ESIP")
will generally result in a charge equal to the fair market value of shares
granted plus 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 (the 1997 and 1998
target prices having been met) would be approximately $108.8 million based
upon such target prices and the number of shares of Common Stock and Employee
Preferred Stock outstanding at January 30, 1998. The charge for any year,
however, could be substantially higher if the then market price of the Common
Stock exceeds certain target prices. On February 17, 1998, the first target
price of $11.00 was realized and a grant of 2.0% of the outstanding Common
Stock and Employee Preferred Stock will be made on July 15, 1998. Based on
the current number of outstanding shares of Common Stock and Employee
Preferred Stock and taking into account a credit with respect to the Company's
required contribution, the net contribution will be 1,109,722 shares. In
addition, on March 4, 1998 the market price of the Company's Common Stock
exceeded the $12.10 target price for the 30-day period necessary to earn the
1998 grant. As a result, on July 15, 1998 the Company will be required to
make an additional contribution to the relevant employee trusts of 1.5% of its
Common Stock and Employee Preferred Stock. Based on the current number of
outstanding shares of Common Stock and Employee Preferred Stock, that
contribution would be 1,172,354 shares. As a result of the grants earned in
1998, an aggregate non-cash charge in connection with such issuance was
recorded in the first quarter of 1998 in the amount of $26.5 million. However,
the actual number of shares and the actual charge will not be known until the
shares are issued on July 15, 1998. See "Business--Employees."
Fresh Start Reporting
In connection with the '95 Reorganization, the Company adopted
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"). The fresh
start reporting common equity value of the Company was determined by the
Company, with the assistance of its financial advisors, to be approximately
$270.0 million based, in part, on assumptions as to future results of
operations. The carrying value of the Company's assets does not reflect
historical cost but rather reflects current values determined by the Company
as of the August 23, 1995 effective date (the "'95 Effective Date") of the '95
Reorganization (including values for intangible assets such as routes, gates
and slots of approximately $458.4 million). The difference between (i) the
equity valuation of the Company plus the estimated fair market value of the
Company's liabilities and (ii) the estimated fair market value of its
identifiable assets was allocated to "reorganization value in excess of
amounts allocable to identifiable assets" in the amount of approximately
$839.1 million. In future periods, these intangible assets will be evaluated
for recoverability based upon estimated future cash flows. If expectations
are not substantially achieved, charges to future operations for impairment
of these assets might be required and such charges could be material. Due to
the significant adjustments relating to the '95 Reorganization and the
adoption of fresh start reporting, the pre-reorganization consolidated
financial statements are not comparable to the post-reorganization
consolidated financial statements. A vertical black line is shown in the
Consolidated Financial Statements and Selected Consolidated Financial Data
presented herein to separate TWA's post-reorganization Consolidated Financial
Statements from its pre-'95 Reorganization consolidated financial statements
since they have not been prepared on a consistent basis of accounting. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 19 to the Consolidated Financial Statements.
In the fourth quarter of 1996, the Company reported a special
charge of $26.7 million relating to the write-down of the carrying value of
TWA's JFK-Athens route authority, reflecting the Company's decision to
terminate service on such route after April 18, 1997.
Risk Factors Related to the Industry
Competition
The airline industry operates in an intensely competitive
environment. TWA competes with one or more major airlines on most of its
routes (including on all routes between major cities) and with various forms
of surface transportation. The airline 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 RASM and cost per
available seat mile ("CASM") can have a significant impact on the Company's
financial results. Airline profit levels are highly sensitive to, and during
recent years have been adversely affected by, among other things, changes in
fuel costs, fare levels and passenger demand. Vigorous price competition
exists, and TWA and its competitors have frequently offered sharply reduced
discount fares in many markets. Airlines, including TWA, use discount fares
and other promotions to stimulate traffic during normally slack travel
periods, to generate cash flow and to increase relative market share in
selected markets. TWA has often elected to initiate or match discount or
promotional fares in certain markets in order to compete vigorously in those
discounted markets or to stimulate traffic. Passenger demand and fare levels
have also been affected adversely by, among other factors, the state of the
economy and international events.
The airline industry has consolidated as a result of mergers
and liquidations and more recently through alliances, and further
consolidation may occur in the future. This consolidation has, among other
things, enabled certain of the Company's major competitors to expand their
international operations and increase their domestic market presence. In
addition, many of the major U.S. carriers have announced plans for alliances
with other major U.S. carriers. Such alliances could further intensify the
competitive environment. In addition, certain of the Company's competitors
have in recent years established alliances with one or more large foreign
carriers, allowing those competitors to strengthen their overall operations
by, among other things, transporting passengers connecting with or otherwise
traveling on the alliance carriers. Although the Company has established a
code share arrangement with one foreign carrier and has filed an application
with the DOT to establish an alliance with another foreign carrier, it does
not have an alliance with a large foreign carrier.
The emergence and growth of low cost, low fare carriers in
domestic markets represents an intense competitive challenge for the Company,
which has higher operating costs than many of such low fare carriers and fewer
financial resources than many of its major competitors. In many cases, such
low cost carriers have initiated or triggered price discounting. In part as a
result of the industry consolidation referred to above, aircraft, skilled
labor and gates at most airports continue to be readily available to start-up
carriers. To the extent new carriers or other lower cost competitors enter
markets in which the Company operates, such competition could have a material
adverse effect on the Company. Certain of the traditional carriers that
compete with TWA have implemented, or are in the process of implementing,
measures to reduce their operating costs including the creation of low cost
regional jet airline affiliates. In addition, the Company is more highly
leveraged and has significantly less liquidity (and in certain cases, a higher
cost structure) than certain of its competitors, several of whom have
available lines of credit, significant unencumbered assets and/or greater
access to capital markets. Accordingly, TWA may be less able than certain of
its competitors to withstand a prolonged recession in the airline industry or
prolonged periods of competitive pressure.
Demand for air transportation has historically tended to mirror
general economic conditions. During the most recent economic recession in the
United States, the change in industry capacity failed to mirror the reduction
in demand for domestic air transportation due primarily to continued delivery
of new aircraft. While in the period following such recession, industry
capacity leveled off, such capacity has again begun to expand. TWA expects
that the airline industry will remain extremely competitive for the
foreseeable future.
Aircraft Fuel
Since fuel costs constitute a significant portion of the
Company's operating costs (approximately 15.6% in 1996 and approximately 14.3%
in 1997), significant increases in fuel costs would materially and adversely
affect the Company's operating results. Fuel prices continue to be
susceptible to, among other factors, political events and market factors
beyond the Company's control, and the Company cannot predict near or
longer-term fuel prices. In the event of a fuel supply shortage resulting
from a disruption of oil imports or otherwise, higher fuel prices or
curtailment of scheduled service could result. During 1996, the Company's
average per gallon cost of fuel increased approximately 22.3% versus 1995,
from approximately 57.0 Cents per gallon to approximately 69.8 Cents per
gallon. During 1997, the Company's average per gallon cost of fuel decreased
approximately 5.6%, from approximately 69.8 Cents per gallon to approximately
65.9 Cents per gallon. During the first quarter of 1998, the Company's
average per gallon cost of fuel decreased approximately 25.0%, from
approximately 74.1 Cents per gallon to approximately 55.6 Cents per gallon,
over the same period in 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." A one cent change in the cost
per gallon of fuel (based on consumption during 1997) impacts operating
expense by approximately $609,000 per month. Increases in fuel prices may
have a greater proportionate and more immediate impact on TWA than many of its
competitors because of the composition of its fleet and because the Company
does not presently maintain substantial reserves of fuel required for its
operations or otherwise hedge the cost of anticipated purchases of fuel. See
"Business--Aircraft Fuel."
Regulatory Matters
The airline industry is subject to extensive federal and
international government regulations relating to airline safety, security and
scheduling, as well as to local, state, federal, and international
environmental laws. Adoption of newly proposed regulations relating to these
matters could increase the Company's cost of compliance with governmental
regulations, and could therefore increase operating expenses and in some cases
restrict the operations of airlines, including TWA, thereby adversely
affecting TWA's results of operations.
During the last several years, the FAA has issued a number of
maintenance directives and other regulations relating to, among other things,
collision avoidance systems, airborne windshear avoidance systems, noise
abatement and increased inspection requirements, including added requirements
for aging aircraft. TWA believes, based on its current fleet, that it will
incur substantial capital expenditures to comply with the aging aircraft and
noise abatement regulations. The Company expects that a number of aircraft
will be retired before major aging aircraft modifications and noise compliance
will be required; however, required capital expenditures will vary depending
upon changes in TWA's fleet composition. Management expects that the cost of
compliance will be funded through a combination of internally generated funds
and utilization of cost sharing and/or funding provisions under certain lease
agreements and loan agreements. See "--Risk Factors Related to the
Company--Liquidity; Substantial Indebtedness; Capital Expenditure
Requirements."
Additional laws and regulations have been proposed from time to
time which could significantly increase the cost of airline operations by, for
instance, imposing additional requirements or restrictions on operations. For
example, several airports have recently sought to increase substantially the
rates charged to airlines, and the ability of airlines to contest such
increases has been restricted by federal legislation, DOT resolutions and
judicial decisions. In addition, laws and regulations have also been
considered from time to time that would prohibit or restrict the ownership
and/or transfer of airline routes or takeoff and landing slots. Also, the
award of international routes to U.S. carriers (and their retention) is
regulated by treaties and related agreements between the United States and
foreign governments which are amended from time to time. The Company cannot
predict what laws and regulations will be adopted or what changes to
international air transportation treaties will be effected, if any, or how
they will affect TWA. See "Business--Regulatory Matters."
Management believes that the Company benefitted from the
expiration on December 31, 1995 of the aviation trust fund tax (the "Ticket
Tax"), which imposed certain taxes including a 10% air passenger tax on
tickets for domestic flights, a 6.25% air cargo tax and a $6 per person
international departure tax. The Ticket Tax was reinstated on August 27, 1996
and expired again on December 31, 1996. At the end of February 1997, the
Ticket Tax was reinstated effective March 7, 1997 through September 30, 1997.
Congress has passed tax legislation reimposing and significantly modifying the
Ticket Tax, effective October 1, 1997. The legislation includes the
imposition of new excise tax and significant fee tax formulas over a multiple
year period, an increase in the international departure tax, the imposition
of a new arrivals tax, and the extension of the Ticket Tax to cover items such
as the sale of frequent flier miles. Management believes that the
reimposition and modification of the Ticket Tax will have a negative impact on
the Company, although neither the amount of such negative impact nor the
benefit previously realized by its expiration can be precisely determined.
However, management believes that the recent tax legislation and any other
increases of the Ticket Tax will result in higher costs to the Company and/or,
if passed on to consumers in the form of increased ticket prices, might have
an adverse effect on passenger traffic, revenue and/or margins. See
"Business--Regulatory Matters."
Risk Factors Relating to the Notes and the Exchange Offer
Certain Bankruptcy Considerations
If the Company were to become a debtor in a proceeding under
Title 11 of the United States Bankruptcy Code, as amended (the "Bankruptcy
Code"), it is likely that there would be delays in payment with respect to the
Notes and delays in or prevention from enforcing remedies and other rights
that may otherwise be available to holders of the Notes. It is also possible
that holders of Notes would not ultimately receive repayment, in whole or in
part, of the Notes.
Ranking of the Notes
The Notes are not secured and, therefore, will be effectively
subordinated to all existing and future secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness. As of
December 31, 1997, the Company had $1,008.0 million of secured indebtedness
outstanding. Subject to certain conditions specified therein, the Indenture
permits the Company to incur additional secured indebtedness which will
effectively rank senior to the Notes to the extent of the value of the assets
subject thereto. See "Description of Notes." The Notes will represent senior
unsecured obligations of the Company and will rank pari passu in right of
payment with other senior obligations of the Company. As of December 31,
1997, after giving effect to the issuance of the Notes and the application of
the net proceeds therefrom, the aggregate principal amount of the Company's
total outstanding indebtedness would be approximately $1,158.0 million. The
Notes are not presently guaranteed by any subsidiary of the Company and as a
result will effectively rank junior to all creditors (including trade
creditors) of, and holders of preferred stock issued by, subsidiaries of the
Company. As of December 31, 1997, the subsidiaries of the Company did not
have any outstanding indebtedness or preferred stock, except for the
wholly-owned, bankruptcy remote subsidiary that is the issuer of the
Receivables Securitization Notes. Although the Notes will contain
restrictions on the incurrence of indebtedness by subsidiaries, the amount of
indebtedness which is permitted to be incurred could be substantial. The
Notes will contain no limitations on the ability of subsidiaries to incur
trade credit and other obligations. See "Description of Notes."
Fraudulent Conveyance
Under certain circumstances, subsidiaries of the Company will
be required to guarantee the Company's obligations with respect to the Notes.
The Company believes that any such guarantee will be for proper purposes and
in good faith. See "Description of Notes--Certain Covenants--Limitation on
Guarantees by Restricted Subsidiaries."
If a court of competent jurisdiction in a suit by an unpaid
creditor or a representative of creditors (such as a trustee in bankruptcy or
a debtor-in-possession) were to find that, at the time such subsidiary
incurred its obligations under its guarantee, either such subsidiary incurred
such obligations with the intent to hinder, delay or defraud its present or
future creditors, or that it was insolvent or was rendered insolvent by reason
of such incurrence, was engaged or was about to engage in a business or
transaction for which its remaining unencumbered assets constituted
unreasonably small capital to carry on its business or intended to incur, or
believed or reasonably should have believed that it would incur, debts beyond
its ability to pay such debts as they matured, and the indebtedness was
incurred for less than reasonably equivalent value, such court could avoid
such subsidiary's obligations under its guarantee, subordinate such guarantee
to any or all other indebtedness of such subsidiary or take other action
detrimental to the holders of the Notes. In that event, there can be no
assurance that any repayment on such guarantee could ever be recovered by the
holders of the Notes.
The measure of insolvency for purposes of the foregoing will
vary depending upon the law of the jurisdiction in which it is being applied.
Generally, however, an entity would be considered insolvent for these purposes
if, at the time it incurred indebtedness such as a guaranty obligation, either
the sum of its debts was then greater than all of its property at a fair
valuation, or the then fair salable value of its assets was less than the
amount that was then required to pay its probable liabilities on its existing
debts (including contingent liabilities such as guarantee obligations) as they
become absolute and matured or if, at any time, it proved unable to satisfy
its liabilities immediately due and payable with its current cash flow and
available assets.
Change in Control; Cross Default Provisions
Upon a Change in Control, each holder of Notes will have the
right, for a limited period of time, to require the Company to repurchase all
or any part of such holder's Notes at a price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and Special
Interest, if any, to the date fixed for repurchase. However, there can be no
assurance that upon the occurrence of such a Change in Control, the Company
will be able to repurchase the Notes. In the event the Company fails to
repurchase the Notes upon a Change in Control, it would be in default under
the Indenture and the maturity of substantially all of its long-term debt
could be accelerated. See "Description of Notes--Repurchase of Notes Upon a
Change in Control."
Lack of Prior Market for the Exchange Notes
The Exchange Notes are being offered to the holders of the Old
Notes. The Old Notes were offered and sold in March 1998 to "Qualified
Institutional Buyers" and to a limited number of other institutional
"Accredited Investors" (as defined in Rule 144A and Rule 501(a)(1), (2), (3)
or (7) under the Securities Act, respectively) and in offshore transactions
complying with Rule 903 or Rule 904 of Regulation S under the Securities Act
and are eligible for trading in the PORTAL Market.
The Exchange Notes will constitute a new issue of securities
for which there is currently no established trading market, and the Exchange
Notes may not be widely distributed. Although the Initial Purchaser is making
a market in the Old Notes and has indicated to the Company that it currently
intends to make a market in the Exchange Notes, as permitted by applicable
laws and regulations, it is not obligated to do so and any such market-making
may be discontinued at any time without notice at the sole discretion of the
Initial Purchaser. In addition, such market making activities may be limited
during the Exchange Offer and the tendency of a Shelf Registration Statement.
Accordingly, no assurance can be given that an active trading market for the
Exchange Notes will develop. If a market for any of the Exchange Notes does
develop, the price of such Exchange Notes may fluctuate and liquidity may be
limited. If a market for any of the Exchange Notes does not develop,
purchasers may be unable to resell such Exchange Notes for an extended period
of time, if at all. The Company has agreed to list the Exchange Notes on the
American Stock Exchange or on such other stock exchange or market as the
Common Stock is then principally traded no later than the earliest to occur of
(i) the effectiveness of the this Exchange Offer Registration Statement and
(ii) the effectiveness of the Shelf Registration Statement, provided that such
Exchange Notes meet the minimum requirements for listing on any such exchange
or market, and, if applicable, to maintain such listing for so long as any of
the Exchange Notes is outstanding.
Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices
of such securities. There can be no assurance that the market for the Old
Notes or the Exchange Notes will not be subject to similar disruptions. Any
such disruptions may have an adverse effect on holders of the Old Notes or the
Exchange Notes.
Consequences of Failure to Exchange
Holders of Old Notes who do not exchange their Old Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Old Notes as set forth in the legend
thereon. In general, the Old Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or
in a transaction not subject to the Securities Act and applicable state
securities laws. The Company does not intend to register the Old Notes under
the Securities Act. The Company believes that, based upon interpretations
contained in letters issued to third parties by the staff of the SEC, Exchange
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by each Holder thereof
(other than a broker-dealer, as set forth below, and any such Holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and such Holder
has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Eligible Holders wishing to accept the
Exchange Offer must represent to the Company in the Letter of Transmittal that
(i) the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is such holder, (ii) neither the
holder of Old Notes nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes, (iii) if the holder is not a broker-dealer or is a
broker-dealer but will not receive Exchange Notes for its own account in
exchange for Old Notes, neither the holder nor any such other person is
engaged in or intends to participate in a distribution of the Exchange Notes
and (iv) neither the holder nor any such other person is an "affiliate" of the
Company within the meaning of Rule 405 or if such holder is an "affiliate",
that such holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. Each
broker-dealer (whether or not it is also an "affiliate") that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
represent that the Old Notes tendered in exchange therefor were acquired as a
result of market-making activities or other trading activities and must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with the resales of Exchange Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
an exemption from registration or qualification is available and is complied
with. The Company does not currently intend to take any action to register or
qualify the Exchange Notes for resale in any such jurisdictions.
In the event the Exchange Offer is consummated, the Company
will not be required to register the transfer of the Old Notes under the
Securities Act or any applicable securities laws. In such event, holders of
Old Notes seeking liquidity in their investment would have to rely on
exemptions to the registration requirements under such laws. The Old Notes
currently may be sold to "Qualified Institutional Buyers" and to a limited
number of other institutional "Accredited Investors" (as defined in Rule 144A
and Rule 501(a) (1), (2), (3) or (7) under the Securities Act, respectively)
and in offshore transactions complying with Rule 903 or Rule 904 of Regulation
S under the Securities Act or pursuant to another available exemption under
the Securities Act without registration under the Securities Act. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
reduction in the principal amount of Old Notes outstanding could have an
adverse effect upon, and increase the volatility of the market price for, the
untendered and tendered but unaccepted Old Notes.
Exchange Offer Procedures
To participate in the Exchange Offer, and avoid the
restrictions on Old Notes, each holder of Old Notes must transmit a properly
completed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the First Security Bank, National Association
(the "Exchange Agent") at the address set forth below under "The Exchange
Offer -- Procedures for Tendering -- Exchange Agent" on or prior to the
Expiration Date. In addition, (i) certificates for such Old Notes must be
received by the Exchange Agent along with the Letter of Transmittal, (ii) a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Old Notes, if such procedure is available, into the Exchange Agent's
account at The Depository Trust Company ("DTC" or the "Depositary") pursuant
to the procedure for book-entry transfer described below, must be received by
the Exchange Agent prior to the Expiration Date or (iii) the Holder must
comply with the guaranteed delivery procedures. See "The Exchange Offer."
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange
Offer. The Company has agreed to pay the expenses of the Exchange Offer. No
underwriter is being used in connection with the Exchange Offer.
THE EXCHANGE OFFER
Purpose of the Exchange Offer
On March 3, 1998, the Company issued $150 million aggregate
principal amount of Old Notes to the Initial Purchaser. In connection with the
issuance and sale of the Old Notes, the Company entered into the Registration
Rights Agreement with the Initial Purchaser, which obligated the Company to
(i) file the Registration Statement of which this Prospectus is a part for the
Exchange Offer within 60 days after March 3, 1998, the date the Old Notes were
issued (the "Issue Date"), (ii) use its best efforts to cause the Registration
Statement to become effective within 150 days after the Issue Date, and (iii)
consummate the Exchange Offer within 180 days of the Issue Date. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Exchange Offer is being made
pursuant to the Registration Rights Agreement to satisfy the Company's
obligations thereunder.
Based on interpretations by the staff of the Commission, as set
forth in no-action letters issued to Exxon Capital Holdings Corporation
(available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 5,
1991), Mary Kay Cosmetics, Inc. (available June 5, 1991) and Warnaco, Inc.
(available October 11, 1991), the Company believes that a holder who exchanges
Old Notes for Exchange Notes pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such Exchange Notes without compliance
with the registration and prospectus delivery requirements of the Securities
Act; provided, that (i) such Exchange Notes are acquired in the ordinary
course of such holder's business, (ii) such holder is not engaged in, and does
not intend to engage in, a distribution of such Exchange Notes and has no
arrangement with any person to participate in the distribution of such
Exchange Notes, and (iii) such holder is not an affiliate of the Company (as
defined under Rule 405 of the Securities Act). However, the staff of the
Commission has not considered the Exchange Offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer as in such
other circumstances. A holder who exchanges Old Notes for Exchange Notes
pursuant to the Exchange Offer with the intention to participate in a
distribution of the Exchange Notes may not rely on the staff's position
enunciated in the Exxon Capital Letter, the Morgan Stanley Letter or similar
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes (other than a resale of an unsold allotment
from the original sale of the Notes) received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the Exchange Offer), the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue a principal amount at maturity of
Exchange Notes in exchange for an equal principal amount at maturity of
outstanding Old Notes validly tendered pursuant to the Exchange Offer and not
withdrawn prior to the Expiration Date. Old Notes may only be tendered in
integral multiples at maturity of $1,000. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer.
The terms of the Exchange Notes and the Old Notes are
substantially identical in all material respects, except that (i) the exchange
will be registered under the Securities Act and, therefore, the Exchange Notes
will not bear legends restricting the transfer of such Exchange Notes, and
(ii) holders of the Exchange Notes will not be entitled to any of the
registration rights of holders of Old Notes under the Registration Rights
Agreement, which rights will terminate upon the consummation of the Exchange
Offer. See "Description of Notes." The Exchange Notes will evidence the same
indebtedness as the Old Notes. The Exchange Notes will be issued under and
entitled to the benefits of the Indenture pursuant to which the Old Notes were
issued such that the Exchange Notes and Old Notes will be treated as a single
class of debt securities under the Indenture.
As of the date of this Prospectus, $150 million aggregate
principal amount at maturity of the Old Notes are outstanding. This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders of the Old Notes.
Holders of Old Notes do not have any appraisal or dissenters'
rights under the DGCL or the Indenture in connection with the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Old Notes which are not tendered and were not
prohibited from being tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and to be subject to transfer
restrictions, but will not be entitled to any rights or benefits under the
Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the
Exchange Offer, the Company will accept, promptly after the Expiration Date,
all Old Notes properly tendered and not withdrawn and will issue Exchange
Notes in exchange therefor promptly after acceptance of the Old Notes. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
properly tendered Old Notes for exchange when, as and if, the Company has
given oral or written notice thereof to the Exchange Agent. The Exchange Agent
will act as agent for the tendering holders for the purposes of receiving the
Exchange Notes from the Company.
In all cases, issuance of Exchange Notes for Old Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of such Old Notes, a properly completed
and duly executed Letter of Transmittal and all other required documents;
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer.
If any tendered Old Notes are not accepted for any reason set forth in the
terms and conditions of the Exchange Offer or if Old Notes are submitted for a
greater principal amount at maturity than the holder desires to exchange, such
unaccepted or nonexchanged Old Notes or substitute Old Notes evidencing the
unaccepted portion, as appropriate, will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Old Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extension; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on July 31, 1998 (30 days following the commencement of the Exchange
Offer), unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" will mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify
the Exchange Agent of any extension by oral or written notice and will mail to
the registered holders an announcement thereof, prior to 9:00 a.m., New York
City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to
delay accepting any Old Notes, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under
"--Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of Old Notes of such amendment.
Without limiting the manner in which the Company may choose to
make a public announcement of any delay, extension, amendment or termination
of the Exchange Offer, the Company shall have no obligation to publish,
advertise, or otherwise communicate any such public announcement, other than
by making a timely release to an appropriate news agency.
Interest on the Exchange Notes
The Exchange Notes will bear interest from March 3, 1998 at the
rate of 11 3/8% per annum, payable semi-annually in arrears, in cash, on March
1 and September 1 of each year, commencing September 1, 1998. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on the Old Notes
accrued from March 3, 1998 until the date of the issuance of the Exchange
Notes. Consequently, holders who exchange their Old Notes for Exchange Notes
will receive the same interest payment on September 1, 1998 (the first
interest payment date with respect to the Old Notes and the Exchange Notes)
that they would have received had they not accepted the Exchange Offer.
Conditions
Notwithstanding any other term of the Exchange Offer, the
Company will not be required to exchange any Exchange Notes for any Old Notes,
and may terminate or amend the Exchange Offer before the acceptance of any Old
Notes for exchange, if: (a) any action or proceeding is instituted or
threatened in any court or by or before any governmental agency with respect
to the Exchange Offer which seeks to restrain or prohibit the Exchange Offer
or, in the Company's judgment, would materially impair the ability of the
Company to proceed with the Exchange Offer, or (b) any law, statute, rule or
regulation is proposed, adopted or enacted, or any existing law, statute,
rule, order or regulation is interpreted, by any government or governmental
authority which, in the Company's judgment, would materially impair the
ability of the Company to proceed with the Exchange Offer, or (c) the Exchange
Offer or the consummation thereof would otherwise violate or be prohibited by
applicable law.
If the Company determines in its sole discretion that any of
these conditions are not satisfied, the Company may (i) refuse to accept any
Old Notes and return all tendered Old Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Old Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders
who tendered such Old Notes to withdraw their tendered Old Notes, or (iii)
waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Old Notes which have not been withdrawn. If the
Company's waiver constitutes a material change to the Exchange Offer, the
Company will promptly disclose such waiver by means of a prospectus supplement
that will be distributed to the registered holders, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
The foregoing conditions are for the sole benefit of the
Company and may be asserted by the Company regardless of the circumstances
giving rise to any such condition or may be waived by the Company in whole or
in part at any time and from time to time in its sole discretion. The
Company's failure at any time to exercise any of the foregoing rights will not
be deemed a waiver of any such right, and each such right will be deemed an
ongoing right which may be asserted at any time and from time to time. Any
determination by the Company concerning the events described above will be
final and binding on all parties. NO VOTE OF THE COMPANY'S SECURITYHOLDERS IS
REQUIRED TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS
BEING SOUGHT HEREBY.
Procedures for Tendering
Only a holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must (i) complete,
sign and date the Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Old Notes (unless such tender is being effected pursuant to
the procedure for book-entry transfer described below) and any other required
documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on
the Expiration Date, or (ii) comply with the guaranteed delivery procedures
described below. Delivery of all documents must be made to the Exchange Agent
at its address set forth herein. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Old Notes, where such Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with the resale of such Exchange Notes. See "Plan of Distribution."
The tender of Old Notes by a holder as set forth below will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth in this Prospectus and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contract the registered holder promptly and
instruct such registered holder to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Old Notes, either make appropriate arrangement to
register ownership of the Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal
(described below), as the case may be, must be guaranteed by an "eligible
guarantor institution" (banks, stockbrokers, savings and loan associations and
credit unions with membership in an approved signature guarantee medallion
program), pursuant to Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution") unless the Old Notes tendered pursuant thereto are tendered (i)
by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution.
If a person other than the registered holder of any Old Notes
listed therein signs the Letter of Transmittal, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes,
with the signature thereon guaranteed by an Eligible Institution. If the
Letter of Transmittal or any Old Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company will determine, in its sole discretion, all
questions as to the validity, form, eligibility (including time of receipt),
acceptance of tendered Old Notes and withdrawal of tendered Old Notes and the
Company's determination will be final and binding. The Company reserves the
absolute right to reject any and all Old Notes not properly tendered or any
Old Notes the Company's acceptance of which would, in the opinion of counsel
for the Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole
discretion to purchase or make offers for any Old Notes that remain
outstanding subsequent to the Expiration Date or, as set forth above under
"Conditions," to terminate the Exchange Offer and, to the extent permitted by
applicable law, to purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or
offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that,
among other things, (i) the Notes to be acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of such holder,
(ii) such holder has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes and (iii) such holder is not an "affiliate," as defined in
Rule 405 under the Securities Act, of the Company, or that if it is an
"affiliate," it will comply with applicable registration and prospectus
delivery requirements of the Securities Act.
Book-Entry Transfer
Within two business days after the date of this Prospectus, the
Exchange Agent will make a request to establish an account with respect to the
Old Notes at the book-entry transfer facility for the Old Notes, DTC, for
purposes of the Exchange Offer. Any financial institution that is a
participant in DTC's systems may make book-entry delivery of Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with DTC's procedures for such
transfer. Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received and confirmed by
the Exchange Agent at its address set forth below on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old
Notes are not immediately available, (ii) who cannot deliver their Old Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, or (iii) who cannot complete the
procedures for book-entry transfer of Old Notes to the Exchange Agent's
account with DTC prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution (by facsimile transmission, mail or
hand delivery) a properly completed and duly executed notice of guaranteed
delivery substantially in the form provided by the Company (the "Notice of
Guaranteed Delivery"), setting forth the name and address of the holder, the
certificate number(s) of such Old Notes (if possible) and the principal amount
at maturity of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five business trading days after the
Expiration Date, (i) the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Old Notes and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent, or (ii) that book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC will be effected and
confirmation of such book-entry transfer will be delivered to the Exchange
Agent; and
(c) Such properly completed and executed Letter of Transmittal
(or facsimile thereof), as well as the certificate(s) representing all
tendered Old Notes in proper form for transfer and all other documents
required by the Letter of Transmittal, or confirmation of book-entry transfer
of the Old Notes into the Exchange Agent's account at DTC, are received by the
Exchange Agent within five business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed
Delivery will be sent to holders who wish to tender their Old Notes according
to the guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, the
Exchange Agent must receive at its address set forth herein a telegram, telex,
facsimile transmission or letter indicating notice of withdrawal prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having tendered the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount at
maturity of such Old Notes), (iii) be signed by the holder in the same manner
as the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accomplished
by documents of transfer sufficient to have the Trustee with respect to the
Old Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawn Old Notes or otherwise comply with DTC's
procedures. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Old Notes so withdrawn are validly retendered. Any Old Notes which
have been tendered but which are not accepted for payment will be returned to
the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
Untendered Old Notes
Holders of Old Notes whose Old Notes are not tendered or are
tendered but not accepted in the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights and preferences and subject to
the limitations applicable thereto under the Indenture. Following consummation
of the Exchange Offer, the holders of Old Notes will continue to be subject to
the existing restrictions upon transfer contained in the legend thereon. In
general, the Old Notes may not be offered for resale or resold, unless
registered under the Securities Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities Act and applicable state
securities laws. The Company will have no further obligations to such holders,
other than the Initial Purchaser, to provide for the registration under the
Securities Act of the Old Notes held by them after the Expiration Date. To the
Extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected.
Exchange Agent
First Securities Bank, National Association, has been appointed
as Exchange Agent of the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
By Mail, Overnight Courier or Hand:
First Security Bank, National Association
79 South Main Street
Salt Lake City, Utah 84111
Attention: Corporate Trust Department
(registered or certified mail recommended)
Telephone: 801/246-5630
Facsimile: 801/246-5053
Delivery to an address other than as set forth above or
transmission of instructions via facsimile to a number other than as set forth
above will not constitute a valid delivery.
Fees and Expenses
The Company will bear the expenses of soliciting tenders. The
principal solicitation is being made by mail; however, officers and regular
employees of the Company and its affiliates may make additional solicitation by
telegraph, facsimile transmission, telephone or in person.
The Company has not retained any dealer-manager in connection
with the Exchange Offer and will not make any payments to brokers, dealers or
other soliciting acceptances of the Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The Company will pay the cash expenses to be incurred in
connection with the Exchange Offer. Such expenses include registration fees
and expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, among others.
The Company will pay any and all transfer taxes applicable to
the exchange of Old Notes pursuant to the Exchange Offer. If, however,
certificates representing Exchange Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered, or if tendered Old Notes are registered in
the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Notes pursuant to the Exchange Offer, satisfactory evidence of
the payment of the amount of any such transfer taxes must be submitted with
the Letter of Transmittal (whether imposed on the registered holder or any
other person). Certificates representing Exchange Notes will not be issued to
such persons until satisfactory evidence of the payment of such taxes, or an
exemption therefrom, is submitted.
Consequences of Failure to Exchange
Upon consummation of the Exchange Offer, holders that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon as a consequence of the issuance of the Old
Notes pursuant to exemptions from or in transactions not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. In general, the Old Notes may not be offered for resale or
resold, unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Old Notes under the Securities Act. The Exchange Notes may not be offered or
sold unless they have been registered or qualified for sale under applicable
state securities laws or an exemption from registration or qualification is
available and is complied with. The Registration Rights Agreement requires the
Company to register the Exchange Notes in any jurisdiction requested by the
holders, subject to certain limitations. To the extent the Old Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Notes could be adversely affected.
Resale of the Exchange Notes
Under existing interpretations of the staff of the Commission
contained in several no-action letters to third parties, the Exchange Notes
would in general be freely transferable after the Exchange Offer without
further registration under the Securities Act. However, any purchaser of Old
Notes who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (i) would not be able to rely on the
interpretation of the staff of the Commission, (ii) will not be able to tender
its Old Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Notes unless such sale or transfer
is made pursuant to an exemption from such requirements. By executing the
Letter of Transmittal, each holder of the Old Notes will represent that (i) it
is not an affiliate of the Company or if such Holder is an "affiliate," that
such Holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable, (ii) any Exchange
Notes to be received by it were acquired in the ordinary course of its
business and (iii) at the time of commencement of the Exchange Offer, it had
no arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. In addition, in
connection with any resales of Exchange Notes, any broker-dealer (a
"Participating Broker-Dealer") who acquired the Notes for its own account as a
result of market-making or other trading activities must deliver a prospectus
meeting the requirements of the Securities Act. The Commission has taken the
position that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Exchange Notes (other than a resale
of an unsold allotment from the original sale of the Old Notes) with the
prospectus contained in the Exchange Offer Registration Statement. Under the
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers and other persons, if any, subject to similar prospectus
delivery requirements to use this Prospectus as it may be amended or
supplemented from time to time, in connection with the resale of such Exchange
Notes.
Other
Participation in the Exchange Offer is voluntary and holders
should carefully consider whether to accept. Holders of the Old Notes are
urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Upon consummation of the Exchange Offer, holders who were not
prohibited from participating in the Exchange Offer and who did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes and such Old Notes
will continue to be subject to the restrictions on transfer contained in the
legend thereon. Accordingly, such Old Notes may not be offered, sold, pledged
or otherwise transferred except (i) to a person whom the seller reasonably
believes is a "Qualified Institutional Buyer" within the meaning of Rule 144A
under the Securities Act purchasing for its own account or for the account of
a Qualified Institutional Buyer in a transaction meeting the requirements of
Rule 144A, (ii) in an offshore transaction complying with Rule 904 of
Regulation S under the Securities Act, (ii) pursuant to an exemption from
registration under the Securities Act provided by Rule 144 thereunder (if
available), (iv) pursuant to an effective registration statement under the
Securities Act or (v) to the Company and, in each case, in accordance with all
other applicable securities laws.
Accounting Treatment
The Exchange Notes will be recorded in the Company's accounting
records at the same carrying value as the Old Notes as reflected in the
Company's accounting records on the date of the exchange. Accordingly, the
Company will recognize no gain or loss for accounting purposes upon the
consummation of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the remaining term of the Exchange Notes.
THE COMPANY
TWA is the eighth largest U.S. air carrier (based on RPMs for
the full-year 1997), whose primary business is transporting passengers, cargo
and mail. During 1997, the Company carried approximately 23.4 million
passengers and flew approximately 25.1 billion RPMs. As of March 31, 1998, TWA
provided regularly scheduled jet service to 89 cities in the United States,
Mexico, Europe, the Middle East, Canada and the Caribbean. As of March 31,
1998, the Company operated a fleet of 181 jet aircraft.
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 36 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. During 1997, TWA's North American revenues
accounted for approximately 85.9% of its total revenues versus approximately
81.7% during the same period of 1996.
St. Louis
TWA is the predominant carrier at St. Louis, with approximately
360 scheduled daily departures as of March 31, 1998 serving 79 cities. In
1997, TWA had approximately a 74.5% share of airline passenger enplanements in
St. Louis, excluding all commuter flights, while the next largest competitor
enplaned approximately 12.6%. Since 1995, TWA has added service from its St.
Louis hub to Reno, Nevada, Knoxville, Tennessee, Shreveport, Louisiana,
Steamboat Springs, Colorado, Palm Springs, California, Toronto, Canada and the
Mexican resort cities of Cancun, Puerto Vallarta and Ixtapa/Zihuatenejo.
JFK
TWA serves 26 domestic and international cities from its JFK
hub, with approximately 40 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
17 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 169 daily flights into St. Louis and 56
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 primarily designed to provide domestic traffic feed for
its transatlantic service. International cities served include: Barcelona,
Cairo, Lisbon, Madrid, Milan, Riyadh, Rome, Tel Aviv from JFK; Paris from JFK
and St. Louis; and London-Gatwick from St. Louis. On January 13, 1997, as part
of its plans to improve the operating and financial performance 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 was discontinued on April 18, 1997. In 1997, TWA's international
passenger revenues accounted for approximately 14.1% of total revenues versus
approximately 18.3% in 1996.
On April 28, 1997, TWA announced it had filed an application
with the DOT seeking approval of code-share service with Royal Jordanian
Airline. The DOT approved the code-share on October 1, 1997. The agreement
calls for the joint coding of TWA domestic flights between seven U.S. cities
and JFK and of Royal Jordanian Airline's direct flights between JFK, Amsterdam
and Amman, Jordan. Service began on November 1, 1997. In addition, TWA and
Royal Jordanian Airline recently announced that they have requested an
amendment to their statements of authorization to add additional cities in the
U.S. and in the Persian Gulf area. The DOT has approved the application and
TWA is seeking authority to serve Bahrain, Qatar, Pakistan and India. It is
anticipated that such authority will be received in the second quarter of
1998. On October 24, 1997, TWA announced that it had signed an agreement with
Spanish carrier Air Europa to provide code share service. Under the
agreement, which still requires governmental approval, TWA will place its TW
flight code on Air Europa flights operating between Madrid and Barcelona, on
the one hand, and Palma and Malaga, Spain, on the other hand. Air Europa will
place its UX flight code on TWA flights operating between both Madrid and
Barcelona, on the one hand, and JFK, on the other hand, and to numerous U.S.
points beyond JFK. The code share service is anticipated to commence in the
second quarter of 1998. Pursuant to their agreements, both Royal Jordanian
Airline and Air Europa have moved their operations to the Company's JFK
terminal. On February 11, 1998, TWA announced that it had applied to the DOT
seeking authority to operate 28 frequencies of code share service between St.
Louis and Japan in cooperation with Delta Air Lines ("Delta"). The
application proposed to start code share service to Tokyo, Nagoya, Osaka and
Fukuoka. TWA also applied for non-stop route authority from St. Louis to
Tokyo beginning June 1, 1999. On May 18, 1998, the DOT issued a final order
authorizing the Company to serve the St. Louis-Tokyo market with seven weekly
frequencies and allocating to the Company fourteen of the weekly frequencies
for United States-Japan code share service.
TWA is exploring the possibility of entering into marketing and
code-share alliances with additional 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.
Business Strategy
In late 1996, the Company began implementing certain
initiatives designed to further its strategic objectives. These initiatives
were implemented in response to a significant deterioration in the Company's
operating performance and financial condition during the second half of 1996.
This deterioration was primarily caused by (i) an overly aggressive expansion
of TWA's capacity and planned flight schedule, particularly during the 1996
summer season, which forced the Company to rely disproportionately on
lower-yield 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 operations during the summer
of 1996; 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 and adversely
affected the Company's yields and unit costs. 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. The Company also
experienced a 27.6% increase in fuel costs in 1996 versus 1995, primarily due
to a 22.3% increase in the average fuel price paid per gallon during the year.
The primary focus of the Company's strategic initiatives,
initially implemented in late 1996, was to reestablish TWA's operational
reliability and schedule integrity and overall product quality in order to
attract higher-yield passengers and enhance overall productivity, which was
intended to improve the Company's financial results. As the initial steps in
implementing this strategy, the Company temporarily reduced its flight
schedule during the first quarter of 1997 to more closely match aircraft
available for active service and worked to reduce the number of aircraft in
maintenance backlog by increasing overtime and maintenance capacity made
available by terminating an unprofitable aircraft maintenance contract with
the U.S. government. The other key initiatives which TWA began implementing
in late 1996 included: (i) acceleration of the Company's fleet renewal plan;
(ii) a restructuring of TWA's operations at JFK; (iii) a focus on improving
productivity; (iv) implementation of a series of revenue-enhancing marketing
initiatives; and (v) implementation of a number of employee-related
initiatives to reinforce the Company's focus on operational performance.
The key elements of the Company's overall ongoing business
strategy, as well as the late 1996 strategic initiatives, are outlined below.
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. These changes are
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 will offset any
increased costs. Management believes this initiative will further improve the
Company's operating performance while allowing the Company to achieve Stage 3
compliance with the Noise Act by the year 2000 and will not require further
fleet reductions.
In the first quarter of 1997, as part of its efforts to improve
near-term operational reliability, the Company announced plans to accelerate
retirement of the 14 747s (four-engine, 3-pilot wide-body jets with an average
age of approximately 25.6 years) and the 11 L-1011s (three-engine, three-pilot
wide-body jets with an average age of approximately 22.6 years) remaining in
its fleet as of December 31, 1996. All of the L-1011s and 747s have been
retired. These older, less efficient and less reliable aircraft have been
replaced with new or later-model used 757, 767 and MD-80 aircraft. Management
believes that these smaller aircraft are more appropriately sized to the
routes served and, by reducing the Company's reliance on lower-yield feed
traffic to fill capacity, have resulted in higher load factors and improved
yields. Further, these newer twin-engine, two-pilot aircraft are expected to
provide efficiencies in fuel, flight crew and maintenance expenses, while
reducing long-term pilot training costs by enabling TWA to have fewer aircraft
types in the fleet. Such aircraft should also permit TWA to more effectively
utilize its yield management system. In 1996, TWA entered into agreements to
lease 10 new 757s and to purchase an additional 10 new 757 aircraft. As of
February 1, 1998, TWA had taken delivery of 15 of such aircraft. The Company
also acquired the right, subject to certain conditions, to purchase up to 20
more new 757 aircraft from the manufacturer. In addition, the Company entered
into agreements with a major operating lessor to lease two 767-300ERs which
were delivered in early 1998. In 1996, the Company entered into an agreement
with the manufacturer to acquire 15 new MD-83s. As of February 1, 1998, the
Company had taken delivery of seven of the MD-83s, and expects to take
delivery of six additional planes during 1998 and two additional planes in
1999. The Company also entered into an agreement for the lease of nine
late-model used MD-82s, which were delivered in 1997 and early 1998. The
Company also intends to retire eight of its older 727s in 1998, which are
expected to be replaced with MD-80s. As of March 31, 1998, TWA had retired two
such 727s. As a result of this fleet restructuring, the Company's mix of
narrow-body and wide-body aircraft shifted to approximately 90%/10% as of
December 31, 1997 versus 80%/20% as of year-end 1996, while TWA's average
number of seats per aircraft declined to 141 from 161 over the same period.
As of December 31, 1997, the average age of its fleet had decreased to 16.9
years from 19.0 years at year-end 1996. In April 1998, the Company entered
into an agreement to purchase from the manufacturer 24 new MD-83 aircraft with
deliveries in 1999. The Company has obtained financing commitments for
long-term debt and lease financing for such aircraft. If TWA takes delivery of
all of these aircraft, and assuming no other changes in the composition of the
Company's fleet, the average age of its fleet as of December 31, 1999 would
decrease to 12.8 years. TWA also entered into an agreement with a third-party
aircraft lessor for the sale and leaseback of 15 Boeing 727-200A aircraft
owned by the Company. The aircraft were delivered on March 31 and April 1,
1998 and leased to TWA under leases which expire in 1999 and 2000. On May 19,
1998, the Company announced the acquisition of three 757-200 aircraft for
delivery in 1999 and 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Commitments."
During 1996 and 1997, the Company outfitted 30 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 is considering
"hush-kitting" additional aircraft as well as other alternatives to assure
compliance with Stage 3 noise requirements, in particular the replacement of
such DC9 aircraft with newer model aircraft. See "Business--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 continue to implement its strategic plan.
See "Risk Factors--Risk Factors Related to the Company--Liquidity; Substantial
Indebtedness; Capital Expenditure Requirements."
Route Structure Optimization
The Company has been 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 continue to 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 74.5% of total enplanements in 1997, excluding commuter traffic.
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 has increased its number of daily
departures at St. Louis from 229 in 1993 to approximately 365 as of December
31, 1997. In addition, beginning in 1995, the Company has increased service
to the north and south with service to Reno, Nevada, Knoxville, Tennessee,
Shreveport, Louisiana, Steamboat Springs, Colorado, Palm Springs, California,
Toronto, Canada and the Mexican resort cities of Cancun, Puerto Vallarta and
Ixtapa/Zihuatenejo.
Internationally, the Company's operations are concentrated at
JFK. The Company's strategy has been to reduce and streamline international
operations to focus on markets that it believes can support non-stop service
and to maximize utilization of the JFK facility. As a result, since 1994, the
Company has eliminated service to several European cities and reduced its
service to and from Paris. In addition, during 1996 and 1997 the Company
increased service from JFK to the Caribbean, Florida and to 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. On February 11, 1998, the Company applied to the
DOT seeking authority to operate code share service between St. Louis and
Japan in cooperation with Delta Air Lines. The application proposes to start
code share service to Tokyo and Nagoya as soon as possible after approval, and
to Osaka and Fukuoka on October 28, 1998. TWA also applied for non-stop route
authority from St. Louis to Tokyo beginning June 1, 1999. On March 16, 1998,
the DOT issued an order authorizing the Company to serve the St. Louis-Tokyo
market with seven weekly frequencies and allocating to the Company fourteen of
the weekly frequencies for United States-Japan code share service. The DOT
allowed interested parties ten days to object and seven additional days to
reply to objections. It is anticipated that a final order will be issued by
the DOT in the second quarter.
As part of its efforts to position the Company for sustained
profitability, TWA restructured its operations at JFK during 1997 by
eliminating certain unprofitable international destinations (such as Frankfurt
and Athens), as well as certain low-yield domestic feed service into JFK. The
Company also consolidated 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. In addition to
enhancing yields and load factors, the substitution of 757s and 767s for 747s
and L-1011s on international routes also has increased operating efficiencies
and on-time performance at JFK, since these smaller aircraft are better suited
to the physical limitations of TWA's terminals. As a result of these changes,
TWA's international scheduled capacity (as measured by ASMs) decreased 31.5%
in 1997 versus 1996 and represented 19.5% of total scheduled capacity for the
full year 1997 versus 25.6% for the full year 1996. The Company believes that
this decrease in international operations, together with the rationalization
of fleet size described above, will help deseasonalize TWA's business, with
the difference between TWA's seasonal average daily peak and trough capacities
anticipated to be approximately 4.2% in 1998, versus 20.5% in 1996 and 16.9%
in 1997. As a result, the Company believes the seasonal variability of its
financial performance will be reduced; however, there can be no assurance that
such deseasonalization will occur.
Customer Service; Travel Agent Commissions
The Company is focusing on improving the quality of its air
travel product and the service provided to passengers by TWA personnel. The
Company believes that its increased focus on quality, certain new marketing
initiatives and the steps taken to restore operational reliability and
schedule integrity in 1997 have resulted and will allow TWA to attract a
greater percentage of higher-yield passengers. Ongoing initiatives include:
Focus on Business Traveler. Based on customer research, the
Company has targeted 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 is introducing a series of marketing initiatives
designed to attract a greater percentage of higher-yield business passengers.
In March 1995, TWA introduced Trans World One, a premium
business class service in its international and certain trans-continental
non-stop markets. This product has recently been enhanced and relaunched with
advertising and promotional support. Trans World One is available in 767
equipment and in selected 757 equipment. Overall service is being improved,
including check-in, on-board comfort, food service and priority baggage
return. TWA is also increasing first class cabin seating in its narrow-body
domestic aircraft by 60% and is planning a series of airport and in-flight
enhancements. This domestic service was launched in early 1998 as Trans World
First. In March 1998, the Company launched TWQ, a specially designed service
for short-haul business markets. The Company is also in the early phases of a
series of facilities upgrades, including a newly opened Ambassadors Club in
St. Louis, a renovated club at LaGuardia, a completely refurbished club in its
JFK terminal and improved new check-in counters and backwalls. A new
electronic passenger and baggage processing system is being installed in St.
Louis.
TWA rebranded its frequent flier program named "Aviators"
effective May 1, 1998. The Company has already implemented several new
initiatives to improve its frequent flier program. A Platinum level was
introduced in the third quarter of 1997 to offer the Company's most attractive
travel benefits for its highest mileage customers. Platinum level travelers
and travelers purchasing first class or full fare coach tickets will also be
given mileage bonuses equal to the base dollar amount paid for their tickets,
in addition to other existing bonuses. Further, TWA joined the American
Express Membership Rewards Program, allowing members the opportunity to earn
additional miles for amounts charged on the American Express Card.
Leisure Traveler. Within the leisure travel market, TWA is
positioned as a high-quality, competitive-fare carrier. Management believes
that TWA's cost structure and attractive route system position it well to
compete for leisure traffic. Further, TWA's Getaway Program, which was the
original airline tour program, has a leading position in this sector.
Travel Agent Commissions. Until recently TWA paid the full
traditional 10% commission on tickets for domestic transportation on TWA sold
by independent travel agents without the cap of $50 and $25 per domestic
round-trip and one-way tickets, respectively, which most other major airlines
imposed in 1995, and paid an 11% commission on tickets for international
transportation. On October 2, 1997, the Company reduced its commissions on
tickets for domestic and international transportation to 8% and 10%,
respectively, without the cap imposed by most other major airlines. On May
11, 1998, the Company began paying a maximum travel agent commission of $50
per roundtrip and $25 for one-way tickets for domestic travel and 8% for
international travel with no commission cap. In addition, Internet vendors
receive 5% commission with a maximum payment of $10. See "Business--Travel
Agencies--Travel Agent Commissions."
Labor Relationship
Management believes TWA has a generally cooperative
relationship with its employees, including employees represented by 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 Reorganization (as defined) and the '95 Reorganization. As a
result of these 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 currently represented by ALPA
and the IAM to elect four of the Company's 15 directors. See "Description of
Capital Stock--Description of Employee Preferred Stock" and "Certain
Provisions of the Certificate of Incorporation, the By-laws and Delaware Law."
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 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
"Business--Employees."
Each of the Company's union contracts became amendable as of
August 31, 1997, and negotiations have begun with respect to all three major
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.
In January 1997, TWA implemented programs through which TWA has
sought to institutionalize throughout all levels of its organization the
importance of running an airline with operational reliability and schedule
integrity. These programs provide certain operating and procedural guidelines
for enhancing performance and improving overall product quality. In addition,
in 1996 the Company introduced Flight Plan 97, which paid eligible employees a
$65 bonus for each month that TWA finished in the top five in all three
performance categories tracked by the DOT (on-time performance, customer
complaints and baggage handling) and a total of $100 if TWA also ranked first
in at least one of such categories. Based on the Company's performance in
September 1997, eligible employees earned their first bonus under this
program, a $100 payment for ranking first in on-time performance, fourth in
customer complaints and fifth in baggage handling. This program has been
enhanced as Flight Plan 98 and now provides that in any quarter where the
Company places first in one of the DOT-tracked performance categories for the
entire quarter (and assuming that no bonus was paid to employees during that
quarter) the eligible employees would receive a $100 bonus.
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 taken a significant step forward in this area by
installing a computerized yield management system. The need to build a
historical database for such yield management system has delayed full
realization of benefits expected from such system; however, as this database
grows during 1998, it 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 as this database grows the 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 center in St. Louis. TWA is also in the process of installing
state-of-the-art computer hardware for ticket counter and gate podiums at St.
Louis using "QIK-Chek" software to improve passenger service and data
collection while simplifying the ticket and check-in process.
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 8.12 Cents in 1995 to 8.76 Cents in 1996 and to 8.97 Cents in
1997. The primary contributors to these increases were increases in
maintenance costs and costs associated with flight crew training which
occurred primarily during the first six months of 1997. Despite these
increases, management believes that TWA's operating costs remain below the
average of the six largest full service carriers. See "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 results.
During 1997, TWA realized cost efficiencies in maintenance, reflecting the
elimination of TWA's maintenance backlog during the first quarter of 1997, as
well as the reduced maintenance requirements for the newer aircraft already
added to TWA's fleet. In addition, as described above, the Company's fleet
renewal plan is expected to provide efficiencies in fuel, flight crew and
training expenses, while the JFK restructuring has eliminated certain
unprofitable routes and reduced certain operating costs. TWA's average number
of employees per aircraft has decreased from 131.0 as of December 31, 1996 to
120.7 as of December 31, 1997, which is generally consistent with industry
standards.
The Company has increased to 12 the number of connecting
"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
has begun to test automatic ticket machines in selected markets. 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 began 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. Such booking fees are separate transaction fees that
are paid in addition to any travel agent commission. 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.
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 Carl 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 $1.0 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 (as defined)
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 also agreed to provide up to $200.0 million of financing pursuant to
the Icahn Loans (as defined) (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
'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 $91.0
million and other modifications to certain aircraft leases, and (iv) obtained
an extension of the term of the approximately $190.0 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 $52.0 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.
See "Description of Capital Stock--Description of Employee Preferred Stock."
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 "Business--Employees."
CAPITALIZATION
The following table sets forth the consolidated cash and the
capitalization of the Company as of March 31, 1998. This information should
be read in conjunction with the Consolidated Financial Statements appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
--------------
(in millions)
<S> <C>
Cash and cash equivalents(1) $ 346.1
========
Long-term debt and capital lease obligations (net of unamortized discounts and including current
maturities)(2):
11 3/8% Senior Notes due 2006........................................................................ $ 150.0
9.80% Airline Receivable Asset Backed Notes, Series 1997.............................................. 100.0
11 1/2% Senior Secured Notes due 2004............................................................ 138.4
12% Senior Secured Notes due 2002................................................................ 43.5
8% IAM Backpay Notes............................................................................. 13.7
PBGC Notes....................................................................................... 117.1
Various secured notes, 4.0% to 12.4%, due 1997-2001.............................................. 36.7
Installment Purchase Agreements, 10.00% to 10.53%, due 2002-2003................................. 115.3
Boeing Co. 757 Purchase Agreements, 11.85% to 12.38%, due 2015................................... 147.9
IRS Deferral Note................................................................................ 4.8
Predelivery Financing Agreement.................................................................. 6.4
Worldspan Note................................................................................... 31.2
Capital lease obligations........................................................................ 211.1
--------
Total long-term debt and capital lease obligations............................................... 1,116.1
--------
Shareholders' equity:
Preferred Stock, $0.01 par value; 137,500,000 shares authorized:
8% Preferred Stock, 3,869,000 shares authorized; 3,869,000 shares issued and
outstanding.................................................................................. --
9 1/4% Preferred Stock, no shares authorized; no shares issued and outstanding;
1,725,000 authorized, issued and outstanding and as adjusted................................. --
Employee Preferred Stock; 6,959,860 shares authorized; 6,020,145 shares issued and
outstanding (3).............................................................................. 0.1
Common Stock, $0.01 par value; 150,000,000 shares authorized; 51,946,129 shares issued
and outstanding (4).......................................................................... 0.5
Additional paid-in capital..................................................................... 687.8
Accumulated deficit (481.3)
--------
Total shareholders' equity................................................................ 207.1
--------
Total capitalization...................................................................... $1,323.2
========
</TABLE>
- ---------------
(1) Includes cash and cash equivalents held in its international operations
and by its subsidiaries which, based upon foreign monetary regulations and
other factors, might not be immediately available to the Company.
(2) Current maturities of long-term debt and capital lease obligations at
March 31, 1998 were $49.2 million and $36.6 million, respectively. In
April 1998, the Company consummated a private placement of $43.2 million
aggregate principal amount of 11 3/8% Senior Secured Notes due 2003 and
$31.8 million principal amount of Mandatory Conversion Equity Notes due
1999 in connection with the acquisition of three used Boeing 767-231 ETOPS
aircraft. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(3) Comprised of 3,191,759 shares of the Company's IAM Preferred Stock, par
value $0.01 per share, 962,892 shares of the Company's IFFA Preferred
Stock, par value $0.01 per share, and 1,865,494 shares of the Company's
ALPA Preferred Stock, par value $0.01 per share, distributed and
allocated to employees through employee stock ownership plans for the
benefit of employees represented by IAM and ALPA (collectively, the
"Employee Preferred Stock"). See "Description of Capital Stock--
Employee Preferred Stock."
(4) Does not include (i) the number of shares of Common Stock that will be
reserved as of the Issue Date for issuance upon conversion of the Equity
Notes, which number shall be calculated using the closing price of the
Common Stock on the American Stock Exchange, or on such other stock
exchange or market system as the Common Stock is principally traded, on
the Issue Date, and which number of reserved shares may be adjusted
pursuant to the terms of the Equity Notes, (ii) approximately 10.9
million shares of Common Stock initially reserved for issuance upon
conversion of the 1997 Preferred Stock, (iii) approximately 6.3 million
shares of Common Stock reserved for issuance upon exercise of warrants
issued in connection with the March 1997 offering of the Company's
50,000 Units (the "Units"), each consisting of (x) one 12% Senior
Secured Note due 2002, in the principal amount of $1,000 and (y) one
Redeemable Warrant to purchase 126.26 shares of Common Stock at an
exercise price of approximately $7.92 per share, (iv) approximately 9.5
million shares of Common Stock reserved for issuance upon conversion of
the 8% Preferred Stock, (v) approximately 3.7 million shares of Common
Stock which may be issued upon exercise of outstanding stock options
granted to officers and employees of the Company under the KESIP (as
defined) at prices ranging from $4.64 to $18.37 per share and Common
Stock issuable upon the exercise of warrants, and (vi) shares of Common
Stock which may be granted or sold at a discount to employees under the
ESIP. See Notes 11 and 12 to the Consolidated Financial Statements,
"Risk Factors--Risk Factors Related to the Company--Corporate
Governance Provisions; Special Voting Arrangements" and "Business--
Employees."
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below relate
to periods in the three months ended March 31, 1998 and 1997, years ended
December 31, 1997 and 1996, the four months ended December 31, 1995, the eight
months ended August 31, 1995, the year ended December 31, 1994, the two months
ended December 31, 1993 and the ten months ended October 31, 1993. This data
should be read in conjunction with "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 were
derived from the audited consolidated financial statements of the Company.
Certain amounts have been reclassified to conform with presentations adopted
in 1997.
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>
Prior
Predecessor
Reorganized Company Predecessor Company Company
------------------------------------------------------------ ------------------------------------- ----------
Four Eights
Three Months Ended Months Months Two Months Ten Months
March 31, Year Ended December 31, Ended Ended Year Ended Ended Ended
------------------- ------------------------- December 31, August 31, December 31, December 31, October 31,
1998 1997 1997 1996 1995 1995 1994 1993 1993
-------- -------- ---------- ----------- ------------ ---------- ------------ ------------ -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Operating revenues. $765,389 $762,306 $3,327,952 $3,554,407 $1,098,474 $2,218,355 $3,407,702 $520,821 $2,633,937
Operating income
(loss)(1)........ (68,707) (99,486) (29,260) (198,527) 10,446 14,642 (279,494) (58,251) (225,729)
Loss before income
taxes and
extraordinary
items(2)........ (79,558) (105,193) (89,335) (274,577) (32,268) (338,309) (432,869) (88,140) (362,620)
Provision (credit)
for income
taxes........... (25,418) (35,161) 527 450 1,370 (96) 960 (248) 1,312
Loss before
extraordinary
items........... (54,140) (70,032) (89,862) (275,027) (33,638) (338,213) (433,829) (87,892) (363,932)
Extraordinary
items, net
of income
taxes(3)......... (1,380) (1,532) (20,973) (9,788) 3,500 140,898 (2,005) -- 1,075,581
Net income (loss).. (55,520) (71,564) (110,835) (284,815) (30,138) (197,315) (435,834) (87,892) 711,649
Ratio of earnings
to fixed
charges (4)...... -- -- -- -- -- -- -- -- --
Per share amounts(5):
Loss before
extraordinary
items............ $(1.04) $(1.51) $(1.98) $(6.60) $(1.15)
Net loss......... (1.06) (1.54) (2.37) (7.27) (1.05)
</TABLE>
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------------------------------------------- --------------------------
December 31,
March 31, ---------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- -------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Cash and cash equivalents(6). $346,134 $237,765 $181,586 $304,340 $138,531 $187,717
Current assets............... 860,591 632,957 625,745 737,301 603,806 728,303
Net working capital
(deficiency)................ (211,471) (303,988) (336,416) (81,913) (1,238,216) (106,703)
Flight equipment, net........ 594,399 626,382 472,495 455,434 508,625 660,797
Total property and
equipment, net.............. 706,718 741,765 614,207 600,066 693,045 886,116
Intangible assets, net....... 1,103,034 1,118,864 1,184,786 1,275,995 921,659 1,024,846
Total assets................. 2,974,701 2,773,848 2,681,939 2,868,211 2,512,435 2,958,862
Current maturities of long-
term debt and capital
leases(7)...................... 85,779 88,460 134,948 110,401 1,149,739 108,345
Long-term debt, less current
maturities(7)............... 855,771 736,540 608,485 764,031 -- 1,053,644
Long-term obligations under
capital leases, less current
maturities.................. 174,520 182,922 220,790 259,630 339,895 376,646
Shareholders' equity
(deficiency)(8)............. 207,151 268,284 238,105 302,855 (417,476) 18,358
</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.
(3) The extraordinary items in 1997 and 1996 are the result of 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) For purposes of determining the ratio of earnings to fixed charges,
"earnings" consist of earnings before income taxes, extraordinary items and
fixed charges (excluding capitalized interest) and "fixed charges" consist
of interest (including capitalized interest) on all debt and that portion of
rental expense that management believes to be representative of interest.
Earnings were not sufficient to cover fixed charges as follows (in
millions): for the three months ended March 31, 1998 and 1997, $80.6 and
$105.7, respectively; for the years ended December 31, 1997 and 1996, $94.1
and $280.0, respectively; for the four months ended December 31, 1995,
$32.3; for the eight months ended August 31, 1995, $338.3; for the year
ended December 31, 1994, $435.0; for the two months ended December 31, 1993,
$88.4; and for the ten months ended October 31, 1993, $364.7.
(5) No effect has been given to stock options, warrants, convertible preferred
stock or potential issuances of additional Employee Preferred Stock as the
impact would have been anti-dilutive.
(6) Includes cash and cash equivalents held in international operations and by
subsidiaries which, based upon foreign monetary regulations and other
factors, might not be immediately available to the Company.
(7) Long-term debt in 1994 was reclassified to current maturities as a result
of certain alleged defaults and payment defaults.
(8) No dividends were paid on the Company's outstanding common stock during
the periods presented above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In late 1996, the Company began implementing certain strategic
initiatives in response to a significant deterioration in the Company's
operating performance and financial condition during the second half of 1996.
This deterioration was primarily caused by: (i) an overly aggressive expansion
of TWA's capacity and planned flight schedule, particularly during the 1996
summer season, which forced the Company to rely disproportionately on
lower-yield 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 operations during the summer
of 1996; 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 and adversely affected the
Company's yields and unit costs. 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. The Company also experienced a 27.6%
increase in fuel costs in 1996 versus 1995, primarily due to a 22.3% increase
in the average fuel price paid per gallon during the year.
The primary focus of the Company's new strategic initiatives
was to reestablish TWA's operational reliability, schedule integrity and
overall product quality in order to attract higher-yield passengers and
improve its financial results. As the initial steps in implementing this
strategy, the Company temporarily reduced its flight schedule during the first
quarter of 1997 to more closely match aircraft available for active service
and worked to reduce the number of aircraft in maintenance backlog by
increasing overtime and utilizing maintenance capacity made available by the
termination of an unprofitable aircraft maintenance contract with the U.S.
government. The other key initiatives which TWA began implementing in late
1996 included: (i) acceleration of the Company's fleet renewal plan; (ii) a
restructuring of TWA's operations at JFK; (iii) a focus on improving
productivity; (iv) implementation of a series of revenue-enhancing marketing
initiatives; and (v) implementation of a number of employee-related
initiatives to reinforce the Company's focus on operational performance.
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 RASM and cost per ASM 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. The airline industry has consolidated in
recent years as a result of mergers, alliances, liquidations, and further
consolidation may occur in the future. This consolidation has, among other
things, enabled certain of the Company's major competitors to expand their
international operations and increase their domestic market presence. The
emergence and growth of low cost, low fare carriers in domestic markets
represents an intense competitive challenge for the Company, which has higher
operating costs than many of such low fare carriers and fewer financial
resources than many of its major competitors. In many cases, such low cost
carriers have initiated or triggered price discounting.
The '94 Labor Agreements became amendable after August 31,
1997. Negotiations on a new collective bargaining agreement with the IAM with
regard to the flight attendants commenced in July 1997 and are currently
ongoing, and negotiations regarding the Company's ground employees represented
by the IAM commenced in February 1997 and are currently ongoing. At the
request of the IAM, a mediator was appointed on August 6, 1997 in connection
with the negotiations on the collective bargaining agreement covering the
ground employees. On March 27, 1998, at the request of the IAM, a mediator
was appointed in connection with the negotiations on the collective bargaining
agreement covering the flight attendants. Negotiations on a new collective
bargaining agreement with ALPA commenced in June 1997 and are also currently
ongoing. While wage rates currently in effect will likely increase,
management believes that it is essential that the Company's labor costs remain
favorable in comparison to its largest competitors. See "The
Company--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
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.
There are a number of uncertainties relating to agreements with
employees, the resolution of which could result in significant non-cash
charges to future operating results of the Company. Shares granted or
purchased at a discount under the ESIP will generally result in a charge equal
to the fair value of shares granted plus 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 (the 1997 and 1998 target prices having been met) would be approximately
$108.8 million based upon such target prices and the number of shares of
Common Stock and Employee Preferred Stock outstanding at January 30, 1998.
The charge for any year, however, could be substantially higher if the then
market price of the Common Stock exceeds certain target prices. On February
17, 1998, the first target price of $11.00 was realized and a grant of 2% of
the outstanding Common Stock and Employee Preferred Stock will be made on July
15, 1998. Based on the current number of outstanding shares of Common Stock
and Employee Preferred Stock and taking into account a credit with respect to
the Company's required contribution, the net contribution will be 1,109,722
shares and the related non-cash charge recorded in the first quarter of 1998
was approximately $12.3 million. In addition, on March 4, 1998 the market
price of the Company's Common Stock exceeded the $12.10 target price for the
30-day period necessary to earn the 1998 grant. As a result, on July 15, 1998
the Company will be required to make an additional contribution to the
relevant employee trusts of 1.5% of its Common Stock and Employee Preferred
Stock. Based on the current number of outstanding shares of Common Stock and
Employee Preferred Stock, that contribution would be 1,172,354 shares. As a
result of the grants earned in 1998, the Company expects to issue a combined
total of 2,282,076 shares of Common Stock and Employee Preferred Stock on July
15, 1998 and the aggregate non-cash charge in connection with such issuance
was recorded in the first quarter of 1998 in the amount of $26.5 million. See
"Business--Employees."
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 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 Consolidated
Financial Statements. 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 it believes the amount due to the IAM is much greater
than the amount which has been estimated by management. TWA also entered into
an agreement which provides for an adjustment to existing salary rates of
labor-represented employees based on the amount of the cash bonus for overtime
ultimately paid to the employees represented by the IAM as described in this
paragraph. The exact amount of such adjustment is not capable of being
determined until the amount of the IAM bonus payment is finally determined.
In addition, in connection with certain wage scale adjustments
afforded to non-contract employees, employees previously represented by the
IFFA have asserted and won an arbitration ruling with respect to the
comparability of wage concessions made in 1994 that, if sustained, would
require that the Company provide additional compensation to such employees.
The Company estimates that at December 31, 1997 such additional compensation
that would be payable pursuant to the arbitration ruling would be
approximately $12.0 million. The Company denies any such obligation and is
pursuing an appeal of the arbitration ruling and a court award affirming the
ruling. Effective September 1, 1997, the Company also reduced the overall
compensation and benefits package for non-contract employees so as to offset,
in the Company's view, any claims by such employees previously represented by
IFFA for any retroactive or prospective wage increases. As such, no liability
has been recorded by the Company.
In connection with the '95 Reorganization, the Company entered
into a letter agreement with employees represented by 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 ALPA. The defined
thresholds were exceeded during the measurement periods through December 31,
1996 and no amount was therefore owed to ALPA as of that date. A payment of
approximately $2.6 million was due under the agreement on August 14, 1997 for
the period January through June 1997. The Company made this payment in
January 1998. Management estimates that its aggregate obligation for 1997 is
approximately $9.5 million. See Notes 7 and 12 to the Consolidated Financial
Statements. For a description of certain additional employee related
uncertainties, see "Risk Factors--Risk Factors Related to the Company--Certain
Potential Future Earnings Charges."
TWA has historically experienced significant variations in
quarterly and annual operating revenues and operating expenses and expects
such variations to continue. Due to the greater demand for air travel during
the summer months, airline industry revenues for the third quarter of the year
are generally significantly greater than revenues in the first and fourth
quarters of the year and moderately greater than revenues in the second
quarter of the year. In the past, given the Company's historical dependence
on summer leisure travel, TWA's results of operations have been particularly
sensitive to such seasonality. While the Company, through an acceleration of
its fleet renewal program and restructuring of its JFK operations, anticipates
that the deseasonalization of operations affected thereby will reduce quarter
to quarter fluctuations in the future, there can be no assurance that such
deseasonalization will occur.
The Company's results of operations have also been impacted by
numerous other factors that are not necessarily seasonal. 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 necessitating additional
capital expenditures; (vii) the outcome of certain ongoing labor negotiations;
and (viii) the reduction in yield due to the continued implementation of a
discount ticket program entered into by the Company with Karabu in connection
with the '95 Reorganization on the terms currently applied by Karabu (which
terms are, in the opinion of the Company, inconsistent with and in violation
of, the agreement governing such program). See "-- Liquidity and Capital
Resources" and "Business--Legal Proceedings--Icahn Litigation." The Company is
unable to predict the potential impact of any of such uncertainties upon its
future results of operations.
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, which to date has
not been determined. The National Transportation Safety Board held hearings
relating to the crash in December of 1997 and is continuing its investigation.
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. 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 or
from any future findings by the National Transportation Safety Board. See
"Business--Legal Proceedings."
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.
Management believes that the Company benefitted from the
expiration on December 31, 1995 of the Ticket Tax, which imposed certain taxes
including a 10% air passenger tax on tickets for domestic flights, a 6.25% air
cargo tax and a $6 per person international departure tax. The Ticket Tax was
reinstated on August 27, 1996 and expired again on December 31, 1996. At the
end of February 1997, the Ticket Tax was reinstated effective March 7, 1997
through September 30, 1997. Congress passed tax legislation reimposing and
significantly modifying the Ticket Tax, effective October 1, 1997. The
legislation includes the imposition of new excise tax and significant fee tax
formulas over a multiple year period, an increase in the international
departure tax, the imposition of a new arrivals tax, and the extension of the
Ticket Tax to cover items such as the sale of frequent flier miles.
Management believes that the imposition and modification of the Ticket Tax
have a negative impact on the Company, although neither the amount of such
negative impact nor the benefit previously realized by its expiration can be
precisely determined. However, management believes that the recent tax
legislation and any other increases of the Ticket Tax will result in higher
costs to the Company and/or, if passed on to consumers in the form of
increased ticket prices, might have an adverse effect on passenger traffic,
revenue and/or margins. See "Business--Regulatory Matters."
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 financial statements arising from
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.
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 ($839.1 million). The Company has evaluated its future
cash flows and, notwithstanding the operating loss experienced since the '95
Effective Date, expects that the carrying value of the intangibles at December
31, 1996 will be recovered. However, the achievement of such improved future
operating results and cash flows are subject to considerable uncertainties.
In future periods these intangibles will be evaluated for recoverability based
upon estimated future cash flows. If expectations are not substantially
achieved, charges to future operations for impairment of those assets may be
required and such charges could be material.
The Company's ability to improve its financial position and
meet its financial obligations will depend upon a variety of factors,
including: significantly improved operating results, favorable domestic and
international airfare pricing environments, absence of adverse general
economic conditions, more effective operating cost controls and efficiencies,
and the Company's ability to attract new capital and maintain adequate
liquidity. No assurance can be given that the Company will be successful in
generating the operating results or attracting new capital required for future
viability.
Results of Operations
TWA's passenger traffic data, for scheduled passengers only and
excluding Trans World Express, Inc. ("TWE") a wholly-owned subsidiary of the
Company that provided a commuter feed service to the Company's New York hub
prior to November, 1995, are shown in the table below for the indicated
periods (1):
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
--------------------- --------------------------------------
1998 1997 1997 1996 1995
------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
North America
Passenger revenues ($ millions).................. $ 610 $ 596 $ 2,512 $ 2,515 $ 2,292
Revenue passenger miles (millions)(2)............ 4,793 4,590 19,737 19,513 17,902
Available seat miles (millions)(3)............... 7,071 7,036 29,341 30,201 28,194
Passenger load factor(4)......................... 67.8% 65.2% 67.3% 64.6% 63.5%
Passenger yield (cents)(5)....................... 12.74 Cents 12.99 Cents 12.73 Cents 12.89 Cents 12.80 Cents
Passenger revenue per available seat mile
(cents)(6)..................................... 8.63 Cents 8.47 Cents 8.56 Cents 8.33 Cents 8.13 Cents
International
Passenger revenues ($ millions).................. $ 66 $ 76 $ 412 $ 563 $ 544
Revenue passenger miles (millions)(2)............ 971 1,084 5,363 7,598 7,000
Available seat miles (millions)(3)............... 1,396 1,503 7,093 10,393 9,719
Passenger load factor(4)......................... 69.6% 72.1% 75.6% 73.1% 72.1%
Passenger yield (cents)(5)....................... 6.79 Cents 6.97 Cents 7.68 Cents 7.41 Cents 7.78 Cents
Passenger revenue per available seat mile
(cents)(6)..................................... 4.72 Cents 5.03 Cents 5.81 Cents 5.42 Cents 5.60 Cents
Total System
Passenger revenues ($ millions).................. $ 676 $ 672 $ 2,924 $ 3,078 $ 2,836
Revenue passenger miles (millions)(2)............ 5,764 5,673 25,100 27,111 24,902
Available seat miles (millions)(3)............... 8,467 8,539 36,434 40,594 37,905
Passenger load factor(4)......................... 68.1% 66.4% 68.9% 66.8% 65.7%
Passenger yield (cents)(5)....................... 11.74 Cents 11.84 Cents 11.65 Cents 11.35 Cents 11.39 Cents
Passenger revenue per available seat mile
(cents)(6)..................................... 7.99 Cents 7.87 Cents 8.03 Cents 7.58 Cents 7.48 Cents
Operating cost per available seat mile
(cents)(7)..................................... 9.36 Cents 9.88 Cents 8.98 Cents 8.76 Cents 8.12 Cents
Average daily utilization per aircraft
(hours)(8)..................................... 9.81 8.95 9.38 9.63 9.45
Aircraft in fleet being operated at end
of period...................................... 181 185 185 192 188
</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 Three Months Ended March 31, 1998 Compared to
the Three Months Ended March 31, 1997
For the first quarter of 1998, TWA reported an operating loss
of $68.7 million and a pre-tax loss of $79.6 million including a non-cash
operating expense of $26.5 million relating to a distribution to be made in
July 1998 of TWA common stock to employee stock plans pursuant to the ESIP.
These results compare to an operating loss of $99.5 million and a pre-tax loss
of $105.2 million in the first quarter of 1997. Excluding the effect of the
non-cash ESIP charge, the first quarter 1998 operating loss was $42.2 million,
a 57.0% improvement over the comparable prior year operating loss of $98.2
million. After the effect of the same exclusion, the pre-tax loss of $53.1
million in the first quarter 1998 improved 48.9% over the 1997 pre-tax loss of
$103.9 million. In part due to improved load factors, the Company's yield
(passenger revenue per RPM) for the first quarter of 1998 decreased 0.8% to
11.74 cents versus 11.84 cents for the comparable prior year period; however,
RASM increased 1.5% to 7.99 cents versus the comparable prior year period.
The Company's CASM improved 5.3% to 9.36 cents for the quarter from 9.88 cents
in the same period of 1997.
In the first quarter 1998, total operating revenues of $765.4
million were $3.1 million (0.4%) greater than the comparable 1997 period.
This increase occurred primarily in scheduled passenger revenues ($4.6
million), charter revenue ($1.9 million) and revenues from rental of
facilities and equipment ($4.8 million). Offsetting these increases were
decreases in cargo revenue ($4.0 million) due to reduced widebody capacity and
revenue from contract maintenance ($1.9 million) due to the termination of an
unprofitable governmental contract.
System-wide capacity, measured by scheduled ASMs, decreased by
0.8% during the frist quarter of 1998 (representing decreases in domestic and
international ASMs of 0.5% and 7.1%, respectively)f rom the comparable period
of 1997. The decrease in capacity was primarily attributed to the ongoing
replacement of B-747 and L-1011 aircraft with smaller B-767 and B-757 aircraft
and the elimination of unprofitable international routes. The retirement of
the last B-747 aircraft from TWA's fleet occurred in February 1998, completing
the retirement of the widebody jets. The number of revenue flight segments
operated increased 5.3% in the first quarter 1998 compared to 1997. Passenger
traffic volume, as measured by total RPMs in scheduled service for the three
months ended March 31, 1998 increased 1.6%. Passenger load factors were 68.1%
in the first quarter of 1998 compared to 66.4% in the same period of 1997.
Reflecting the Company's continued efforts to improve operating
efficiency and reduce operating costs, operating expenses of $834.1 million in
the first quarter of 1998 decreased $27.7 million (3.2%) from operating
expenses of $861.8 million in the first quarter of 1997, representing a net
change in the following expense groups:
* Salary, wages and benefits of $297.8 million for the
first quarter of 1998 were $17.5 million (5.6%) less than
the same period in 1997, primarily due to a decrease of
2,254 in the average number of employees. The Company
had an average of 22,213 full-time equivalent employees
in the first quarter of 1998 as compared to 24,467 in the
first quarter of 1997.
* Earned stock compensation charges of $26.5 million for
the first quarter of 1998 versus $1.3 million for the
first quarter of 1997 represent 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. The 1998
charge is related to incentive shares to be issued in
July 1998 under the ESIP relative to the achievement of
certain common stock target prices in February and March
1998. The 1997 charge is related to the three month
allocation of shares to the pilots' ESOP, which became
fully allocated in 1997.
* Aircraft fuel and oil expense of $92.4 million for the
first quarter of 1998 was $37.5 million (28.9%) less than
the expense of $129.9 million for the first quarter of
1997. Approximately $30.7 million of the decrease was
due to a reduction in the average cost of fuel from 74.1
cents per gallon in the first quarter of 1997 to 55.6
cents per gallon in the first quarter of 1998 and the
remaining $6.8 million decrease was due to the reduction
in gallons consumed (175.5 million gallons in the first
quarter of 1997 versus 166.3 million gallons in the first
quarter of 1998) resulting from the replacement of B-747
and L-1011 aircraft with more fuel efficient B-757 and
B-767 aircraft and a reduction in unprofitable
international flying.
* Passenger sales commission expense of $51.5 million for
the first quarter of 1998 was $6.0 million (10.5%) less
than the comparable period in 1997 primarily due to
reductions in commissionable sales of approximately 5%,
resulting in part from an increase in electronic
ticketing, and a reduction in average commission rates
of approximately 18%.
* Aircraft maintenance material and repairs expense of
$34.7 million for the first quarter of 1998 represented a
decrease of $9.0 million (20.8%) from $43.7 million for
the same period of 1997. The decrease was primarily the
result of higher levels of maintenance on narrow-body
aircraft during the first quarter of 1997, reduced
material usage on wide-body aircraft and engines in 1998
due to the retirement of the B-747 and L-1011 fleets and
a reduction in unprofitable contract maintenance work
performed on both government and commercial aircraft and
engines.
* Depreciation and amortization expense increased
slightly in the first quarter of 1998 compared to the
same period of 1997. A $2.0 million increase in
depreciation of aircraft (primarily for B-757 and B-767
fleet additions and DC-9 engine hushkitting) was offset
by reduced depreciation, amortization and obsolescence
provided for the B-747 and L-1011 fleets which were
retired.
* Operating lease rentals of $103.9 million for the first
quarter of 1998 were $18.1 million (21.1%) more than the
rentals of $85.8 million for the first quarter of 1997.
Reflecting TWA's continuing fleet renewal program, the
increase was primarily due to an increase in the average
number of leased aircraft from 150 in the first quarter
of 1997 to 160 in the comparable period of 1998, and
higher lease rates attributable primarily to the
addition of new B-757 and MD-80/83 aircraft to the fleet.
* Passenger food and beverage expense of $21.6 million
during the first quarter of 1998 represented an increase
of $1.1 million (5.5%) from $20.5 million during the
first quarter of 1997. The increase was related to a 5.6%
increase in enplaned passengers.
All other operating expenses of $166.5 million during the first
quarter of 1998 decreased by $2.4 million (1.4%) from $168.9 million for the
three months ended March 31, 1997. Expenses decreased in several categories
including landing fees ($1.2 million), cost of parts and services sold ($2.3
million), crew accommodation expenses ($1.5 million), ground equipment
maintenance ($1.3 million) and expenses related to TWA's subsidiary Getaway
Vacations ($2.1 million). Offsetting these favorable variances were increased
expenses in the areas of advertising ($3.9 million) and computerized
reservation system fees ($3.0 million).
Other charges (credits) were a net charge of $10.9 million for
the first quarter of 1998 as compared to $5.7 million for the same period in
1997. Interest expense increased $1.8 million in the first quarter of 1998
over the first quarter of 1997 as a result of the issuance of new debt in the
fourth quarter of 1997 and the first quarter of 1998, which was partially
offset by a decrease in certain debt retired in 1997. Interest income
increased by $1.7 million in the first quarter of 1998 primarily as a result
of increased levels of invested funds. Net gains from the disposition of
assets were $7.0 million in the first quarter of 1998 as compared to $9.4
million in the same period of 1997. The net gain in the first quarter of 1998
was related to the sale of certain aircraft, engines and other surplus
equipment while the net gain in 1997 was related to the sale of three gates at
Newark International Airport and spare flight equipment. Other charges and
credits net decreased from a net credit of $10.4 million for the first quarter
of 1997 to a net credit of $7.7 million for the first quarter of 1998. The
change was primarily related to trade credits received in 1997 ($1.7 million)
with no corresponding credits received in 1998.
A tax benefit of $25.4 million was recorded in the first
quarter of 1998 compared to a tax benefit of $35.2 million recorded in the
first quarter of 1997.
As a result of the above and excluding the effect of the
non-cash ESIP charge, the Company's operating loss of $42.2 million for the
three months ended March 31, 1998 improved $56.0 million from the operating
loss of $98.2 million for the first quarter of 1997. Giving effect to the
same exclusion, the Company had a net loss of $39.4 million for the first
quarter of 1998 compared to a net loss of $70.8 million for the first quarter
of 1997. The first quarter 1998 net loss included a $1.4 million non-cash
extraordinary loss related to the early extinguishment of debt versus a $1.5
million non-cash extraordinary loss in the first quarter of 1997.
Results of Operations for the Fiscal Year Ended December 31, 1997 Compared to
the Fiscal Year Ended December 31, 1996
Total operating revenues of $3,328.0 million for 1997 were
$226.4 million or 6.4% less than the total operating revenues of $3,554.4
million for the year ended December 31, 1996. The decrease was primarily
reflected in TWA passenger revenues, which were $153.9 million less than in
1996, resulting from the elimination of certain unprofitable international
destinations and the planned reduction in capacity as the Company replaced
older L-1011 and B-747 aircraft with new B-757, B-767 and MD-80 aircraft on
many routes. Additionally, revenues from contract work decreased $41.8
million primarily due to the termination of an unprofitable aircraft
maintenance contract with the U.S. government and overall reduction in other
third party maintenance as the Company focused its resources on maintenance of
its own aircraft. Revenue from freight and mail also decreased $26.3 million
as a result of the reduction in capacity.
As a result of the Company's planned retirement of older
widebody aircraft and elimination of unprofitable services, capacity and
traffic decreased in 1997 as compared to 1996. System-wide capacity, measured
in ASMs, decreased by 10.2% in 1997 as compared to 1996 (reflecting a 2.8%
decrease in domestic ASMs and a 31.5% decrease in international ASMs).
Passenger traffic volume, as measured by total RPMs in scheduled service,
decreased 7.4% in 1997 over 1996. Passenger load factor for 1997 was 68.8%
compared to 66.8% in 1996. TWA's yield per passenger mile increased from
11.35 cents in 1996 to 11.65 cents in 1997.
Reflecting the Company's efforts to improve productivity and
reduce operating costs, operating expenses declined to $3,357.2 million in
1997, $395.7 million (10.5%) lower than the total operating expenses of
$3,752.9 million for the year ended December 31, 1996, representing a net
change in the following expense groups:
Salaries, wages and benefits of $1,224.1 million for 1997 were
$30.2 million (2.4%) less than 1996, primarily due to a decrease in the
average number of employees. The average number of employees declined 3.5% to
23,413 in 1997 as compared to 24,254 in 1996. A reduction of the number of
employees occurred in several areas, particularly those impacted by the
reduction in flying or maintenance of older narrow and widebody aircraft.
Earned stock compensation charges of $4.2 million for 1997 and
$9.1 million for 1996 represent 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. For a further
discussion of future charges related to non-cash compensation, see Note 12 to
the Consolidated Financial Statements.
Aircraft fuel and oil expense of $480.9 million for 1997 was
$104.3 million (17.8%) less than expenses of $585.2 million for the year ended
December 31, 1996. The decrease in expenses is primarily due to decreases in
the price of fuel ($28.2 million) and in gallons consumed ($76.1 million).
Passenger sales commission expense of $242.1 million for 1997
was $26.0 million (9.7%) less than the expense of $268.1 million in 1996
primarily related to the $153.9 million decrease in TWA passenger revenues.
Other factors contributing to the decrease were a reduction in commission
rates in October 1997 and a decrease in the percentage of commissionable sales
resulting in decreases in commission expense of $7.1 million and $3.2 million,
respectively.
Aircraft maintenance materials and repairs expense of $138.4
million in 1997 represented a decrease of $69.8 million (33.5%) from $208.2
million for 1996. The decrease was primarily the result of higher levels of
scheduled maintenance in 1996, including heavy maintenance, a 3.0% decrease in
flying hours in 1997 versus 1996, addition of new aircraft and retirement of
old aircraft from TWA's fleet, and a decrease in contract repair work
performed by the Company for other air carriers and third parties. The
average age of TWA's operating fleet decreased from 19.0 years at December 31,
1996 to 16.9 years at December 31, 1997.
Depreciation and amortization expense decreased $11.4 million
from $161.8 million in 1996 to $150.4 million in 1997 primarily represented by
decreases in the provision for obsolescence ($7.0 million), depreciation of
aircraft ($3.0 million) and amortization of intangible assets ($1.2 million).
The decrease in obsolescence was significantly related to the retirement of
L-1011 and B-747 aircraft fleets and its replacement with newer aircraft
fleets. The decrease in aircraft depreciation was related to B-727-200, B-747
and L-1011 fleets becoming fully depreciated partially offset by increased
depreciation on B-757, B-767 and DC9-30 fleets related to new aircraft
acquisitions and aircraft modifications on the DC9-30 aircraft associated with
noise compliance and aging aircraft. The decrease in amortization of
intangible assets was related to the 1996 write-off of the carrying value of
TWA's New York to Athens route authority as a result of TWA's decision to
discontinue unprofitable service to Athens and the sale of three gates at
Newark International Airport in early 1997.
Operating lease rentals of $370.8 million for 1997 were $67.8
million (22.4%) more than the total rentals of $303.0 million for 1996. The
increase was primarily due to an increase in the average number of aircraft
under operating leases from 123 in 1996 to 137 in 1997 and higher lease rates
attributed to the introduction of newer aircraft into the fleet.
Passenger food and beverage expense of $83.2 million in 1997
represented a decrease of $26.9 million (24.4%) from $110.1 million for the
twelve months of 1996. The decrease was primarily due to a 29.7% reduction in
the number of passengers boarded on international flights resulting from the
31.5% reduction in international scheduled ASMs together with savings derived
from changes and improved efficiencies in food and beverage service.
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 carrying value of TWA's New York-Athens route
authority ($26.7 million) and international employee severance liabilities
($5.5 million) related to the termination of service to Athens and Frankfurt.
The 1996 special charges also include a reduction in carrying value of TWA's
owned L-1011 and B-747 fleets ($32.2 million) and the related inventories
($21.5 million). These charges were based upon management's estimate of the
amounts to be realized upon the disposition of these assets when they are
removed from service. Actual amounts could materially differ from such
estimates. See Note 16 to the Consolidated Financial Statements for a further
discussion of these special charges.
All other operating expenses decreased $104.1 million (13.6%)
to $663.1 million in 1997 from $767.2 million during the year ended December
31, 1996. Decreases were noted in the cost of services sold ($19.3 million),
cost of services purchased ($23.0 million), advertising and publicity ($17.8
million), navigation charges ($9.4 million), landing fees ($6.4 million),
subsidiary expenses ($7.4 million), uncollectible accounts ($5.6 million),
taxes-other than income ($5.4 million) and numerous other miscellaneous
categories. These decreases were primarily related to TWA's planned
reductions in capacity (10.2% reduction in system scheduled ASMs) and
maintenance performed for third parties.
Other charges (credits) were a net charge of $60.1 million for
1997 as compared to $76.1 million for 1996. Interest expense decreased $12.8
million in 1997 over 1996 as a result of the reduction of debt arising from
the '95 Restructuring and additional reductions of debt during 1997 and 1996.
Interest income decreased by $8.8 million in 1997 primarily as a result of
lower levels of invested funds. Dispositions of assets resulted in a net gain
of $16.0 million in 1997, compared to a net loss of $1.1 million in 1996. The
net gain in 1997 included $7.4 million from the sale of three gates at Newark
International Airport and $8.6 million from the sale of aircraft, engines and
other property. Other charges and credits-net were unfavorable by $5.2
million in 1997 compared to 1996, primarily due to a $1.2 million decline in
foreign currency translation adjustments, a $1.7 million decrease in vendor
discounts and a $2.5 million credit in 1996 to reflect a litigation settlement.
The provision for income taxes in 1997 and 1996 related
primarily to foreign taxes. 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 purposes exceeding statutory rates,
notwithstanding the Company's substantial net operating loss carryforwards.
See Note 5 to the Consolidated Financial Statements.
As a result of the above, the operating loss of $29.3 million
for 1997 was $169.2 million less than the operating loss of $198.5 million for
1996. The net loss of $110.8 million for 1997 was $174.0 million less than the
net loss of $284.8 million for 1996. The operating and net losses for 1996
included special charges for nonrecurring items of $85.9 million as further
described in Note 16 to the Consolidated Financial Statements. The 1996 net
loss also included $9.8 million in extraordinary charges related to the early
extinguishment of debt while the 1997 net loss included $21.0 million of such
charges.
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.
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 represent 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.
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 1995.
This increase 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 carrying value of TWA's New York-Athens route
authority ($26.7 million), international employee severance liabilities ($5.5
million) related to the termination of service to Athens and Frankfurt, and a
reduction in carrying value of TWA's owned L-1011 and B-747 fleets ($32.2
million) and the related inventories ($21.5 million), reflecting planned
retirement of such aircraft. 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
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 million 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.
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
March 31, 1998 was $346.1 million, a $108.4 million increase from the December
31, 1997 balance of $237.8 million. The net increase in cash and cash
equivalents during the first quarter of 1998 was due, in large part, to cash
provided by financing activities of $160.9 million in 1998 versus $17.1
million in 1997. Sources of cash generated by financing activities included
proceeds from the sale of notes of $144.9 million and from the sale and
leaseback of 15 B-727 aircraft and one B-757 engine ($43.2 million) in 1998
and proceeds from notes and warrants issued of $47.2 million in 1997. These
proceeds were partially offset by the repayment of long-term debt and capital
lease obligations of $21.5 million in 1998 versus $31.5 million in 1997. Cash
used by operating activities was $44.0 million in 1998 versus $81.1 million in
1997. Net discounted sales from tickets sold under the Karabu Ticket
Agreement are excluded from cash flows from operating activities as the
related amounts are applied as a reduction of the Icahn Loans (as defined
below) and PBGC Notes. During 1998, $35.2 million has been applied as a
reduction to the PBGC Notes, while in the same period of 1997, the proceeds
applied as reductions to the Icahn Loans were $20.6 million. Additionally,
$27.3 million in cash was generated from an increase in accounts payable and
accrued expenses, primarily due to the timing of payments of certain
obligations, and $85.2 million was generated by an increase in advanced ticket
sales. These were offset by reductions related to increases in receivables
($65.7 million) and prepaid expenses and other current assets ($37.7 million).
Cash used by investing activities was $8.6 million in 1998 compared to cash
provided of $19.0 million in 1997. Components of this net change include an
increase in capital expenditures (including aircraft pre-delivery payments) to
$26.0 million in 1998 versus $13.6 million in 1997 and a decrease in proceeds
from the sale of assets to $12.8 million in 1998 versus $14.3 million in 1997.
Gross proceeds from assets sold during 1998 were $12.8 million from the sale
of aircraft, engines and other surplus equipment while 1997 proceeds
represented $10.0 million for three gates at Newark International Airport and
$4.3 million from the sale of spare flight equipment.
The Company's consolidated cash and cash equivalents balance at
December 31, 1997 was $237.8 million, a $56.2 million increase from the
December 31, 1996 balance of $181.6 million. This increase in the Company's
cash balances resulted primarily from the issuance of long-term debt and sale
of preferred stock as described below. Although the Company's operational
performance substantially improved during the second, third and fourth
quarters of 1997, the residual effects of difficulties experienced in 1996
continued throughout the first two quarters of 1997 and, to a lesser extent,
during the third quarter of 1997. However, the Company has taken various
initiatives designed to improve the Company's financial performance. As a
result, the Company's financial performance for the final six months of 1997
was better than its performance in the final six months of 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. In March 1997, the Company
raised approximately $47.2 million in net proceeds from the issuance of 50,000
Units, with each Unit consisting of (i) one 12% Senior Secured Note due 2002,
in the principal amount of $1,000, and (ii) one Redeemable Warrant to purchase
126.26 shares of Common Stock at an exercise price of approximately $7.92 per
share. In December 1997, the Company raised net proceeds of $82.2 million
from the sale of the 9(1)/(4)% Preferred Stock, net proceeds of $133.5 million
from the sale of the 11(1)/(2)% Notes, a portion of the proceeds of which was
used to repay the 12% Reset Notes, and net proceeds of $97.0 million from the
sale of the Receivables Securitization Notes, a portion of the proceeds of
which was used to repay the outstanding balance of the Icahn Loans.
The net increase in cash and cash equivalents during 1997 was
due, in large part, to cash provided by financing activities of $112.2 million
in 1997 versus cash used by financing activities of $9.7 million in 1996.
Sources of cash generated by financing activities related primarily to
proceeds from long-term debt, warrants and preferred stock sold of $359.9
million in 1997 versus $188.9 million in 1996. These proceeds were partially
offset by the repayment of long-term debt and capital lease obligations of
$257.8 million in 1997 versus $117.2 million in 1996, and the 1996 redemption
of 12% preferred stock in the amount of $81.7 million. Cash provided by
operating activities improved to $0.2 million in 1997 from cash used by
operating activities of $5.7 million in 1996. This favorable change reflects
a reduction in the net loss from $284.8 million in 1996 to $110.8 million in
1997. Additionally, as an offset, net discounted sales from tickets sold
under the Karabu Ticket Agreement are excluded from cash provided by operating
activities as the related amounts are applied as a reduction of the Icahn
Loans and PBGC Notes. During 1997, $53.8 million of such proceeds had been
applied as a reduction to the principal balance of the Icahn Loans and $70.3
had been applied as a reduction to the PBGC Notes. During 1996, the proceeds
applied as reductions to the Icahn Loans and the PBGC Notes were $62.9 million
and $6.4 million, respectively. Additionally, $42.5 million in cash was
generated from an increase in accounts payable and accrued expenses, primarily
due to the timing of payments of certain obligations, and $65.3 million in
cash was generated from a decrease in receivables, offset by a related
reduction of $41.3 million in advanced ticket sales. Cash used by investing
activities decreased to $56.3 million in 1997 from $107.4 million in 1996.
Components of this decrease include a decrease in capital expenditures
(including aircraft pre-delivery payments) to $74.0 million in 1997 from
$121.5 million in 1996, an increase in proceeds from the sale of assets to
$22.8 million in 1997 versus $3.2 million in 1996 and the return of $5.6
million in pre-delivery deposits related to a new B-757 aircraft which was
purchased by a lessor and simultaneously leased back to TWA. Gross proceeds
from assets sold during 1997 included $10.0 million for three gates at Newark
International Airport and $12.8 million from the sale of aircraft, engines and
other surplus property and equipment.
The net decrease in cash and cash equivalents during 1996 as
compared to 1995 was due, in large part, to the fact that cash used in
operating activities in 1996 was $5.7 million as compared to 1995 when cash
provided by operating activities was $216.9 million. The adverse change was
primarily attributable to the decrease in 1996 operating income as compared
with 1995. Additionally, as discussed above, net discounted sales from tickets
sold under the Karabu Ticket Agreement are excluded from cash provided by
operating activities as the related amounts were 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 $84.1 million from $23.3 million in 1995 to $107.4 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 used $9.7 million of cash in 1996, compared with a net use of cash
of $27.8 million in 1995. Proceeds from long-term debt issued 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% Preferred Stock were $186.2 million while the early redemption of the
Mandatorily Redeemable 12% Preferred 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.
In March 1998, the Company completed the sale of $150.0 million
in 11 3/8% Senior Notes due 2006 resulting in net proceeds to the Company of
$144.9 million. The Company intends to use the net proceeds for certain
capital expenditures, including pre-delivery deposits on new aircraft
acquisitions, and for working capital and other general corporate purposes.
In late 1996, the Company began implementing a series of new
strategic initiatives designed to improve the Company's financial and
operating results. The achievement of these improved operating results is
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. No assurance can be
given that any of the initiatives already implemented or any new initiatives,
if implemented, will be successful, or if successful, that such initiatives
will produce sufficient results for the Company to be successful in generating
the operating revenues and cash required for profitable operations or future
viability.
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
a 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 $0.7
million 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, $9.1 million in 1997 and are expected to approximate $0.5
million in 1998.
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 and to obtain the consent of
Karabu and the Icahn Entities to certain modifications to the PBGC Notes.
Collateral for the Icahn Loans included a number of aircraft, engines and
related equipment, along with substantially all of the Company's receivables.
On December 30, 1997 the Company repaid the outstanding balance of the Icahn
Loans with a portion of the proceeds from the sale of the Receivables
Securitization Notes.
On June 14, 1995, in consideration of, among other things, the
extension of the Icahn Loans, TWA and Karabu entered into the Ticket
Agreement, which permitted Karabu to purchase two categories of discounted
tickets: (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
purchased 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 System Tickets through travel agents or directly
to the general public. Karabu, however, has been marketing System Tickets
through travel agents and directly to the general public. The Company filed
suit in St. Louis County, Missouri, Circuit Court against Karabu seeking,
among other things, a declaratory judgment that Karabu and other entities were
violating the Ticket Agreement. The defendants filed various counterclaims
against the Company. On May 7, 1998, the court denied the Company's petition
and dismissed the defendant's counterclaims. The Company is currently
reviewing this decision and evaluating options available to it, including a
possible appeal of the Circuit Court's decision. For a description of the
litigation pending between TWA and Karabu, Mr. Icahn and affiliated companies,
see "Business--Legal Proceedings--Icahn Litigation."
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 had been
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, 1997, approximately $118.6 million of such
proceeds had been applied to the principal balance of the Icahn Loans and
$76.7 million had been applied to the PBGC Notes. On December 30, 1997, the
Company repaid the outstanding balance of the Icahn Loans out of the proceeds
of the Receivables Securitization Offering. As a result, the purchase price
of tickets purchased by Karabu will be paid, at Karabu's election, either to
the settlement trust for prepayments on the PBCG Notes or to TWA directly.
The Company elected to pay interest, due August 1, 1995 and
February 1, 1996, and half the interest due February 1, 1997, on the 12% Reset
Notes, in shares of Common Stock. The amount of such interest aggregated
approximately $10.4 million, $10.2 million and $3.7 million, respectively, and
resulted in the issuance of approximately 1.9 million, 1.1 million and 0.6
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
During 1997 the Company continued a series of privately
negotiated exchanges with a significant holder of 12% Reset Notes which
resulted in the return to the Company of $51.8 million in 12% Reset Notes and
approximately $1.4 million in accrued interest thereon in exchange for the
issuance of approximately 7.7 million shares of Common Stock leaving an
outstanding principal balance of approximately $72.5 million. The Company
redeemed the outstanding balance of its 12% Reset Notes on January 20, 1998.
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 capital sources or from the sale of
assets. As a result of the financings consummated in the fourth quarter of
1997 and the repayment of certain debt in connection therewith, assets with an
approximate appraised value of $165.0 million were released from collateral
liens. Since that time, the Company has sold and subsequently leased back 15
B-727 aircraft and sold two L-1011 aircraft leaving assets with an approximate
appraised value of $100.0 million free and clear of liens and encumbrances.
Further pledging of these unencumbered assets, however, may be limited by
negative pledge restrictions in outstanding indebtedness. Substantially all
of TWA's other strategic assets have been pledged to secure various issues of
outstanding indebtedness of the Company. To the extent that the pledged
assets are sold, the applicable financing agreements generally require the
sale proceeds to be applied to repay the corresponding indebtedness. To the
extent that the Company's access to capital is constrained, the Company may
not be able to make certain capital expenditures or to continue to implement
certain other aspects of its strategic plan, and the Company may therefore be
unable to achieve the full benefits expected therefrom.
Commitments
In February 1996, TWA executed definitive agreements providing
for the operating lease of 10 new 757 aircraft, all of which have been
delivered. These aircraft have an initial lease term of 10 years. Although
individual aircraft rentals escalate over the term of the leases, aggregate
rental obligations are estimated to average approximately $59 million per
annum over the lease terms. The Company also entered into an agreement in
February 1996 with Boeing for the purchase of ten 757-231 aircraft and related
engines, spare parts and equipment for an aggregate purchase price of
approximately $500 million. The agreement also provides for the purchase of
up to ten additional aircraft. As of March 31, 1998, TWA had taken delivery
of five purchased aircraft and had five on firm order. 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. Four of the
five aircraft already delivered were manufacturer financed and one was leased.
TWA has obtained commitments for debt financing for approximately 80% of the
total costs associated with the acquisition of four of the remaining five
aircraft which have not been delivered and obtained commitments for 100% lease
financing of the total costs of the remaining fifth and final of such
aircraft. Such commitments are subject to, among other things, so-called
material adverse change clauses which make the availability of such debt and
lease financing dependent upon the financial condition of the Company.
In 1997, TWA reached agreements for the acquisition, by lease,
of two new Boeing 767-300ER aircraft, which were delivered to TWA in March and
April 1998. The longer-range 300 series aircraft will be utilized on TWA's
international routes and to Hawaii.
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 $1.0 billion. The agreements, as amended,
require the delivery of the aircraft in 2001 and 2002 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 quarter of 1997 and the first
quarter of 1999. As of March 31, 1998, the Company has taken delivery of
seven of the MD-83 aircraft and expects to take delivery of six additional
planes during 1998 and two additional planes in 1999.
In April 1998, the Company entered into an agreement to
purchase from the manufacturer 24 new MD-83 aircraft with deliveries in 1999.
The Company has obtained financing commitments for long-term debt and lease
financing for such aircraft. Although the Company anticipates that rental
payments for such aircraft would represent a substantial financial commitment,
it is not possible to accurately estimate the amount of such payments at this
time.`
TWA 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. To comply with the 1996
requirement, the Company retrofitted, by means of engine hush-kits, 30 of its
DC-9 aircraft. As of December 31, 1997, hush-kits have been installed on 71
DC-9 engines at an aggregate cost of approximately $55 million, most of which
was financed by lessors with repayments being facilitated through increased
rental rates or lease term extensions. TWA intends to comply with the
transition requirements for December 31, 1998 by having 75% of its fleet meet
Stage 3 requirements. By December 31, 1999, 100% of the fleet must meet Stage
3 requirements.
The Company has acquired three Boeing 767-231 ETOPS airframes
and six accompanying engines (collectively, the "Aircraft") which the Company
previously leased in exchange for the issuance of (i) $43.2 million aggregate
principal amount of the 11 3/8% Senior Secured Notes due 2003, and (ii) $31.8
million aggregate principal amount of the Mandatory Conversion Equity Notes
due 1999, which have a second priority security interest in the Aircraft and
are convertible into shares of Common Stock.
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.
The Company utilizes software and related computer technologies
essential to its operations that use two digits rather than four to specify
the year, which will result in a date recognition problem in the year 2000 and
thereafter unless modified. The Company has completed an assessment to
determine the changes needed to make its computer systems year 2000 compliant
and has developed a plan to implement such changes. The Company is also
evaluating its reliance on other third parties to determine and minimize the
extent to which its operations may be dependent on such third parties to
remediate the year 2000 issues in their systems. The Company currently expects
that it will complete the necessary changes and testing in mid-1999.
The costs of the Company's year 2000 project and the date on
which it will be completed are based on management's best estimates and
include assumptions regarding third party modification plans. As of March 31,
1998, the Company estimates that the total cost to complete the remediation of
its computer systems would be approximately $18.0 million. However, there can
be no assurance that these estimates will be achieved and actual results could
differ materially from those anticipated.
Availability of NOLs
The Company estimates that it had, for federal income tax
purposes, net operating loss carryforwards ("NOLs") amounting to approximately
$855 million at December 31, 1997. Such NOLs expire in 2008 through 2012 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. Changes in ownership in future periods could substantially restrict
the Company's ability to utilize its tax net operating loss carryforwards. The
Company believes that no ownership change has occurred subsequent to the '95
Reorganization. There can be no assurance, however, 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 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 excess of amounts allocable to identifiable assets.
BUSINESS
TWA is the eighth largest U.S. air carrier (based on RPMs for
the full-year 1997), whose primary business is transporting passengers, cargo
and mail. During 1997, the Company carried approximately 23.4 million
passengers and flew approximately 25.1 billion RPMs. As of March 31, 1998,
TWA provided regularly scheduled jet service to 89 cities in the United
States, Mexico, Europe, the Middle East, Canada and the Caribbean. As of
March 31, 1998, the Company operated a fleet of 181 jet aircraft.
Route Structure
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. For the year ended 1997, the Company's North
American passenger operations accounted for 85.9% of its total passenger
revenues, while its international passenger operations contributed 14.1% of
total revenues.
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 36 states, the District of Columbia,
Puerto Rico, Mexico, Canada, and the Caribbean. TWA also participates in the
charter market, flying both domestic and international charter flights.
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, from
which it now serves 26 cities with approximately 40 daily departures.
International cities served include Barcelona, Cairo, Lisbon, Madrid, Milan,
Riyadh, Rome, and Tel Aviv from JFK; Paris from JFK and St. Louis; and
London-Gatwick from St. Louis.
Other Activities
In addition to TWA's passenger and cargo services, the Company
operates Getaway Vacations, a tour package offering leisure travel products
and services. In addition, TWA earns revenue by providing contract maintenance
services for a number of third parties. In 1996, the Company began reducing
certain third-party airframe and engine contract maintenance service and,
while the Company expects to maintain the reduced level of airframe third-party
contract work through 1998, the Company has selectively expanded the amount of
engine third-party contract maintenance work that it performs.
Flight Equipment
As of March 31, 1998, TWA operated a fleet of 181 aircraft, of
which 18 were owned by TWA and 163 were leased. All aircraft in use are
maintained in airworthy condition in accordance with procedures approved by
the FAA. The active operating aircraft owned by and leased to TWA as of March
31, 1998 are listed below.
<TABLE>
<CAPTION>
Average Age Seats in
of Aircraft (in Standard TWA
Type Owned(2) Leased Total(3) years) Configuration
- ------------------------- -------- ------ -------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Douglas DC-9-10.......... -- 7 7 31.2 77
Douglas DC-9-30.......... -- 36 36 28.3 100
Douglas DC-9-40.......... -- 3 3 23.4 100
Douglas DC-9-50.......... -- 12 12 21.2 115
Douglas MD-80/83(1)...... -- 66 66 10.0 142
Boeing 727-200(1)........ 8 19 27 20.8 146
Boeing 757............... 4 11 15 1.0 180
Boeing 767............... 6 9 15 12.7 192
-- --- --- ----
Total................... 18 163 181 16.5
== === === ====
</TABLE>
- ------------
(1) Excludes the following aircraft which are not in the active fleet: four
Boeing 727-100s, four Boeing 727-200s, eight Boeing 747-100s, two Boeing
747-200s, 10 L-1011s and two Douglas MD-80s.
(2) A significant portion of 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 "--Regulatory Matters--Noise Abatement."
For a discussion of the Company's fleet restructuring plans,
see "The Company--Business Strategy--Fleet Upgrade and Simplification."
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 29 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. TWA's tenancy is
currently on a month-to-month basis and no lease has been signed. The Company
has recently consolidated for the near term most of its JFK operations into
Terminal 5, using only limited facilities in Terminal 6. TWA has currently
subleased a majority of the gates in Terminal 6 to other carriers.
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 "--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.
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
1997, approximately 81.9% of all ticket sales on TWA were sold by travel
agents. Until October 2, 1997, TWA paid the full traditional 10% commission
on tickets for domestic transportation on TWA sold by independent travel
agents without the cap of $50 and $25 per domestic round-trip and one-way
tickets, respectively, which most other major airlines imposed in 1995 and
paid an 11% commission on tickets for international transportation. On
October 2, 1997, the Company reduced its commission on tickets for domestic
and international transportation to 8% and 10%, respectively, without the cap
imposed by most of the major airlines. On May 11, 1998, the Company began
paying a maximum travel agent commission of $50 per roundtrip and $25 for
one-way tickets for domestic travel and 8% for international travel with no
commision cap. In addition, Internet vendors receive a 5% commission with a
maximmum payment of $10. TWA pays 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 by a partnership
in which affiliates of TWA, Delta Air Lines, Northwest Airlines, and ABACUS
Distribution Systems Pte. Ltd, have interests of 25%, 32%, 38% and 5%,
respectively. Management believes that its participation in Worldspan has
given it direct access to an efficient distribution system. Worldspan
continues to expand its offering and coverage, further benefitting the
Company. TWA will continue to increase the methods and efficiency of
distributing its product through a variety of channels and systems, including
increasing use of "E" ticketing (electronic ticketing) and direct booking
through the Internet.
Frequent Flyer Program: "Aviators"
TWA initiated its frequent flyer program in May 1981. Frequent
flier programs like TWA's Aviators 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 fliers.
TWA's frequent flyer program rewards certain of its members
with mileage credits based on the fare paid as well as miles flown for travel
on TWA and also offers mileage credits for members' purchases of goods and
services offered by various travel and non-travel related businesses that
participate in Aviators including other airlines. Aviators 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. For example, through the
American Express Membership Rewards Program, Aviators members may use amounts
charged on the American Express card to earn additional frequent flier miles.
TWA accounts for its frequent flyer 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
Aviators participants accumulate sufficient miles to be entitled to claim
award certificates. Incremental costs include unit costs for passenger food,
beverages and supplies, fuel and liability insurance expenses expected to be
incurred on a per passenger basis. No profit or overhead 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, 1996, participants in TWA's frequent flyer
program had accumulated mileage credits for approximately 751,689 free awards,
compared with accumulated mileage credits for approximately 938,319 free awards
at December 31, 1997. Because TWA expects that some award certificates will
never be redeemed, the calculations of the accrued liability for incremental
costs at December 1996 and 1997 were based on approximately 71.5% and 63.0%,
respectively, of the accumulated credits. Mileage for Aviators participants
who have accumulated less than the minimum number of mileage credits necessary
to claim a free award is excluded from the calculation of the accrual.
The accrued liability at December 31, 1996 was approximately
$20.4 million compared to approximately $19.6 million at December 31, 1997.
TWA's customers redeemed free awards representing approximately 4.5% and 4.9%
of TWA's RPMs in 1996 and 1997, 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. See also "Risk Factors--Risk Factors
Related to the Industry--Aircraft Fuel."
During 1996, aircraft fuel prices increased significantly,
however, such prices declined moderately during 1997. The following table
details TWA's fuel consumption and costs for the four years ended December 31,
1994, 1995, 1996 and 1997 and for the quarters ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
------------------------------------------------------ -----------------------
1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Gallons consumed (in millions)... 852.2 804.2 838.9 730.3 175.5 166.3
Total cost(1) (in millions)...... $477.6 $458.6 $585.2 $480.9 $129.9 $ 92.4
Average cost per gallon.......... 56 Cents 57 Cents 70 Cents 66 Cents 74 Cents 56 Cents
Percentage of operating expenses. 13.0% 13.9% 15.6% 14.3% 15.1% 11.1%
</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, the formation of international and domestic alliances
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 jet service, which may result in increased competition to TWA.
Airlines offer discount fares, a wide range of schedules, frequent flier
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 domestic
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. In addition, many
of the major U.S. carriers have announced plans for alliances with other major
U.S. carriers. Such alliances could further intensify the competitive
environment.
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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General" and "--Regulatory Matters."
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 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. Similarly, other airlines are free
to enter or leave TWA's domestic markets.
Employees
As of March 31, 1998, the Company had approximately 22,203
full-time employees (based upon full-time equivalents which include part-time
employees). Of these, approximately 84.6% were represented by ALPA and the
IAM. 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
equaled 3% in the case of employees represented by ALPA and IFFA, and the IAM
received a 1% wage increase and a 2% contribution to its retirement plan on
August 31, 1997).
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. See "Description of Capital Stock--Description of Employee Preferred
Stock." TWA also issued an aggregate of 1,026,694 shares of Common Stock to a
trust established for the benefit of certain of TWA's other 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 these
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 Stock 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 grant, commencing
in 1997, to certain trusts established for the benefit of its union and
non-union employees certain additional shares of Common Stock and Employee
Preferred Stock. The ESIP provides that the first stock grant under the plan
would be made on July 15, 1997 in an amount sufficient to increase the
employee ownership of the combined total number of then outstanding shares of
Common Stock and Employee Preferred Stock by 2.0% if the average closing price
of the Common Stock on the American Stock Exchange, or such other exchange or
market which is then the principal market on which the Common Stock is listed
or admitted to trading, for 30 consecutive trading days (the "Average Closing
Price") exceeded a target price of $11.00 per share during the period from
January 1, 1997 to July 14, 1997. If the target price of $11.00 per share is
not exceeded, the grant would instead be made, if at all, on July 15 of the
next year (up to and including July 15, 2002) in which the Average Closing
Price of the Common Stock exceeds such target price prior to July 15 of that
year. In each of 1998 through 2002, additional shares of Employee Preferred
Stock and Common Stock will become subject to grant under this program in an
amount sufficient to increase the employee ownership by 1.5% in 1998, 1.5% in
1999, 1.0% in 2000, 1.0% in 2001 and 1.0% in 2002 (subject to adjustment as
described below) based on the combined total number of shares of Common Stock
and Employee Preferred Stock outstanding as of the applicable July 15 grant
date, with the target price applicable to the additional shares made available
for grant in such year equal to $12.10 in 1998, $13.31 in 1999, $14.64 in
2000, $16.11 in 2001 and $17.72 in 2002. Each such grant is cumulative and,
where the applicable target price is not met in the initial grant year, the
applicable grant is carried forward and is subject to grant in future years up
to and including July 15, 2002 in the manner described above. To protect
against the dilutive effect of certain stock issuances, the ESIP provides for
an adjustment (the "Adjustment") to the grants described above 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% Reset Notes or the Company's
Mandatorily Redeemable 12% Preferred Stock (both the 12% Reset Notes and the
Mandatorily Redeemable 12% Preferred Stock have been retired). To the extent
that a sale of additional capital stock for cash results in a decline in the
percentage of employee ownership of the combined total number of shares of
Common Stock and Employee Preferred Stock below a level equal to the Adjusted
Base Ownership Percentage (as defined in the ESIP), one-quarter of the
difference between the new percentage of employee ownership and the Adjusted
Base Ownership Percentage (but in no event greater than 1.0% in each year)
would be added to the percentage of Employee Preferred Stock and Common Stock
to be granted to union employees and non-union employees, respectively, under
the ESIP in each of the years 1999 through 2002, assuming the target prices
are met. Furthermore, if TWA issues additional shares of Common Stock with an
aggregate value of more than $20 million to third parties for cash or a
reduction in debt at a price equal to or greater than $11.00 per share (the
"Equity Issuance Acceleration Trigger"), the last two scheduled grants under
the ESIP are to be aggregated and these shares allocated equally to the
remaining installments in the program. In addition, pursuant to the ESIP,
employees have the right commencing July 15, 1997 through July 15, 2002, to
purchase additional shares of Employee Preferred Stock in amounts up to an
aggregate of 2.0% of the combined total number of outstanding shares of Common
Stock and Employee Preferred Stock at a discount of 20.0% from the then
current market price. Should all of the target prices be met or exceeded
within the time periods specified and should the entire discount stock
purchase option be exercised, the various employee stock trusts would receive
a total of 10.0% (as adjusted as described below) of the Company's outstanding
Common Stock, with the exact amount issued dependent upon the number of shares
outstanding as of the date of each grant and option exercise.
The ESIP separately provides that if additional shares of
Employee Preferred Stock and Common Stock 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 Employee Preferred Stock
and Common Stock such that the employees will retain the same level of
ownership. Union representatives and the Company agreed to a one-time
distribution pursuant to this provision of the ESIP in an aggregate amount of
525,856 shares of Employee Preferred Stock and Common Stock. As part of that
agreement, since additional ESIP shares were not issued to the employees in
July 1997, an additional 405,750 shares of Employee Preferred Stock and Common
Stock were issued to the employee trusts and, to the extent that additional
shares are granted under the ESIP, the Company will receive a credit towards
the new grant for these previously issued shares, in that amount.
While the $11.00 target price was not exceeded as of July 15,
1997 and no grant was made on that date, on February 17, 1998, the Average
Closing Price for the Company's Common Stock did exceed the $11.00 target price
with respect to the first scheduled grant. As a result, the initial grant in
an amount sufficient to increase the employee ownership by 2.0% based on the
then outstanding Common Stock and Employee Preferred Stock will be made on July
15, 1998. Based on the current outstanding Voting Equity (as defined in the
ESIP) of 57,890,907, the number of shares of Employee Preferred Stock and
Common Stock to be issued to the employees under the ESIP on that date is
1,515,472 shares. TWA is entitled to a credit against this number in the
amount of 405,750 shares due to the prior grant to employees as described
above. On March 4, 1998, the Average Closing Price for the Company's Common
Stock did exceed the $12.10 target price with respect to the 1998 grant of
1.5%. As a result, the 1998 grant in an amount sufficient to increase the
employee ownership by 1.5% based on the then outstanding Common Stock and
Employee Preferred Stock will also be made on July 15, 1998. Based on the
current outstanding Voting Equity, the number of additional shares of Employee
Preferred Stock and Common Stock to be issued under the ESIP on that date for
the 1998 grant is 1,172,354 shares, which together with the shares to be
issued in connection with the 1997 grant equals a total of 2,282,076 shares.
The number of shares to be granted could be increased if the last two grants
are accelerated pursuant to the Equity Issuance Acceleration Trigger.
Furthermore, based on issuances of Common Stock to date, the Adjustment has
resulted in a revised grant schedule of 1.5% in 1998, 1.84% in 1999, 1.34% in
2000, 1.34% in 2001 and 1.34% in 2002. Taking into account the Common Stock
to be issued upon conversion of the Mandatory Conversion Equity Notes due
1999, the grants for the years 1999 through 2002 would further increase
pursuant to the Adjustment to: 1.91% in 1999, 1.41% in 2000, 1.41% in 2001 and
1.41% in 2002.
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 and the IAM 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, may be blocked by a vote of six
directors, including each of the Employee Directors. See "Certain Provisions
of the Certificate of Incorporation, the By-laws and Delaware Law--Blocking
Coalition."
The '94 Labor Agreements were three year agreements and became
amendable as of August 31, 1997. Negotiations on a new collective bargaining
agreement with the IAM with regard to the flight attendants commenced in July
1997 and are currently ongoing and negotiations regarding the Company's ground
employees represented by the IAM commenced in February 1997 and are also
currently ongoing. Negotiations on a new collective bargaining agreement with
ALPA commenced in June 1997 and are currently ongoing. Under the RLA workers
whose contracts have become amendable are required to continue to work under
the "status quo" (i.e., under the terms of employment in effect before 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. At the request of the IAM, a
mediator was appointed on August 6, 1997 in connection with the negotiations
on the collective bargaining agreement covering ground employees. On March
27, 1998, at the request of the IAM, a mediator was appointed in connection
with the negotiations on the collective bargaining agreement covering the
flight attendants. 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
"Risk Factors--Risk Factors Related to the Company--'94 Labor Agreements."
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
Ronald Reagan Washington National airports, 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; however the higher use rates required by these rules do
increase the risk that TWA might 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. On May 4, 1993, the bilateral air
transport agreement between the U.S. and France lapsed. In the absence of a
new bilateral agreement, the U.S. and France are currently 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.
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, 75% and 100% of its total fleet will be required to meet Stage
3 requirements by December 31, 1998 and December 31, 1999, respectively. See
"Risk Factors--Risk Factors Related to the Company--Age of Fleet; Noise."
As of December 31, 1997, approximately 69% 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. TWA is
considering "hush-kitting" additional aircraft as well as other alternatives
to assure compliance with Stage 3 noise requirements, and has already acquired
a number of Stage 3 aircraft while phasing out several Stage 2 aircraft.
However, there can be no assurance that TWA will be able to satisfy all
applicable noise level requirements. See also "Risk Factors--Risk Factors
Related to the Company--Liquidity; Substantial Indebtedness; Capital
Expenditure 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. At this time, TWA cannot predict what
additional restrictions will be implemented or, if so, the timing or effect on
TWA of any such implementation. The effect on TWA 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.
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 two
domestic unions which together represent approximately 84.6% of the Company's
employees. See "Risk Factors--Risk Factors Related to the Company--'94 Labor
Agreements."
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 1996 and 1997, TWA spent approximately $3.4 million and $4.2
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 $19.8 million for 1998
through 2001. 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 $12.00
per round trip, although Congress is currently considering allowing airports
to raise the PFCs. 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, "--Legal
Proceedings."
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.
Insurance
The Company maintains commercial airline insurance with a major
group of independent insurers that regularly participate in world aviation
insurance markets. The Company's policies include coverage for losses
resulting from the physical destruction of or damage to TWA's owned and leased
aircraft, as well as losses arising from bodily injury, property damage and
personal injury to third parties for which TWA becomes legally obligated to
pay. The Company maintains aircraft third party and airline general third
party liability insurance with a combined single limit of $1.0 billion per
occurrence. Management believes that TWA's commercial airline insurance
policies are generally consistent with those of other United States domiciled
scheduled passenger air carriers operating similar aircraft over similar
routes.
Legal Proceedings
Icahn Litigation
On June 14, 1995, in consideration of, among other things, the
extension of the Icahn Loans, TWA and Karabu entered into the Ticket Agreement
which permitted Karabu to purchase two categories of discounted tickets: (1)
"Domestic Consolidator Tickets," which are subject to a cap of $610.0 million,
based on the full retail price of the tickets ($120.0 million in the first 15
months and $70.0 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. TWA believes that applicable
provisions of the Ticket Agreement do not allow Karabu to market or sell
System Tickets through travel agents or directly to the general public.
Karabu, however, has been marketing System Tickets through travel agents and
directly to the general public. 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 or directly to the general public. 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 Icahn Loans, which financing was then
secured by receivables and certain flight equipment pledged under the Karabu
Security Agreements. Mr. Icahn's position was based upon a variety of claims
related to his interpretations of the Karabu Security Agreements as well as
with respect to certain alleged violations of the Ticket Agreement by the
Company. 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.
On March 20, 1996, the Company filed a Petition (the "TWA
Petition") in the Circuit Court for St. Louis County, Missouri, commencing a
lawsuit against Carl Icahn, Karabu and certain other entities affiliated with
Icahn (collectively, the "Icahn Defendants"). The TWA Petition alleged 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. The TWA Petition sought a
declaratory judgment finding that the Icahn Defendants have violated the
Ticket Agreement, and also sought liquidated, compensatory and punitive
damages, in addition to the Company's costs and attorney's fees. On May 7, 1998
the court denied the TWA Petition and dismissed the Icahn Defendants'
counterclaims. The court concluded that the Icahn Defendants could sell
discount tickets under the Ticket Agreement to any person who actually uses
the ticket, including non-business travelers, and that the Icahn Defendants
had not breached the Ticket Agreement. No damages were assessed in respect to
either plaintiff's or defendants' petitions.
The court's ruling could have an adverse effect on revenue,
which could be significant but the impact of which will depend on a number of
factors, including yield, load factors and whether any resulting incremental
sales by the Icahn Defendants will be to passengers that would not otherwise
have flown on TWA. The Icahn Defendants moved to amend or modify the court's
ruling to include a declaratory judgment that the Icahn Defendants are
permitted to sell tickets to any person for any purpose, which could include
use by the purchaser's family members or friends. TWA opposed the motion and
requested that the Court clarify the ruling to limit its scope consistent with
the reasoning set forth in the decision, specifically so that the person
purchasing the ticket must use the ticket (with certain enumerated exceptions)
and may not purchase a ticket for any other person. The motions of both
parties were denied on June 29, 1998. TWA intends to appeal the court's
ruling in its entirety.
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 alleged, among other
things, that the Company had 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 was based upon
an interpretation by Mr. Icahn and the Icahn Entities that the Ticket
Agreement permits sales of tickets through travel agents and directly to the
general public. The Icahn Complaint sought 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 claim 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, the United States District
Court for the Southern District of New York, on the Company's motion,
dismissed the suit in its entirety and that decision has not been appealed.
On August 11, 1997, Karabu and another entity controlled by Mr.
Icahn filed another suit against six senior officers of the Company in New
York state court seeking damages and other relief and alleging tortious
interference with prospective economic advantage based on alleged violations
of the Ticket Agreement. This suit is similar to the previous action with
respect to which the Icahn Complaint related. The defendants removed this case
to the United States District Court for the Southern District of New York and
have moved to dismiss the case on the grounds of lack of personal
jurisdiction, res judicata and failure to state a claim. This action is
pending.
Although the Company intends to press its claims vigorously, it
is possible that Karabu's interpretation of the Ticket Agreement regarding
system discount ticket sales by the Icahn Defendants through travel agents or
directly to the general public 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.
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. 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. The National Transportation Safety Board held hearings
relating to the crash in December 1997 and is continuing its investigation.
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. On August 19, 1997 the
MDNR and the EPA approved the CMS. On February 27, 1998, MDNR notified TWA of
the EPA's preliminary decision to issue a hazardous waste post-closure permit
for TWA's maintenance facility, subject to public comment. Upon final
approval of the permit, 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.
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 and claimed that the cash
undertaking constituted a preference payment. Following prolonged litigation
with respect to jurisdiction, the United States Supreme Court determined that
the entire 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. On January 20, 1998, the Court of Appeals for the
Third Circuit reversed the District Court and affirmed the findings of the
Bankruptcy Court. Travellers sought reconsideration by the Third Circuit which
reconsideration was denied. In May 1998, the U.S. Supreme Court denied a writ
of certiorari in the case.
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., now known as
AirTran Airlines, Inc. ("ValuJet") instituted a lawsuit against TWA and 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.
ValuJet has settled its claim with Delta and appealed the grant of summary
judgment to the 11th Circuit Court of Appeals. Settlement discussions are
ongoing.
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 DOJ 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.
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.
DESCRIPTION OF NOTES
The Company issued the Old Notes and will issue the Exchange
Notes under the Indenture dated as of March 3, 1998 by and between the Company
and First Security Bank, National Association, as trustee (the "Trustee"), a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The Notes are entitled to the benefits of and
are subject to those terms set forth in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"), as in effect on the date of the Indenture. Copies of the Indenture can
be obtained from the Company upon request. The following description of
material provisions of the Notes, the Indenture and the Registration Rights
Agreement is intended as a summary only and is qualified by reference to those
documents, including the definitions in those documents of certain terms.
Whenever particular articles, sections or defined terms of the Notes, the
Indenture or the Registration Rights Agreement are referred to, it is intended
that those articles, sections or defined terms are to be incorporated herein
by reference. See "--Certain Definitions" for definitions of certain
capitalized terms used herein.
General
The Notes will represent senior unsecured obligations of the
Company. The Notes will rank senior in right of payment to all existing and
future subordinated indebtedness of the Company and will rank pari passu in
right of payment with other senior obligations of the Company. The Notes are
not secured and, therefore, will be effectively subordinated to all existing
and future secured indebtedness of the Company to the extent of the value of
the assets securing such indebtedness. Subject to certain conditions specified
therein, the Indenture permits the Company to incur additional indebtedness,
including certain senior secured indebtedness. The Notes are not presently
guaranteed by any subsidiary of the Company and as a result will effectively
rank junior to all creditors (including trade creditors) of, and holders of
preferred stock issued by, subsidiaries of the Company. Although the Notes
will contain restrictions on the incurrence of indebtedness by subsidiaries,
the amount of indebtedness which is permitted to be incurred could be
substantial. The Notes will contain no limitations on the ability of
subsidiaries to incur trade credit and other obligations. As of March 31,
1998, after giving effect to the issuance of the Notes and the application of
the net proceeds therefrom, the aggregate principal amount of the Company's
total outstanding unsecured indebtedness would be approximately $150.0
million, all of which constitutes senior obligations.
The Notes are issued only in fully registered form, without
coupons, in minimum denominations of $1,000 and integral multiples of $1,000.
Holders will not be charged for any registration of transfer or exchange of
the Notes, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection with any such
transaction.
Principal, Maturity and Interest
The Notes will be limited to $150.0 million of principal in the
aggregate and will mature on March 1, 2006. The Notes will bear interest at
the annual rate of 11 3/8% from the date of original issuance, or from the
most recent interest payment date to which interest has been paid or provided
for, payable semiannually in arrears on March 1 and September 1 of each year,
commencing on September 1, 1998, to the person in whose name the Note is
registered at the close of business on the preceding February 15 and August
15, as the case may be. Interest and Special Interest, if any, will be payable
to the holders of record as they appear on the register of the Company kept by
the registrar on such record dates. Interest will be computed on the basis of
a 360-day year of twelve 30-day months. The Notes will not be subject to any
sinking fund. Principal of, premium, if any, interest on, and Special
Interest, if any, with respect to the Notes will be payable, and the transfer
of the Notes will be registerable, at the office or agency of the Company
maintained for such purposes. In addition, payment of interest and Special
Interest, if any, may, at the option of the Company, be made by check mailed
to the address of the person entitled thereto as it appears in the register of
the holders of Notes. The Trustee will initially act as paying agent and
registrar for the Notes. The Company may change the paying agent and registrar
in accordance with the Indenture.
Redemptions
Mandatory Redemption. Except as set forth under "--Repurchase
of Notes Upon a Change in Control", "--Repurchase of Notes in Connection with
Incurrence of Acquired Indebtedness" and "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock," the Company will not be required to
repurchase or make mandatory redemption or sinking fund payments with respect
to the Notes.
Optional Redemption. Except as described below under
"--Redemption upon Public Equity Offering" and "--Certain Covenants-Merger and
Consolidation," the Notes may not be redeemed prior to March 1, 2002. On or
after March 1, 2002, the Notes may be redeemed at any time in whole or in part
(in any integral multiple of $1,000) by the Company at its sole option at the
applicable redemption price (expressed as a percentage of principal amount) as
set forth below during the twelve month periods beginning March 1 of the years
shown below, plus in each case an amount equal to accrued and unpaid interest
and Special Interest, if any, with respect to the Notes to and including the
redemption date.
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2002................................ 105.69%
2003................................ 102.84%
2004 and thereafter................. 100.00%
</TABLE>
Notice of redemption shall be sent to each holder of Notes
being redeemed at the address shown on the books of the Company at least 30
but not more than 60 days prior to the redemption date. If less than all of
the Notes are to be redeemed, the Notes to be redeemed shall be selected by
lot or pro rata. On or after the redemption date, interest will cease to
accrue on the Notes or portions thereof called for redemption.
Redemption upon Public Equity Offering. The Notes will be
redeemable prior to March 1, 2002 only in the event that on or before March 1,
2001 the Company receives Net Cash Proceeds of one or more Public Equity
Offerings in which case the Company may, at its option, use all or a portion
of any such Net Cash Proceeds to redeem up to $52.5 million aggregate
principal amount of the Notes, within 90 days of such Public Equity Offering,
on not less than 30 days, but not more than 60 days, notice to each Holder of
the Notes to be redeemed, at a redemption price (expressed as a percentage of
principal amount) of 111.375% plus accrued and unpaid interest and Special
Interest, if any, to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest and Special Interest,
if any, due on the relevant interest payment date); provided, however, that at
least $97.5 million aggregate principal amount of the Notes must remain
outstanding after each such redemption.
Repurchase of Notes Upon a Change in Control
The Company must commence, within 30 days of the occurrence of
a Change in Control, and consummate an Offer to Purchase for all Notes then
outstanding, at a purchase price equal to 101% of the principal amount thereof
on the relevant Payment Date, plus accrued and unpaid interest and Special
Interest, if any, to the Payment Date.
There can be no assurance that the Company will have sufficient
funds available at the time of any Change in Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well
as may be contained in other securities or agreements of the Company which
might be outstanding at the time).
Future indebtedness of the Company may contain prohibitions on
the occurrence of certain events that would constitute a Change in Control or
require such indebtedness to be purchased upon a Change in Control. Moreover,
the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if
the Change in Control itself does not, due to the financial effect of such
purchase on the Company. Finally, the Company's ability to pay cash to the
holders of Notes following the occurrence of a Change in Control may be
limited by the Company's then existing financial resources. The provisions
under the Indenture relative to the Company's obligation to make an offer to
repurchase the Notes as a result of a Change in Control may be waived or
modified with the written consent of the holders of a majority in principal
amount of the Notes.
One of the events which constitutes a Change in Control under
the Indenture is the disposition of "all or substantially all" of the
Company's assets. This term has not been interpreted under New York law (the
law governing the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Notes elect to require the
Company to repurchase the Notes and the Company elects to contest such
election, there can be no assurance as to how a court interpreting New York
law would interpret the phrase.
The Company could, in the future, enter into certain
significant transactions that would not constitute a Change in Control with
respect to the Change in Control purchase feature of the Notes. The Change in
Control purchase feature of the Notes may in certain circumstances make more
difficult or discourage a takeover of the Company and, thus, the removal of
incumbent management. The Change in Control purchase feature, however, is not
the result of, to management's knowledge, any specific effort to obtain
control of the Company by means of a merger, tender offer, solicitation or
otherwise, nor is it part of a plan by management to adopt a series of
anti-takeover provisions.
The right to require the repurchase of Notes shall terminate
after a discharge of the Company from its obligations under the Notes and the
Indenture in accordance therewith. See "--Defeasance." Repurchase of the Notes
may, under certain circumstances, constitute a default or event of default
under senior indebtedness then outstanding and, in such instances, repurchase
of the Notes would be prohibited unless and until such default has been cured
or waived. The failure to repurchase the Notes in such instance would
constitute an Event of Default. See "--Events of Default."
Repurchase of Notes in Connection with Incurrence of Acquired Indebtedness
The Company shall not, and shall not permit any Restricted
Subsidiary to incur any Acquisition Indebtedness in reliance, in whole or in
part, on clause (8) of paragraph (b) of the "Limitation on Indebtedness"
covenant described below under "--Certain Covenants" unless the Company shall
have (i) made an Offer to Purchase all of the Notes at a purchase price equal
to 100% of the principal amount thereof, plus the Applicable Premium (as
defined) as of, and accrued and unpaid interest and Special Interest, if any,
to, the Payment Date and (ii) such Payment Date shall have occurred and money
sufficient to pay the purchase price of all Notes or portions thereof tendered
for purchase pursuant to such Offer to Purchase shall have been deposited with
the Trustee. Any such Offer to Purchase shall contain information concerning
the business of the Company which the Company in good faith believes will
enable the Holders of the Notes to make an informed decision with respect to
such Offer to Purchase and will include (A) the most recent annual and
quarterly financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the documents
required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer to Purchase), (B) a description of material developments, if any, in the
Company's business subsequent to the date of the latest of such financial
statements referred to in clause (A) (including a description of the events
requiring the Company to make such Offer to Purchase), (C) if applicable,
appropriate pro forma financial information concerning such Offer to Purchase
and the events requiring the Company to make the Offer to Purchase and (D) any
other information required by applicable law to be included therein.
Registered Exchange Offer; Registration Rights
Pursuant to a Registration Rights Agreement between the Company
and the Initial Purchaser (the "Registration Rights Agreement"), the Company
has agreed to use its best efforts to (i) file with the Commission, within 60
days after the date of original issuance of the Notes, a registration
statement on an appropriate form under the Securities Act (the "Exchange Offer
Registration Statement") with respect to a registered offer (the "Registered
Exchange Offer") to exchange the Notes for a like aggregate principal amount
of debt securities (the "Exchange Notes") of the Company issued under the
Indenture and identical in all material respects to the Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions)
and (ii) cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act within 150 days after the date of original
issuance of the Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer the Exchange Notes in exchange
for surrender of the Notes. The Company will keep the Registered Exchange
Offer open for not less than 30 days (or longer if required by applicable law)
after the date notice of the Registered Exchange Offer is first mailed to the
holders of the Notes. For each Note surrendered to the Company pursuant to the
Registered Exchange Offer, the holder of such Note will receive an Exchange
Note having a principal amount equal to that of the surrendered Note. Under
existing Commission interpretations, the Exchange Notes would be freely
transferable by holders other than affiliates of the Company after the
Registered Exchange Offer without further registration under the Securities
Act if the holder of the Exchange Notes represents that it is acquiring the
Exchange Notes in the ordinary course of its business, that it has no
arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and that it is not an affiliate of the
Company, as such terms are interpreted by the Commission; provided, however,
that broker-dealers ("Participating Broker-Dealers") receiving Exchange Notes
in the Registered Exchange Offer will have a prospectus delivery requirement
with respect to resales of such Exchange Notes. The Commission has taken the
position that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to Exchange Notes (other than a resale of
an unsold allotment from the original sale of the Notes) with the prospectus
contained in the Exchange Offer Registration Statement. Under the Registration
Rights Agreement, the Company is required to allow Participating
Broker-Dealers and other persons, if any, with similar prospectus delivery
requirements to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such Exchange Notes.
A Holder of Notes (other than certain specified holders) who
wishes to exchange such Notes for Exchange Notes in the Registered Exchange
Offer will be required to represent that any Exchange Notes to be received by
it will be acquired in the ordinary course of its business and that at the
time of the commencement of the Registered Exchange Offer it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes
and that it is not an "affiliate" of the Company, as defined in Rule 405 of
the Securities Act, or if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
In the event that applicable interpretations of the staff of
the Commission do not permit the Company to effect the Registered Exchange
Offer, or if for any other reason the Registered Exchange Offer is not
consummated within 180 days of the date of the Registration Rights Agreement,
or if the Initial Purchaser so requests with respect to Notes not eligible to
be exchanged for Exchange Notes in the Registered Exchange Offer, or if any
holder of Notes is not eligible to participate in the Registered Exchange
Offer or does not receive freely tradable Exchange Notes in the Registered
Exchange Offer, the Company will, at its cost, (a) as promptly as practicable,
file a shelf registration statement (the "Shelf Registration Statement")
covering resales of the Notes or the Exchange Notes, as the case may be, (b)
use its best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act and (c) keep the Shelf Registration
Statement effective for a period of two years from the date of original
issuance of the Notes or such shorter period that will terminate when Notes
covered by the Shelf Registration Statement have been sold pursuant thereto or
can be sold pursuant to Rule 144(k). The Company will, in the event a Shelf
Registration Statement is filed, among other things, provide to each holder
for whom such Shelf Registration Statement was filed copies of the prospectus
which is a part of the Shelf Registration Statement, notify each such holder
when the Shelf Registration Statement has become effective and take certain
other actions as are required to permit unrestricted resales of the Notes or
the Exchange Notes, as the case may be. A holder selling such Notes or
Exchange Notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights Agreement
which are applicable to such holder (including certain indemnification
obligations).
If (i) on or prior to 60 days after the date of original
issuance of the Notes, neither the Registered Exchange Offer Registration
Statement nor the Shelf Registration Statement has been filed with the
Commission; (ii) on or prior to 150 days after the original issuance of the
Notes, neither the Exchange Offer Registration Statement nor the Shelf
Registration Statement is declared effective; (iii) on or prior to 180 days
after the original issuance of the Notes, neither the Registered Exchange
Offer is consummated nor the Shelf Registration Statement is declared
effective; (iv) notwithstanding the filing of the Exchange Offer Registration
Statement or the effectiveness thereof or the consummation of the Registered
Exchange Offer, by the later of (x) 60 days after the date of original
issuance of the Notes and (y) 30 days after a request by the Initial Purchaser
or certain other holders of Notes, pursuant to the Registration Rights
Agreement, that the Company file a Shelf Registration Statement, a Shelf
Registration Statement has not been filed with the Commission or such Shelf
Registration Statement has not been declared effective by the Commission
within 150 days after any such request; or (v) after either the Exchange Offer
Registration Statement or the Shelf Registration Statement is declared
effective, such registration statement thereafter ceases to be effective or
usable (subject to certain exceptions) in connection with resales of Notes or
Exchange Notes in accordance with and during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (v), a "Registration Default," and each period during which a
Registration Default has occurred and is continuing, a "Registration Default
Period"), then special interest ("Special Interest") on the Notes and the
Exchange Notes will accrue at a per annum rate of 0.50% for the first 90 days
of the Registration Default Period, at a per annum rate of 1.0% for the second
90 days of the Registration Default Period, at a per annum rate of 1.50% for
the third 90 days of the Registration Default Period and at a per annum rate
of 2.00% thereafter for the remaining portion of the Registration Default
Period. From and including the date on which all Registration Defaults have
been cured, the accrual of Special Interest will cease. Special Interest is
payable in addition to any other interest payable from time to time pursuant to
the terms of the Notes and the Exchange Notes.
If the Company effects the Exchange Offer, it will be entitled
(subject to applicable law) to consummate the Exchange Offer 30 days after the
commencement thereof provided that it has accepted all Notes theretofore
validly tendered in accordance with the terms of the Exchange Offer. The
summary herein of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject, and is qualified in its entirety by
reference, to all of the provisions of the Registration Rights Agreement, a
copy of which is available upon request to the Company.
Certain Covenants
Limitation on Indebtedness. (a) Neither the Company nor the
Restricted Subsidiaries shall Incur, directly or indirectly, any Indebtedness;
provided, however, that the Company may Incur Indebtedness so long as, on the
date of such Incurrence and after giving effect thereto, the Consolidated
Coverage Ratio exceeds (i) 2.00 to 1 for Indebtedness Incurred on or prior to
December 31, 1999, (ii) 2.25 to 1 for Indebtedness Incurred after December 31,
1999 and on or prior to December 31, 2001 and (iii) 2.50 to 1 for Indebtedness
Incurred after December 31, 2001.
(b) Notwithstanding the foregoing paragraph (a), the Company
and the Restricted Subsidiaries may Incur any or all of the following
Indebtedness:
(i) Indebtedness of the Company Incurred subsequent
to the Issue Date; provided, however, that (A) after giving
effect to any such Incurrence, the aggregate principal amount of
such Indebtedness then outstanding does not exceed $400.0
million, (B) the Stated Maturity of any such Indebtedness is at
least one year after the Stated Maturity of the Notes, (C) the
Average Life of any such Indebtedness at the time that it is
Incurred is not less than the Average Life of the Notes at such
time and (D) except for Liens permitted by clause (p) of the
definition of Permitted Liens, such Indebtedness is not secured
by a Lien on any asset of the Company or its Restricted
Subsidiaries;
(ii) Aircraft Acquisition Debt;
(iii) Indebtedness of the Company owed to and held by
a Restricted Subsidiary or Indebtedness of a Restricted
Subsidiary owed to and held by the Company or a Restricted
Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any subsequent transfer of such Indebtedness (other than to the
Company or another Restricted Subsidiary) shall be deemed in each
case, to constitute the Incurrence of such Indebtedness by the
Company;
(iv) the Notes and the Exchange Notes;
(v) Indebtedness Incurred to finance the cost
(including the cost of design, development, acquisition,
construction, installation, improvement, transportation or
integration) of plant, property and equipment used or to be used
in the airline business or any other business that is
substantially related, ancillary or complementary thereto
(including any Capital Lease Obligation and the cost of the
Capital Stock of a Person that becomes a Restricted Subsidiary to
the extent of the fair market value of the plant, property and
equipment of such Person at the time it becomes a Restricted
Subsidiary) to be acquired by the Company or a Restricted
Subsidiary after the Issue Date; provided that such Indebtedness
is incurred within 270 days after such plant, property and
equipment has been placed into service; provided further that (A)
the principal amount of such Indebtedness does not exceed 80% of
the cost of such plant, property or equipment financed thereby
and (B) the aggregate principal amount of all Indebtedness
Incurred pursuant to the provisions described under this clause
(5) shall not exceed $70.0 million at any time outstanding;
provided further that the limitations described in clauses (A)
and (B) of the immediately preceding proviso shall not apply to
Indebtedness Incurred to finance the cost of (i) airport
facilities, reservations centers or maintenance facilities or
(ii) information technology systems, including all related
hardware and software;
(vi) Indebtedness outstanding on the Issue Date
(other than Indebtedness described in clause (i), (ii), (iii),
(iv) or (v) of this covenant);
(vii) Indebtedness of the Company not to exceed, at
any time outstanding, 2.0 times the Net Cash Proceeds received by
the Company after the Issue Date from the issuance and sale of
its Capital Stock (other than Disqualified Stock) to a Person
that is not a Subsidiary of the Company, to the extent such Net
Cash Proceeds are not included in the calculation of amounts
under clause (iii)(B) of paragraph (a) of the "Limitation on
Restricted Payments" covenant described below or used to make a
Restricted Payment pursuant to clause (i) of paragraph (b) of
such "Limitation on Restricted Payments" covenant; provided that
such Indebtedness (A) is Incurred within 180 days following
receipt of such Net Cash Proceeds and (B) does not have a Stated
Maturity that is prior to the first anniversary of the Stated
Maturity of the Notes and has an Average Life longer than the
Notes at the time of Incurrence of such Indebtedness;
(viii) Acquired Indebtedness; provided that prior to
the Incurrence thereof the Company shall have made an Offer to
Purchase all of the Notes and deposited with the Trustee money
sufficient to pay the purchase price of all Notes or portions
thereof tendered for purchase pursuant to such Offer to Purchase,
all as described above under "--Repurchase of Notes in Connection
with Incurrence of Acquired Indebtedness";
(ix) Refinancing Indebtedness in respect of
Indebtedness Incurred pursuant to paragraph (a) or pursuant to
clause (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) of this
covenant or this clause (ix);
(x) Indebtedness (A) in respect of performance,
surety, appeal or similar bonds provided in the ordinary course
of business, and (B) arising from agreements providing for
indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety
bonds or performance bonds securing any obligations of the
Company or any of the Restricted Subsidiaries pursuant to such
agreements, in any case Incurred in connection with the
disposition of any business, assets of the Company or any of the
Restricted Subsidiaries, including all or any interest in any
Restricted Subsidiary, and not exceeding the gross proceeds
therefrom, other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary or any of the Restricted Subsidiaries for
the purpose of financing such acquisition;
(xi) Hedging Obligations consisting of Interest Rate
Agreements, Fuel Protection Agreements or Currency Agreements;
(xii) Indebtedness Incurred in satisfaction of
payment obligations arising out of collective bargaining
agreements with labor unions representing employees of the
Company or its Restricted Subsidiaries;
(xiii) Indebtedness arising from aircraft lessor
financing of improvements to or maintenance of aircraft, engines
or related parts and equipment leased by the Company or its
Restricted Subsidiaries;
(xiv) Indebtedness Incurred in satisfaction of
"return condition" obligations of the Company or its Restricted
Subsidiaries under aircraft leases in an aggregate principal
amount not to exceed $25.0 million at any time outstanding;
(xv) Indebtedness under working capital and/or
Receivables financing facilities in an aggregate principal amount
not to exceed $150.0 million at any time outstanding and
Guarantees thereof by Restricted Subsidiaries not prohibited by
the "Limitation of Guarantees by Restricted Subsidiary" covenant;
provided that such Indebtedness is not secured by a Lien on any
assets of the Company or its Restricted Subsidiaries other than
Receivables and Capital Stock of special purpose Subsidiaries of
the Company formed to effect a Receivables-based financing;
(xvi) Indebtedness issued in satisfaction of trade
payables arising in the ordinary course of business; provided
that (A) the principal amount of such Indebtedness does not
exceed the amount of such trade payables (including accrued
interest or finance charges), (B) the Stated Maturity of such
Indebtedness is no more than 180 days after the date of
Incurrence thereof and (C) the aggregate principal amount of such
Indebtedness does not exceed $50.0 million at any time
outstanding; and
(xvii) Indebtedness of the Company or any Restricted
Subsidiary in an aggregate principal amount which, together with
all other Indebtedness of the Company and the Restricted
Subsidiaries outstanding on the date of such Incurrence (other
than Indebtedness permitted by clauses (1) through (16) of this
covenant or paragraph (a) of this covenant) does not exceed
$100.0 million.
(c) Notwithstanding the foregoing, neither the Company nor any
Restricted Subsidiary shall Incur any Indebtedness pursuant to the foregoing
paragraph (b) if the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations unless such Indebtedness shall be
subordinated to the Notes, to at least the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with the foregoing
covenant, (i) in the event that an item of Indebtedness meets the criteria of
more than one of the types of Indebtedness described above, the Company, in
its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and classified
in more than one of the types of Indebtedness described above.
Limitation on Restricted Payments. (a) The Company shall not,
and shall not permit any Restricted Subsidiary, directly or indirectly, to
make a Restricted Payment if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment: (i) a Default shall have occurred
and be continuing (or would result therefrom); (ii) the Company is not able to
Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the
covenant described under "--Limitation on Indebtedness"; or (ii) the aggregate
amount of such Restricted Payment and all other Restricted Payments since the
Issue Date (the amount of any such Restricted Payment, if other than cash, as
determined in good faith by the Company, whose determination shall be
conclusive and evidenced by a resolution of the Board of Directors or a
certificate of the chief financial or accounting officer of the Company
delivered to the Trustee prior to the making of such Restricted Payment) would
exceed the sum of:
(A) 50% of the Consolidated Net Income accrued
during the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the fiscal
quarter during which the Notes are originally issued to the end
of the most recent fiscal quarter for which financial statements
are publicly available prior to the date of such Restricted
Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit);
(B) the aggregate net proceeds (including 50% of
the fair market value of property other than cash (as determined
in good faith by the Company, whose determination shall be
conclusive and evidenced by a resolution of the Board of
Directors or a certificate of the chief financial or accounting
officer of the Company delivered to the Trustee prior to the
making of such Restricted Payment)) received by the Company or
any Restricted Subsidiary from the issuance or sale, subsequent
to the Issue Date, of its Capital Stock (other than Disqualified
Stock) and Indebtedness of the Company or any Restricted
Subsidiary that has been converted into or exchanged for Capital
Stock (other than Disqualified Stock) subsequent to the Issue
Date (other than an issuance or sale to a Restricted Subsidiary
and other than an issuance or sale to an employee stock ownership
plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); and
(C) an amount equal to the sum of (i) the net
reduction in Investments in Unrestricted Subsidiaries resulting
from dividends, repayments of loans or advances or other
transfers of assets, in each case to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries, and (ii)
the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary
is designated a Restricted Subsidiary; provided, however, that
the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously
made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not
prohibit:
(i) any Restricted Payment made by exchange for, or
out of the net proceeds (including 50% of the fair market value
of property other than cash (as determined in good faith by the
Company, whose determination shall be conclusive and evidenced by
a resolution of the Board of Directors or a certificate of the
chief financial or accounting officer of the Company delivered to
the Trustee prior to the making of such Restricted Payment)) of
the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their
employees); provided, however, that (A) such Restricted Payment
shall be excluded in the calculation of the amount of Restricted
Payments and (B) to the extent used to make such Restricted
Payment, the net proceeds from such sale shall be excluded from
the calculation of amounts under clause (3)(B) of paragraph (a)
above;
(ii) any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value of
Subordinated Obligations made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness of
the Company which is permitted to be Incurred pursuant to the
covenant described under "--Limitation on Indebtedness";
provided, however, that such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value shall be
excluded in the calculation of the amount of Restricted Payments;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend
would have complied with this covenant; provided, however, that
such dividend shall be included in the calculation of the amount
of Restricted Payments;
(iv) the declaration or payment of dividends on or
payment of liquidated damages with respect to (A) any Preferred
Stock outstanding on the Issue Date or (B) any Preferred Stock
(other than Disqualified Stock) issued after the Issue Date that
ranks on parity with or junior to Preferred Stock outstanding on
the Issue Date; provided, however, that any dividend referred to
in the foregoing clause (A) or, subject to the following proviso,
clause (B), shall be included in the calculation of the amount of
Restricted Payments and provided further, that the Company may
elect to exclude from the calculation of amounts under clause
3(B) of paragraph (a) above any Net Cash Proceeds received by the
Company from the issue or sale of Preferred Stock pursuant to the
foregoing clause (B) (which election must be made by written
notice to the Trustee within ten (10) Business Days of the
receipt of such Net Cash Proceeds) and, if such election is made,
any dividend, distribution, purchase, redemption, acquisition or
retirement on or of the Preferred Stock for which such election
is made shall not be a Restricted Payment;
(v) (A) the payment of cash in lieu of issuing
fractional shares of Capital Stock of the Company in connection
with the exercise of options or warrants, the conversion of
convertible securities or the redemption of interests in employee
stock ownership or benefits plans, (B) the purchase or redemption
of Capital Stock by the Company from employee stock ownership or
benefit plans subject to ERISA to the extent required by ERISA,
(C) repurchases of Capital Stock which occur upon the exercise of
stock options if such Capital Stock represents a portion of the
exercise price of such options, (D) the purchase, redemption,
acquisition, cancellation or other retirement for value of shares
of Capital Stock of the Company or any Restricted Subsidiary,
options on any such shares or related stock appreciation rights
or similar securities held by officers or employees or former
officers or employees (or their estates or beneficiaries under
their estates), upon death, disability, retirement, termination
of employment or pursuant to any agreement under which such
shares of stock or related rights were issued; provided that the
aggregate cash consideration paid pursuant to this clause (D) for
such purchase, redemption, acquisition, cancellation or other
retirement of such shares of Capital Stock or related rights
after the Issue Date does not exceed an aggregate amount of $10.0
million; provided further that the amount of any payment,
purchase, redemption, repurchase, acquisition, cancellation or
other retirement paid pursuant to this clause (D) shall be
included in the amount of Restricted Payments;
(vi) any purchase or redemption of Capital Stock of
the Company resulting from the consolidation or merger with or
into any Person or conveyance, transfer or lease of all or
substantially all of the Company's or any Restricted Subsidiary's
property to one or more Persons substantially as an entirety not
prohibited by the terms of the "Merger and Consolidation"
covenant (other than any consolidation, merger or other
transactions involving only the Company and a Subsidiary of the
Company or involving only Subsidiaries of the Company); provided
that the amount of such purchase or redemption shall be excluded
in the calculation of the amount of Restricted Payments; or
(vii) the exchange of Preferred Stock (other than
Disqualified Capital Stock) for Indebtedness of the Company
permitted to be incurred under the Limitation on Indebtedness
Covenant; provided that the liquidation value of the Preferred
Stock exchanged shall be included in the calculation of the
amount of Restricted Payments but only to the extent of the Net
Cash Proceeds of such Preferred Stock received after the Issue
Date.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed
to the Company, (b) make any loans or advances to the Company or (c) transfer
any of its property or assets to the Company except:
(i) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to
a Restricted Subsidiary or its property or assets pursuant to an
agreement relating to any Indebtedness or Preferred Stock
Incurred by such Restricted Subsidiary on or prior to the date on
which such Restricted Subsidiary became a Restricted Subsidiary
or was acquired by the Company (other than Indebtedness or
Preferred Stock Incurred as consideration in, or to provide all
or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on
such date;
(iii) any encumbrance or restriction pursuant to an
agreement effecting a Refinancing of Indebtedness or Preferred
Stock Incurred pursuant to an agreement referred to in clause (i)
or (ii) of this covenant or this clause (iii) or contained in any
amendment to an agreement referred to in clause (i) or (ii) of
this covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such refinancing agreement or
amendment are in the aggregate no less favorable to the
Noteholders than encumbrances and restrictions with respect to
such Restricted Subsidiary contained in such predecessor
agreements;
(iv) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the
sale or disposition of all or substantially all the Capital Stock
or assets of such Restricted Subsidiary pending the closing of
such sale or disposition;
(v) any encumbrances and restrictions existing
under or by reason of applicable law or regulation;
(vi) any encumbrances and restrictions (A) that
restrict in a customary manner the subletting, assignment or
transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing
by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by
the Indenture or (C) arising or agreed to in the ordinary course
of business not relating to any Indebtedness, and that do not (as
determined by the Company and certified in a resolution of the
Board of Directors or a certificate of the chief financial or
chief accounting officer of the Company delivered to the Trustee
prior to or promptly following such encumbrance or restriction
becoming effective), individually or in the aggregate, (1)
detract from the value of property or assets of the Company or
any Restricted Subsidiary in any manner material to the Company
or any Restricted Subsidiary or (2) materially adversely affect
the Company's ability to make principal or interest (including
Special Interest, if any) payments on the Notes;
(vii) any encumbrance or restriction contained in the
terms of any Indebtedness or any agreement pursuant to which such
Indebtedness was issued if (A) the encumbrance or restriction
applies only in the event of a payment default or default with
respect to a financial covenant contained in such Indebtedness or
agreement, (B) the encumbrance or restriction is not materially
more disadvantageous to the Holders of the Notes than is
customary in comparable financings (as determined by the Company
and certified in a resolution of the Board of Directors or a
certificate of the chief financial or chief accounting officer of
the Company delivered to the Trustee prior to or promptly
following such encumbrance or restriction becoming effective) and
(C) such encumbrance or restriction will not materially adversely
affect the Company's ability to make principal or interest
(including Special Interest, if any) payments on the Notes (as
determined by the Company and certified in a resolution of the
Board of Directors or a certificate of the chief financial or
chief accounting officer of the Company delivered to the Trustee
prior to or promptly following such encumbrance or restriction
becoming effective); and
(viii) any encumbrance or restriction resulting from
any financing transaction involving the sale of Receivables or
aircraft and/or related engines, spare parts and equipment to a
special purpose Subsidiary of the Company formed to effect such
financing and which applies only to such special purpose
Subsidiary and its assets.
Nothing contained in this "Limitation on Restrictions on
Distributions from Restricted Subsidiaries" covenant shall prevent the Company
or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or
assets of the Company or any of its Restricted Subsidiaries that secure
Indebtedness of the Company or any of its Restricted Subsidiaries.
Limitation on Sales of Assets and Subsidiary Stock. The Company
shall not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, consummate any Asset Disposition unless the Company or such
Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (including as to the value
of all non-cash consideration), as determined in good faith by the Board of
Directors or by the chief financial or accounting officer of the Company, of
the shares and assets subject to such Asset Disposition and at least 80% of
the consideration thereof received by the Company or such Restricted
Subsidiary is in the form of cash or cash equivalents. If the Company or any
Restricted Subsidiary engages in an Asset Disposition, the Company may use the
Net Available Cash from such Asset Disposition, within one year after the
later of such Asset Disposition and the receipt of such Net Available Cash
(such later date, the "Trigger Date"), to (i) permanently repay or prepay any
then outstanding Senior Indebtedness of the Company or any Restricted
Subsidiary or (ii) invest in or acquire (or enter into a legally binding
commitment to invest in or acquire) Additional Assets; provided that the
transaction subject to any such commitment be consummated within 180 days
after the date of such commitment. If any such legally binding commitment to
invest in or acquire such Additional Assets is terminated, then the Company
may, within 90 days of such termination or the Trigger Date, whichever is
later, use such Net Available Cash as provided in clause (i) or (ii) (without
giving effect to the parenthetical contained in such clause (ii)) above. The
amount of such Net Cash Proceeds not so used as set forth above in this
paragraph constitutes "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0
million, the Company will, within 30 days thereof, apply such aggregate Excess
Proceeds (1) first, to make an Offer to Purchase outstanding Notes at 100% of
their principal amount plus accrued and unpaid interest and Special Interest,
if any, to the date of purchase and, to the extent required by the terms
thereof, any other Indebtedness of the Company that is pari passu with the
Notes at a price no greater than 100% of the principal amount thereof plus
accrued interest to the date of purchase and (2) second, to the extent of any
remaining Excess Proceeds following the completion of the Offer to Purchase,
to any other use as determined by the Company which is not otherwise
prohibited by the Indenture. Upon the completion of an Offer to Purchase
pursuant to this paragraph, the amount of Excess Proceeds shall be reset to
zero.
For the purposes of this covenant, the following are deemed to
be cash or cash equivalents: (x) the assumption of Indebtedness of the Company
or any Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such
Asset Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash.
Limitation on Affiliate Transactions. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, enter into or permit
to exist any transaction (including the purchase, sale, lease or exchange of
any property or employee compensation arrangements) with any Affiliate of the
Company (an "Affiliate Transaction") unless the terms thereof (1) are no less
favorable to the Company or such Restricted Subsidiary than those that could
be obtained at the time of such transaction in arm's-length dealings with a
Person who is not such an Affiliate and (2) if such Affiliate Transaction
involves an amount in excess of $2.0 million (i) are set forth in writing and
(ii) have been approved by a majority of the members of the Board of Directors
having no personal stake in such Affiliate Transaction. If such Affiliate
Transaction involves an amount in excess of $10.0 million, a fairness opinion
must be obtained from an internationally recognized investment banking firm,
appraisal firm or auditing firm with respect to the financial terms of such
Affiliate Transaction.
(b) The provisions of the foregoing paragraph (a) shall not
prohibit or apply to (i) any Restricted Payment permitted to be paid pursuant
to the covenant described under "--Limitation on Restricted Payments," (ii)
loans or advances to employees in the ordinary course of business and in an
amount that does not exceed $1.0 million in the aggregate outstanding at any
one time, (iii) the payment of reasonable fees to directors of the Company and
its Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries, (iv) any Affiliate Transaction between the Company
and a Restricted Subsidiary or between Restricted Subsidiaries, (v) any
issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors, (vi) the grant of stock options or similar rights to employees and
directors of the Company pursuant to plans approved by the Board of Directors
and (vii) any Affiliate Transaction entered into pursuant to agreements with
labor unions.
Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries. The Company shall not sell or otherwise dispose of
any Capital Stock of a Restricted Subsidiary, and shall not permit any such
Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise
dispose of any of its Capital Stock except (i) to the Company or a Wholly
Owned Subsidiary, (ii) the issuance and sale of directors' qualifying shares,
(iii) if, immediately after giving effect to any such issuance, sale or other
disposition, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and any Investment in such Person remaining after giving effect
thereto would have been permitted to be made under the covenant described
under "--Limitation on Restricted Payments" if made on the date of such
issuance, sale or other disposition, (iv) if such sale or other disposition is
of all or any portion of the Capital Stock of a Restricted Subsidiary and the
Net Available Cash received from such sale or other disposition are applied in
accordance with the covenant "--Limitation on Sales of Assets and Subsidiary
Stock" or (v) to the extent the ownership by a Person other than the Company
or a Wholly Owned Subsidiary is required by applicable law and except that any
Restricted Subsidiary may issue or permit to exist (x) Preferred Stock issued
to and held by the Company or a Wholly Owned Subsidiary; provided, however,
that upon either (A) the transfer or other disposition by the Company or such
Wholly Owned Subsidiary of any Preferred Stock so permitted to a Person other
than the Company or another Wholly Owned Subsidiary or (B) such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary, the provisions of this
clause (x) will no longer be applicable to such Preferred Stock and such
Preferred Stock will be deemed to have been issued at the time of such
transfer or other disposition or such cessation; and (y) Preferred Stock
issued by a Person prior to the time such Person becomes a Restricted
Subsidiary (including by way of a merger or consolidation with another
Restricted Subsidiary), which Preferred Stock was not issued in anticipation
of and was outstanding prior to such transaction; provided, however, that on
the date of such acquisition and after giving effect thereto, the Company
would have been able to Incur at least $1.00 of additional Indebtedness
pursuant to clause (a) of the covenant described under "--Limitation on
Indebtedness."
Limitation on Guarantees by Restricted Subsidiaries. The
Company shall not permit any Restricted Subsidiary, directly or indirectly, to
Guarantee any Indebtedness of the Company which is pari passu with or
subordinate in right of payment to the Notes ("Guaranteed Indebtedness"),
unless (i) such Restricted Subsidiary simultaneously executes and delivers a
Subsidiary Guaranty of payment of the Notes by such Restricted Subsidiary and
(ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guaranty; provided that this paragraph shall not be
applicable to (1) any Guarantee by any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (2) Guarantees of Indebtedness under working capital facilities
of the Company in an aggregate principal amount not exceeding $50.0 million at
any time outstanding or, if less, the amount by which $150.0 million exceeds
the aggregate outstanding principal amount of Indebtedness of the Company
under clause (15) of paragraph (b) of the "Limitation on Indebtedness" which
is secured by a Lien. If the Guaranteed Indebtedness is (A) pari passu with
the Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari
passu with, or subordinated to, the Subsidiary Guarantee or (B) subordinated
to the Notes, then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guaranty at least to the extent that the
Guaranteed Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guaranty by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release
or discharge of the Guarantee which resulted in the creation of such Subsidiary
Guaranty, except a release or discharge by, or as a result of, payment under
such Guarantee.
Limitation on Liens. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, Incur or permit
to exist any Lien of any nature whatsoever on any of its properties other than
Permitted Liens, without effectively providing that the Notes shall be secured
equally and ratably with (or prior to) the obligations so secured for so long
as such obligations are so secured.
Limitation on Sale/Leaseback Transactions. The Company shall
not, and shall not permit any Restricted Subsidiary to, enter into any
Sale/Leaseback Transaction with respect to any property unless (i) the Company
or such Restricted Subsidiary would be entitled to (A) Incur Indebtedness in
an amount equal to the Attributable Debt with respect to such Sale/Leaseback
Transaction pursuant to the covenant described under "--Limitation on
Indebtedness" and (B) create a Lien on such property securing such
Attributable Debt without equally and ratably securing the Notes pursuant to
the covenant described under "--Limitation on Liens," or (ii) the
Sale/Leaseback Transaction is treated as an Asset Disposition and the Company
applies the proceeds of such transaction in compliance with the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock."
Merger and Consolidation. The Company shall not consolidate
with or merge with or into, or convey, transfer or lease, in one transaction
or a series of transactions, all or substantially all of its assets to, any
Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") shall be a Person organized and existing under the laws
of the United States, any state thereof or the District of Columbia and the
Successor Company (if not the Company) shall expressly assume, by an indenture
supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture; (ii) immediately after giving effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Subsidiary of the Company as a result of such
transaction as having been Incurred by such Successor Company or such
Subsidiary at the time of such transaction), no Default shall have occurred
and be continuing; (iii) immediately after giving effect to such transaction,
the Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness;" (iv) immediately after giving effect to such
transaction, the Successor Company shall have Consolidated Net Worth in an
amount that is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; and (v) the Company shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that (A) such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture, (B) the Indenture
and the Notes will constitute valid and legally binding obligations of the
Successor Company and (C) the Indenture is enforceable against the Successor
Company in accordance with its terms.
The Successor Company shall be the successor to the Company and
shall succeed to, and be substituted for, and be bound by and obligated to pay
the obligations of, and may exercise every right and power of, the Company
under the Indenture, but the predecessor Company in the case of a conveyance,
transfer or lease shall not be released from the obligation to pay the
principal of, interest on, and Special Interest, if any, with respect to, the
Notes.
The Company shall have the right, without the consent of the
Holders, to redeem the Notes in whole, but not in part, at a redemption price
equal to 100% of the unpaid principal amount of the outstanding Notes plus the
Applicable Premium as of, and accrued and unpaid interest and Special Interest
if any, to, the date of redemption in the event that the Company enters into a
binding agreement to consummate any transaction which would be prohibited by
this covenant. The redemption date must occur prior to or simultaneously with
the consummation of such prohibited transaction. Notice of redemption will be
mailed to each Noteholder at such Noteholder's address of record not less than
30 days nor more than 60 days prior to the redemption date. On and after the
redemption date, interest will cease to accrue on the Notes.
Maintenance of Properties and Insurance. The Company will, and
will cause its Subsidiaries to, maintain or cause to be maintained in good
repair, working order and condition all properties used or useful in their
businesses; provided, however, that neither the Company nor any such
Subsidiary shall be prevented from discontinuing those operations or
suspending the maintenance of those properties which, in the reasonable
judgment of the Company, are no longer necessary or useful in the conduct of
the Company's business or that of its Subsidiaries. For so long as any property
is deemed to be useful to the conduct of the business of the Company or its
Subsidiaries, the Company shall, or shall cause such Subsidiaries to, maintain
appropriate insurance, in accordance with industry practice, on such
properties.
Application for Rating. The Company will, within 180 days after
the Issue Date, apply to Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group, to obtain a rating for the Notes.
SEC Reports. The Company shall file with the Trustee and
provide, or cause the Trustee to provide, holders of Notes, within 30 days
after it files with, or furnishes to, the SEC, copies of its annual report and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the SEC may by rules and regulations prescribe) which
the Company is required to file with the SEC pursuant to Section 13 or 15(d)
of the Exchange Act or is required to furnish to the SEC pursuant to the
Indenture.
Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act or otherwise report on an annual and quarterly basis on forms provided for
such annual and quarterly reporting pursuant to rules and regulations
promulgated by the SEC, the Indenture requires the Company to continue to file
with, or furnish to, the SEC (i) within 90 days after the end of each fiscal
year (or such shorter period as the SEC may in the future prescribe), annual
reports on Form 10-K (or any successor form) containing the information
required to be contained therein (or required in such successor form),
including annual financial statements audited by an internationally recognized
independent public accountant with respect to such year and prepared in
accordance with GAAP and all applicable exhibits, (ii) within 45 days after
the end of each of the first three fiscal quarters of each fiscal year (or
such shorter period as the SEC may in the future prescribe), reports on Form
10-Q (or any successor form) containing substantially the same information
required to be contained therein prepared in accordance with GAAP and (iii)
promptly from time to time after the occurrence of an event required to be
therein reported, such other reports on Form 8-K (or any successor form)
containing substantially the same information required to be contained therein.
Concurrently with the reports delivered pursuant to the
preceding paragraph, the Company is required to furnish the Trustee an
officer's certificate to the effect that such officer has conducted or
supervised a review of the activities of the Company and of performance under
the Indenture and that, to the knowledge of such officer, based on such
review, the Company has fulfilled all of its obligations under the Indenture
or, if there has been a default, specifying each default known to him, its
nature and status.
Listing of Notes on the AMEX. The Company has agreed to list
the Notes on the American Stock Exchange or on such other stock exchange or
market as the Common Stock is then principally traded no later than the
earliest to occur of (i) the effectiveness of the initial Exchange Offer
Registration Statement and (ii) the effectiveness of the initial Shelf
Registration Statement, provided that such Notes meet the minimum requirements
for listing on any such exchange or market, and, if applicable, to maintain
such listing for so long as any of the Notes is outstanding.
Events of Default
The following shall constitute "Events of Default" with respect
to the Notes: (i) failure to pay the principal of, premium, if any, on, or
Offer to Purchase repurchase amount, if any, with respect to, any Note when
such amounts become due and payable at maturity, upon acceleration,
redemption, tender for repurchase or otherwise; (ii) failure to pay interest
or Special Interest on the Notes when due, where such failure continues for a
30-day period; (iii) the failure by the Company to comply with its obligations
under "--Certain Covenants-Merger and Consolidation" above; (iv) the failure
by the Company to comply for 30 days after notice with any of its obligations
in the covenants described above under "Repurchase of Notes Upon a Change in
Control" or "Repurchase of Notes in Connection with Incurrence of Acquired
Indebtedness" (other than, in each case, a failure to purchase Notes) and
"--Certain Covenants" under "--Limitation on Indebtedness," "--Limitation on
Restricted Payments," "--Limitation on Restrictions on Distributions from
Restricted Subsidiaries," "--Limitation on Sales of Assets and Subsidiary
Stock (other than a failure to purchase Notes)," "--Limitation on Affiliate
Transactions," "--Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries," "--Limitation on Guarantees by Restricted
Subsidiaries," "--Limitation on Liens," "--Limitation on Sale/Leaseback
Transactions," "--Maintenance of Properties and Insurance," "--Application for
Rating," "--SEC Reports" or "--Listing of Notes on the AMEX;" (v) any
representation or warranty of the Company in the Indenture shall prove to have
been untrue in any material respect when made and such default continues for
the period and after the notice specified below, or a default in any material
respect in the observance or performance of any other covenant or agreement of
the Company in the Notes or the Indenture, in each case that continues for the
period and after the notice specified below; (vi) an event of default shall
have occurred and be continuing under any other evidence of Indebtedness of
the Company or any Significant Subsidiary (as defined in SEC Regulation S-X)
of the Company, whether such Indebtedness now exists or is created hereafter,
which event of default results in the acceleration of such Indebtedness which,
together with any such other Indebtedness so accelerated, aggregates more than
$15.0 million (the "cross acceleration provision"); (vii) any final judgment
or judgments for payment of money in excess of $15.0 million in the aggregate
shall be rendered against the Company or any Restricted Subsidiary and shall
remain unstayed, unsatisfied and undischarged for the period and after the
notice specified below; and (viii) certain events of bankruptcy, insolvency or
reorganization involving the Company or any Restricted Subsidiary. The Company
is required to deliver to the Trustee within 120 days after the end of each
fiscal year of the Company, an officer's certificate stating whether or not
the signatories know of any default by the Company under the Indenture and the
Notes and, if any default exists, describing such default.
A default under clause (iv), (v) or (vii) above or, with
respect to a Restricted Subsidiary that is not a Significant Subsidiary,
clause (viii) above, is not an Event of Default until the Trustee or the
holders of at least 25% in principal amount of the then outstanding Notes
notify the Company of the default and the Company does not cure the default
within 60 days with respect to clauses (v) or (vii), or within 30 days with
respect to clause (iv) or, with respect to a Restricted Subsidiary that is not
a Significant Subsidiary, clause (viii), after receipt of the notice. The
notice must specify the default, demand that it be remedied and state that the
notice is a "Notice of Default." If the holders of 25% or more in principal
amount of the then outstanding Notes request the Trustee to give such notice
on their behalf, the Trustee shall do so.
In case an Event of Default (other than an Event of Default
resulting from bankruptcy, insolvency or reorganization of the Company or a
Restricted Subsidiary that is a Significant Subsidiary) shall have occurred
and be continuing, the Trustee, by notice to the Company, or the holders of
25% or more of the principal amount of the Notes then outstanding, by notice
to the Company and the Trustee, may declare the principal amount of the Notes,
plus accrued and unpaid interest and Special Interest, if any, to be
immediately due and payable. In case an Event of Default resulting from
certain events of bankruptcy, insolvency or reorganization of the Company or a
Restricted Subsidiary that is a Significant Subsidiary shall occur, such
amounts shall be due and payable without any declaration or any act on the
part of the Trustee or the holders of the Notes. Such declaration of
acceleration may be rescinded and past defaults may be waived by the holders
of a majority of the principal amount of the Notes then outstanding upon
conditions provided in the Indenture, except a default in the payment of
principal, or interest on, or Special Interest, if any, with respect to, any
Note cannot be waived or amended without payment of the amount then due
otherwise than for the acceleration. Except to enforce the right to receive
payment when due of principal, premium, if any, interest, and Special
Interest, if any, no holder of a Note may institute any proceeding with
respect to the Indenture or the Notes or for any remedy thereunder unless such
holder has previously given to the Trustee written notice of a continuing
Event of Default and unless the holders of 25% or more of the principal amount
of the Notes then outstanding have requested the Trustee to institute
proceedings in respect of such Event of Default and have offered the Trustee
reasonable indemnity against loss, liability and expense to be thereby
incurred, the Trustee has failed so to act for 60 days after receipt of the
same and during such 60-day period the holders of a majority of the principal
amount of the Notes then outstanding have not given the Trustee a direction
inconsistent with the request. Subject to certain restrictions, the holders of
a majority in principal amount of the Notes then outstanding will have the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee. The Trustee, however, may refuse to follow any direction that
conflicts with law or the Indenture, that is unduly prejudicial to the rights
of any holder of a Note or that would involve the Trustee in personal
liability and the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
Modifications and Waivers of the Indenture
Supplemental indentures modifying or amending the Indenture may
be made by the Company and the Trustee with the consent of the holders of not
less than a majority in aggregate principal amount of the then outstanding
Notes; provided, however, that no such modification or amendment may, without
the consent of the holders of each Note affected thereby, (a) change the fixed
maturity of any Note, reduce the rate or extend the time of payment of interest
on, or Special Interest, if any, with respect to, any Note, reduce the
principal amount, or premium, if any, on, or Special Interest, if any, (in
each case, whether on redemption, repurchase or otherwise) with respect to,
any Note, change the time at which any Note may be redeemed as described under
"--Redemptions" above, impair the right of a holder to institute suit for
payment thereof, or change the place of payment of the Notes, or the currency
in which the Notes are payable or make any change in any Subsidiary Guaranty
that would adversely affect any holders of the Notes or (b) reduce the
percentage of Notes, the consent of the holders of which is required for any
modification or waiver. Without the consent of any holders of the Notes, the
Company and the Trustee may amend or supplement the Notes or the Indenture to
(i) provide for uncertificated Notes in addition to or in place of
certificated Notes, (ii) provide for the assumption of the Company's
obligations to holders of the Notes in the case of a merger or consolidation
or transfer of all or substantially all of the Company's assets, (iii) comply
with the TIA, or (iv) cure any ambiguity, defect or inconsistency, or make any
other change, in each case provided that such action does not materially
adversely affect the interests of the holders of the Notes.
The holders of a majority in aggregate principal amount of
outstanding Notes may waive any past default under the Indenture, except a
default in the payment of principal, premium, if any, interest or Special
Interest, if any, or default with respect to certain covenants under the
Indenture.
The consent of the holders of the Notes is not necessary under
the Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After the amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
Defeasance
The Company at any time may terminate all its obligations under
the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations
to register the transfer or exchange of the Notes, to replace mutilated,
destroyed, lost or stolen Notes and to maintain a registrar and paying agent
in respect of the Notes. The Company at any time may terminate its obligations
under "Redemptions," "Repurchase of Notes Upon a Change in Control" and under
the covenants described under "--Certain Covenants" (other than the covenant
described under "--Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Restricted
Subsidiaries, the judgment default provision, described under "--Events of
Default" above and the limitations contained in clauses (iii) and (iv) of the
first paragraph under "--Certain Covenants-Merger and Consolidation" above
("covenant defeasance").
The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option. If the
Company exercises its legal defeasance option, payment of the Notes may not be
accelerated because of an Event of Default with respect thereto. If the
Company exercises its covenant defeasance option, payment of the Notes may not
be accelerated because of an Event of Default specified in clause (iv), (v),
(vi), (vii) or (viii) (with respect only to Restricted Subsidiaries), under
"--Events of Default" above or because of the failure of the Company to comply
with clause (iii) or (iv) of the first paragraph under "--Certain
Covenants-Merger and Consolidation" above. In order to exercise either
defeasance option, the Company must irrevocably deposit in trust with the
Trustee money or U.S. Government Obligations for the payment of principal and
interest and Special Interest, if any, on the Notes to redemption or maturity,
as the case may be, and must comply with certain other conditions, including
delivery to the Trustee of (i) an Opinion of Counsel to the effect that (x)
holders of the Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance and will be
subject to federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance
had not occurred (and, in the case of legal defeasance only, such Opinion of
Counsel must be based on a ruling of the Internal Revenue Service or other
change in applicable federal income tax law) and (y) the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar law affecting creditors rights generally under any
United States federal or state law and that the Trustee has a perfected
security interest in such trust funds for the ratable benefit of the Holders
and (ii) an opinion of counsel in the Company's jurisdiction of incorporation
to the effect that holders of the Notes will not recognize income, gain or
loss for tax purposes in such jurisdiction as a result of such deposit and
defeasance and will be subject to taxes in such jurisdiction on the same
amounts and in the same manner and at the same time as would have been the
case if such deposit and defeasance had not occurred.
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future director, officer, employee, agent,
manager, stockholder or other affiliate, as such, of the Company shall have
any liability for any obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of the Notes by accepting a Note
waives and releases all such liability.
Transfer and Exchange
A holder may transfer or exchange the Notes in accordance with
the Indenture. The Company may require a holder to, among other things,
furnish appropriate endorsements and transfer documents and pay any taxes and
fees required by law or permitted by the Indenture.
The registered holder of a Note may be treated as the owner of
it for all purposes.
Delivery and Form
The Notes are issued in registered form.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received in respect
of any such claim as security or otherwise. Subject to the TIA, the Trustee
will be permitted to engage in other transactions; however, if it acquires any
conflicting interest, as described in the TIA, it must eliminate such conflict
or resign. The Trustee shall have a lien prior to the Notes on all money or
property held or collected by the Trustee or otherwise distributable to
holders of Notes (except money, securities or property held in trust to pay
principal and/or interest on particular Notes) to secure the Company's payment
and indemnity obligations to the Trustee.
Governing Law
The Indenture provides that it and the Notes will be governed
by the laws of the State of New York without regard to principles of conflict
of laws.
Certain Definitions
"Acquired Indebtedness" means Indebtedness of a Person existing
at the time such Person became a Restricted Subsidiary and not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary.
"Additional Assets" means (i) any property or assets utilized
in the airline business or any business that is substantially related,
ancillary or complementary thereto (including an Investment in any Person
engaged in any such business); (ii) the Capital Stock of a Person that becomes
a Restricted Subsidiary as a result of the acquisition of such Capital Stock
by the Company or another Restricted Subsidiary or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a
Restricted Subsidiary.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under "--Certain
Covenants-Limitation on Restricted Payments", "--Certain Covenants--Limitation
on Affiliate Transactions", and "--Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial
owner of Capital Stock representing 10% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Capital Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Aircraft Acquisition Debt" means Indebtedness Incurred by the
Company or any of its Restricted Subsidiaries in connection with an
acquisition of aircraft, related engines or spare engines, spare parts or
other related equipment (including ground equipment) which Indebtedness either
constitutes all or part of the purchase price thereof, or is Incurred prior
to, at the time of or within one year after the acquisition thereof for the
purpose of financing or refinancing part of the purchase price thereof, and
which equipment was not owned by the Company or a Restricted Subsidiary of the
Company prior to such purchase provided, however, that in either case the
proportion (expressed as a percentage) of such Indebtedness to the purchase
price or Appraised Value of such equipment at the time of such financing does
not exceed 90% (except that the foregoing limitation shall not apply to
aircraft under order or option on the Issue Date for which vendor financing
(including by way of vendor guarantee) is initially obtained).
"Applicable Premium" means, with respect to a Note at any
redemption or repurchase date, the greater of (i) 1.0% of the principal amount
of such Note and (ii) the excess of (A) the present value on such redemption
or repurchase date of the principal amount of such Note plus all required
interest and Special Interest payments due on such Note through its Stated
Maturity, such present value computed using a discount rate equal to the
Treasury Rate plus 50 basis points over (B) the principal amount of such Note.
"Appraised Value" means the fair market sale value as of a
specified date of the appraised assets that would be obtained in an arm's
length transaction between an informed and willing seller under no compulsion
to sell and an informed and willing buyer under no compulsion to buy, as
determined by an Independent Appraiser.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means
of a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition") in one transaction or a series
of related transactions, of (i) any shares of Capital Stock of a Restricted
Subsidiary (other than directors' qualifying shares or shares required by
applicable law to be held by a Person other than the Company or a Restricted
Subsidiary), (ii) all or substantially all the assets of any division or line
of business of the Company or any Restricted Subsidiary or (iii) sales of
aircraft, engines and related equipment (and leasehold interests therein) and
any other assets of the Company or any Restricted Subsidiary outside of the
ordinary course of business of the Company or such Restricted Subsidiary;
provided that "Asset Disposition" shall not include (A) any sale, lease,
transfer or other disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Restricted Subsidiary, (B) any
sale, lease, transfer or other disposition that constitutes a Restricted
Payment permitted by the covenant described under "--Certain
Covenants-Limitation on Restricted Payments", (C) any sale, lease, transfer or
other dispositions of (i) inventory, (ii) Receivables or (iii) other current
assets in the ordinary course of business, (D) any sale, lease, transfer or
other dispositions of assets for consideration at least equal to the fair
market value of the assets sold or disposed of, to the extent that the
consideration received would constitute Additional Assets, (E) any sale,
lease, transfer or other disposition of the Company's direct or indirect
interest in Worldspan, (F) any sale, lease, transfer or other disposition of
aircraft and related engines, spare parts and equipment (including ground
equipment) or leasehold interests therein which are obsolete or which have
been grounded and held for resale or are of a type no longer used by the
Company in the ordinary course of business, (G) any Sale/Leaseback Transaction
permitted by clause (i) of the "Sale and Leaseback" covenant or (H) any sale,
lease, transfer or other disposition of maintenance bases, hangars and engine
shops.
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with
respect to any Indebtedness or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption or similar payment with respect to such
Preferred Stock multiplied by the amount of such payment by (ii) the sum of
all such payments.
"Board of Directors" means the Board of Directors of the
Company or any committee of such board duly authorized to act in respect of
any particular matter.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a capital lease for financial
reporting purposes in accordance with GAAP, and the amount of Indebtedness
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with GAAP; and the Stated Maturity thereof
shall be the date of the last payment of rent or any other amount due under
such lease prior to the first date upon which such lease may be terminated by
the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"Change in Control" means the occurrence of any of the
following events: (i) any person (including any entity or group deemed to be a
"person" under Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) is or
becomes the direct or indirect beneficial owner (as determined in accordance
with Rule 13d-3 under the Exchange Act) of shares of the Company's Capital
Stock representing greater than 50% of the total voting power of all shares of
Capital Stock of the Company entitled to vote in the election of directors
under ordinary circumstances or to elect a majority of the Board of Directors,
(ii) the Company sells, transfers or otherwise disposes of all or
substantially all of its assets, (iii) when, during any period of 12
consecutive months after the Issue Date, individuals who at the beginning of
any such 12-month period constituted the Board of Directors (together with any
new directors whose election by such Board or whose nomination for election by
the stockholders of the Company was approved by a vote of a majority of the
directors still in office entitled to vote with respect to such nomination who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved, but excluding any of the
individuals who at the beginning of such 12-month period constituted such
Board but who ceased to be a member of the Board pursuant to the Company's
mandatory retirement policy as in effect as of the Issue Date), cease for any
reason to constitute a majority of the Board of Directors then in office or
(iv) the date of the consummation of the merger or consolidation of the
Company with another corporation where the stockholders of the Company,
immediately prior to the merger or consolidation, would not beneficially own,
immediately after the merger or consolidation, shares entitling such
stockholders to 50% or more of all votes (without consideration of the rights
of any class of stock to elect directors by a separate class vote) to which
all stockholders of the corporation issuing cash or securities in the merger
or consolidation would be entitled in the election of directors or where
members of the Board of Directors, immediately prior to the merger or
consolidation, would not, immediately after the merger or consolidation,
constitute a majority of the board of directors of the corporation issuing
cash or securities in the merger or consolidation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of EBITDA for the period of the
most recent four consecutive fiscal quarters ending prior to the date of such
determination for which financial statements have been made publicly available
to (ii) Consolidated Fixed Charges for such four fiscal quarters; provided,
however, that
(a) if the Company or any Restricted Subsidiary has
Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need
to calculate the Consolidated Coverage Ratio is an Incurrence of
Indebtedness, or both, EBITDA and Consolidated Fixed Charges for
such period shall be calculated after giving effect on a pro
forma basis to such Indebtedness as if such Indebtedness had been
Incurred on the first day of such period and the discharge of any
other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period,
(b) if the Company or any Restricted Subsidiary has
repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of such period or if any
Indebtedness is to be repaid, repurchased, defeased or otherwise
discharged (in each case other than Indebtedness Incurred under
any revolving credit facility unless such Indebtedness has been
permanently repaid and has not been replaced) on the date of the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio, EBITDA and Consolidated Fixed Charges for such
period shall be calculated on a pro forma basis as if such
discharge had occurred on the first day of such period,
(c) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to
the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if
negative), directly attributable thereto for such period and
Consolidated Fixed Charges for such period shall be reduced by an
amount equal to the Consolidated Fixed Charges directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is
sold, the Consolidated Fixed Charges for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to
the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such
disposition),
(d) if since the beginning of such period the
Company or any Restricted Subsidiary (by merger or otherwise)
shall have made an Investment in any Restricted Subsidiary (or
any Person which becomes a Restricted Subsidiary) or an
acquisition of assets, including any acquisition of assets
occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or
substantially all of an operating unit of a business, EBITDA and
Consolidated Fixed Charges for such period shall be calculated
after giving pro forma effect thereto (including the Incurrence
of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period, and
(e) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary
since the beginning of such period) shall have made any Asset
Disposition, any Investment or acquisition of assets that would
have required an adjustment pursuant to clause (c) or (d) above
if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Fixed Charges for such period
shall be calculated after giving pro forma effect thereto as if
such Asset Disposition, Investment or acquisition occurred on the
first day of such period.
For purposes of this definition, whenever pro forma effect is
to be given to an acquisition of assets, the amount of income or earnings
relating thereto and the amount of Consolidated Fixed Charges associated with
any Indebtedness Incurred in connection therewith, the pro forma calculations
shall be determined in good faith by a responsible financial or accounting
officer of the Company. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest of such Indebtedness shall
be calculated as if the rate in effect on the date of determination had been
the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of one year).
"Consolidated Fixed Charges" means, for any period, the sum of
(i) the Consolidated Interest Expense for such period plus (ii) dividends
declared during such period with respect to Preferred Stock that is
Disqualified Stock.
"Consolidated Interest Expense" means, for any period, the
total interest expense of the Company and its consolidated Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP,
plus, to the extent not included in such total interest expense, and to the
extent incurred by the Company or its Restricted Subsidiaries, without
duplication, (i) interest expense attributable to capital leases, (ii)
amortization of debt discount and debt issuance cost, (other than in respect
of the Notes) (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) net costs associated with
Hedging Obligations (including amortization of fees), (vii) interest incurred
in connection with Investments in discontinued operations, (viii) interest
accruing on any Indebtedness of any other Person to the extent such
Indebtedness is Guaranteed by (or secured by the assets of) the Company or any
Restricted Subsidiary and (ix) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income
of the Company and its consolidated Subsidiaries; provided, however, that
there shall not be included in such Consolidated Net Income:
(a) any net income of any Person (other than the
Company) if such Person is not a Restricted Subsidiary, except
that (i) subject to the exclusion contained in clause (d) below,
the Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted
Subsidiary, to the limitations contained in clause (c) below) and
(ii) the Company's equity in a net loss of any such Person for
such period shall be included in determining such Consolidated
Net Income;
(b) any net income (or loss) of any Person acquired
by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition;
(c) any net income of any Restricted Subsidiary if
such Restricted Subsidiary is subject to restrictions, directly
or indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (i) subject to the
exclusion contained in clause (d) below, the Company's equity in
the net income of any such Restricted Subsidiary for such period
shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to
another Restricted Subsidiary, to the limitation contained in
this clause) and (ii) the Company's equity in a net loss of any
such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income;
(d) any gain or loss realized upon the sale or
other disposition of any assets of the Company or its
consolidated Subsidiaries (including pursuant to any
sale-and-leaseback arrangement) which is not sold or otherwise
disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Capital
Stock of any Person;
(e) extraordinary, unusual and non-recurring gains
or losses; and
(f) the cumulative effect of a change in accounting
principles since the Issue Date. Notwithstanding the foregoing,
for the purposes of the covenant described under "Certain
Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends,
repayments of loans or advances or other transfers of assets
from Unrestricted Subsidiaries to the Company or a Restricted
Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such
covenants pursuant to clause (a)(3)(C) thereof.
"Consolidated Net Worth" means the total of the amounts shown
on the balance sheet of the Company and its consolidated Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of
the most recent fiscal quarter of the Company for which financial statements
have been made publicly available prior to the taking of any action for the
purpose of which the determination is being made, as (i) the par or stated
value of all outstanding Capital Stock of the Company plus (ii) paid-in
capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B)
only to the extent otherwise included in the amount specified in clauses (i),
(ii) or (iii) of this definition, any amounts attributable to Disqualified
Stock. "Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement to
which such Person is a party or a beneficiary designed to protect such Person
against fluctuations in currency values and not for the purpose of
speculation.
"Default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable) or upon the happening of
any event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise prior to the first anniversary of the Stated Maturity
of the Notes, (ii) is convertible or exchangeable for Indebtedness with a
Stated Maturity prior to the first anniversary of the Stated Maturity of the
Notes or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part, in each case on or prior to the first
anniversary of the Stated Maturity of the Notes; provided, however, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase
or redeem such Capital Stock upon the occurrence of an "asset disposition" or
"change of control" occurring prior to the first anniversary of the Stated
Maturity of the Notes shall not constitute Disqualified Stock if the "asset
disposition" or "change of control" provisions applicable to such Capital
Stock are not more favorable to the holders of such Capital Stock than the
provisions described under "--Certain Covenants--Limitation on Sales of Assets
and Subsidiary Stock" and "--Repurchase of Notes Upon Change in Control".
"EBITDA" for any period means the sum of Consolidated Net
Income, plus Consolidated Interest Expense plus the following to the extent
deducted in calculating such Consolidated Net Income: (a) all income tax
expense of the Company and its consolidated Restricted Subsidiaries, (b)
depreciation expense of the Company and its consolidated Restricted
Subsidiaries, (c) amortization expense of the Company and its consolidated
Restricted Subsidiaries (excluding amortization expense attributable to a
prepaid cash item that was paid in a prior period) and (d) all other noncash
charges of the Company and its consolidated Restricted Subsidiaries (excluding
any such noncash charge to the extent that it represents an accrual of or
reserve for cash expenditures in any future period), in each case for such
period. Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, and the depreciation and amortization and noncash
charges of, a Restricted Subsidiary shall be added to Consolidated Net Income
to compute EBITDA only to the extent (and in the same proportion) that the net
income of such Restricted Subsidiary was included in calculating Consolidated
Net Income and only if a corresponding amount would be permitted at the date
of determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fuel Protection Agreements" means in respect to a Person any
fuel protection agreement or other financial agreement or arrangement designed
to protect such Person against fluctuations in market prices of aircraft fuels
and not for the purpose of speculation.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those
set forth in (i) the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants, (ii)
statements and pronouncements of the Financial Accounting Standards Board,
(iii) such other statements by such other entity as approved by a significant
segment of the accounting profession and (iv) the rules and regulations of the
SEC governing the inclusion of financial statements (including pro forma
financial statements) in periodic reports required to be filed pursuant to
Section 13 of the Exchange Act, including opinions and pronouncements in staff
accounting bulletins and similar written statements from the accounting staff
of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any Person
and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well,
to purchase assets, goods, securities or services, to take-or-pay or to
maintain financial statement condition or otherwise) or (ii) entered into for
the purpose of assuring in any other manner the obligee of such Indebtedness
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); provided, however, that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary
course of business. The term "Guarantee" used as a verb has a corresponding
meaning. The term "Guarantor" shall mean any Person Guaranteeing any
obligation.
"Hedging Obligations" of any Person means the obligations of
such Person pursuant to any Interest Rate Agreement, Fuel Protection Agreement
or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note
is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock
of a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Subsidiary at the time it becomes a Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning. The
accretion of principal of a non-interest bearing or other discount security
shall be deemed the Incurrence of Indebtedness. Neither the accrual of
interest, the accretion of original issue discount or fluctuations in exchange
rates of currencies shall be considered an Incurrence of Indebtedness. Any
change in GAAP that results in an obligation of such Person that exists at
such time becoming Indebtedness shall not be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication): (a) the principal of and premium (if
any) in respect of (i) indebtedness of such Person for money borrowed and (ii)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable,
including, in each case, any premium on such indebtedness to the extent such
premium has become due and payable;
(b) all Capital Lease Obligations of such Person;
(c) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention agreement
(but excluding trade accounts payable arising in the ordinary course of
business);
(d) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (i) through (iii)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following receipt by such Person of a demand for reimbursement following
payment on the letter of credit);
(e) the amount of all obligations of such Person with respect to
the redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, the liquidation preference with
respect to, any Preferred Stock (but excluding, in each case, any accrued
dividends);
(f) all obligations of the type referred to in clauses (a)
through (e) above of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee;
(g) all obligations of the type referred to in clauses (i)
through (vi) above of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation so secured;
and (viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The "amount" or "principal amount" of Indebtedness at any time
of determination as used herein represented by (a) any contingent
Indebtedness, shall be the maximum principal amount thereof, (b) any
Indebtedness issued at a price that is less than the principal amount at
maturity thereof, shall be the amount of the liability in respect thereof
determined in accordance with GAAP and (c) any Disqualified Stock, shall be
the maximum fixed redemption or repurchase price in respect thereof.
"Interest Rate Agreement" means in respect of a Person any
interest rate swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect such Person against fluctuations
in interest rates and not for the purpose of speculation.
"Investment" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary course of
business that are recorded as accounts receivable on the balance sheet of the
lender) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of transfer of cash
or other property to others or any payment for property or other services for
the account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such Person. For
purposes of the definition of "Unrestricted Subsidiary", the definition of
"Restricted Payment" and the covenant described under "--Certain
Covenants-Limitation on Restricted Payments", (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of any Subsidiary of
the Company at the time that such Subsidiary is designated an Unrestricted
Subsidiary; provided, however, that upon a redesignation of such Subsidiary as
a Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at the
time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation; and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally
issued.
"Legal Holiday" means a Saturday, Sunday or any other day on
which banks located in New York City or the city and state of the Trustee's
corporate trust office as of the Issue Date are authorized or obligated by law
to remain closed.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or
other title retention agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash
payments received therefrom (including any cash payments received by way of
deferred payment of principal pursuant to a note or installment receivable or
otherwise and proceeds from the sale or other disposition of any securities
received as consideration, but only as and when received, but excluding any
other consideration received in the form of assumption by the acquiring Person
of indebtedness or other obligations relating to such properties or assets or
received in any other noncash form), in each case net of (i) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred,
and all Federal, state, provincial, foreign and local taxes required to be
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such assets, or
which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law, be repaid out of the proceeds from
such Asset Disposition, (iii) all distributions and other payments required to
be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition and (iv) the deduction of appropriate amounts
provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets disposed in such
Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition. "Net Cash Proceeds" means, with respect to any
issuance or sale of Capital Stock, the cash proceeds of such issuance or sale
net of attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultant and other fees
actually incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase all or a pro
rata portion, as the case may be, of the Notes by the Company from the Holders
commenced by the mailing (by first class mail, postage prepaid) by the Company
(or, if requested by the Company on at least five Business Days prior notice
to the Trustee and at the Company's expense, by the Trustee) of a notice to
each Holder (and, if mailed by the Company, to the Trustee) at such Holder's
address appearing in the Note register, stating: (i) the covenant pursuant to
which the offer is being made and that all Notes validly tendered will be
accepted for payment on a pro rata basis; (ii) the purchase price and the date
of purchase (which shall be a Business Day no earlier than 30 days nor later
than 60 days from the date such notice is mailed) (the "Payment Date"); (iii)
that any Note not tendered will continue to accrue interest pursuant to its
terms; (iv) that, unless the Company defaults in the payment of the purchase
price, any Note accepted for payment pursuant to the Offer to Purchase shall
cease to accrue interest on and after the Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Offer to Purchase will be
required to surrender the Note, together with the form entitled "Option of the
Holder to Elect Purchase" attached to or on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date (or, if such day is a Legal Holiday, on the next subsequent day which is
not a Legal Holiday), and such Holder shall be entitled to receive from the
Paying Agent a non-transferable receipt of deposit evidencing such deposit;
(vi) that, unless the Company defaults in making the payment of the purchase
price or shall otherwise, in its sole discretion, consent thereto, Holders
will be entitled to withdraw their election only if the Trustee receives, not
later than the close of business on the fifth Business Day immediately
preceding the Payment Date, a telegram, facsimile transmission or letter
setting forth the name of such Holder, the principal amount of Notes delivered
for purchase and a statement that such Holder is withdrawing his election to
have such Notes purchased; and (vii) that Holders whose Notes are being
purchased only in part will be issued new Notes equal in principal amount to
the unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Company shall place such notice in a financial
newspaper of general circulation in New York City. No failure of the Company
to give the foregoing notice shall limit any Holder's right to exercise a
repurchase right. On the Payment Date, the Company shall (i) accept for
payment on a pro rata basis Notes or portions thereof tendered pursuant to an
Offer to Purchase; (ii) deposit with the Trustee money sufficient to pay the
purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions
thereof so accepted together with an officers' certificate specifying the
Notes or portions thereof accepted for payment by the Company. The Trustee
shall promptly mail to the Holders of Notes so accepted payment in an amount
equal to the purchase price, and the Trustee shall promptly authenticate, and
the Company shall promptly execute and mail (or cause to be mailed) to such
Holders a new Note equal in principal amount to any unpurchased portion of the
Note surrendered; provided that each Note purchased and each new Note issued
shall be in a principal amount of $1,000 or integral multiples thereof;
provided further that if the Payment Date is between a regular record date and
the next succeeding interest payment date, Notes to be repurchased must be
accompanied by payment of an amount equal to the interest and Special
Interest, if any, payable on such succeeding interest payment date on the
principal amount to be repurchased, and the interest on the principal amount
of the Note being repurchased, and Special Interest, if any, with respect
thereto, will be paid on such next succeeding interest payment date to the
registered holder of such Note on the immediately preceding record date. A
Note repurchased on an interest payment date need not be accompanied by any
such payment, and the interest on the principal amount of the Note being
repurchased and Special Interest, if any, with respect thereto, will be paid
on such interest payment date to the registered holder of such Note on the
corresponding record date. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The
Trustee shall act as the Paying Agent for an Offer to Purchase. The Company
will comply with Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Company is required to repurchase Notes
pursuant to an Offer to Purchase. Both the notice of the Company and the
notice of the Holder having been given as specified above, the Notes so to be
repurchased shall, on the Payment Date become due and payable at the purchase
price applicable thereto and from and after such date (unless the Company
shall default in the payment of such purchase price) such Notes shall cease to
bear interest. If any Note shall not be paid upon surrender thereof for
repurchase, the principal shall, until paid, bear interest from the Payment
Date at the rate borne by such Note. Any Note which is to be submitted for
repurchase only in part shall be delivered pursuant to the above provisions
with (if the Company or Trustee so requires) due endorsement by, or a written
instrument of transfer in form satisfactory to the Company and the Trustee
duly executed by, the Holder thereof or such Holder's attorney duly authorized
in writing.
"Payment Date" with respect to any Offer to Purchase, has the
meaning specified in the definition herein of Offer to Purchase.
"Permitted Investment" means an Investment by the Company or
any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a
Person that will, upon the making of such Investment, become a Restricted
Subsidiary; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary; (iii)
Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary trade
terms; provided, however, that such trade terms may include such concessionary
trade terms as the Company or any such Restricted Subsidiary deems reasonable
under the circumstances; (v) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary in an aggregate amount outstanding at any time of not
more than $1.0 million; (vii) any Investment arising as a result of any
Hedging Obligations; (viii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to
the Company or any Restricted Subsidiary or in satisfaction of judgments; (ix)
any Investment to the extent such Investment represents the non-cash portion
of the consideration received for an Asset Disposition as permitted pursuant
to the covenant described under "--Certain Covenants-Limitation on Sales of
Assets and Subsidiary Stock" and (x) Investments in the normal course of
business in any Persons the primary business of which is substantially
related, ancillary or complementary to the airline business.
"Permitted Liens" means, with respect to any Person,
(a) Liens existing or securing Indebtedness existing (or for
which a written commitment has been made on or prior to the Issue Date) on the
Issue Date;
(b) Liens granted on or after the Issue Date in favor of the
holders of the Notes or the Exchange Notes;
(c) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company to secure Indebtedness
owing to the Company by such Restricted Subsidiary;
(d) Liens for employee wages and pledges or deposits by such
Person under worker's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of
such Person or deposits of cash or United States government bonds to secure
surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business;
(e) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings or other Liens arising out of judgments or
awards against such Person with respect to which such Person shall then be
proceeding with an appeal or other proceedings for review;
(f) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings;
(g) Liens in favor of issuers of surety bonds or letters of
credit issued pursuant to the request of and for the account of such Person in
the ordinary course of business; provided, however, that such letters of
credit do not constitute Indebtedness;
(h) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses, rights-of-way, sewers,
electric lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real property or Liens
incidental to the conduct of the business of such Person or to the ownership
of its properties which were not Incurred in connection with Indebtedness and
which do not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the business of
such Person;
(i) any Lien securing Aircraft Acquisition Debt, which Lien is
Incurred when such Indebtedness is Incurred and which Lien does not extend to
property other than aircraft, related engines or spare engines, spare parts or
related equipment (including ground equipment) financed thereby;
(j) Liens on property or shares of Capital Stock of another
Person at the time such other Person becomes a Subsidiary of such Person;
provided, however, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of, such other Person becoming such a
Subsidiary; provided further, however, that such Lien may not extend to any
other property owned by such Person or any of its Subsidiaries;
(k) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
merger or consolidation with or into such Person or a Subsidiary of such
Person; provided, however, that such Liens are not created, incurred or
assumed in connection with, or in contemplation of, such acquisition; provided
further, however, that the Liens may not extend to any other property owned by
such Person or any of its Subsidiaries;
(l) Liens securing Hedging Obligations permitted under the
Indenture;
(m) any Lien or pledge created or subsisting in the ordinary
course of business over documents of title, insurance policies or sale
contracts in relation to commercial goods to secure the purchase price thereof;
(n) Liens to secure any Refinancing (or successive Refinancings)
as a whole, or in part, of any Indebtedness secured by any Lien referred to in
clauses (a), (i), (j), (k) and (r);provided, however, that (x) such new Lien
shall be limited to all or part of the same property that secured the original
Lien (plus improvements to or on such property) and (y) the Indebtedness
secured by such Lien at such time is not increased to any amount greater than
the sum of (A) the outstanding principal amount, or, if greater, committed
amount of the Indebtedness described under clause (a), (i), (j), (k) and (r)
at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any fees and expenses, including premiums, related to such
Refinancing;
(o) Liens with respect to Indebtedness permitted pursuant to
clauses (b)(5), (b)(12) or (b)(16) of "--Certain Covenants-Limitation on
Indebtedness" above;
(p) Liens securing any future interest payable with respect to
any Indebtedness on cash and cash equivalents which constituted a portion of
the net proceeds to the Company or a Restricted Subsidiary from the issuance
of such Indebtedness;
(q) Liens securing Indebtedness or other obligations of a
Subsidiary of such Person owing to such Person or a wholly owned Subsidiary of
such Person;
(r) Liens on Receivables (or on the Capital Stock and assets of
any special purpose Subsidiary formed solely for the purpose of effecting a
Receivables based financing transaction) securing Indebtedness permitted under
clause (b)(15) of the covenant described under "--Certain Covenants-Limitation
on Indebtedness" above; and
(s) any judgment Lien, unless the judgment it secures shall not,
within sixty (60) days after the entry thereof, have been discharged, vacated
or reversed or the execution thereof stayed pending appeal, or shall not have
been discharged, vacated or reversed within sixty (60) days after the
expiration of any such stay.
"Person" means any individual, corporation, partnership,
limited liability issuer, joint venture, association, joint-stock issuer,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any
Person means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares of Capital Stock of any other class of
such Person.
"Principal" of a Note means the principal of the Note plus the
premium, if any, payable on the Note which is due or overdue or is to become
due at the relevant time.
"Public Equity Offering" means an underwritten primary public
offering of common stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Receivables" means accounts receivables, chattel paper,
instruments, documents or general intangibles evidencing or relating to the
right to payment of money and other similar assets, in each case, relating to
such receivables, including any interest in merchandise or goods, the sale or
lease of which gave rise to such receivables, related contractual rights,
guarantees, insurance proceeds, collections, other related assets and proceeds
of all of the foregoing.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue other Indebtedness in exchange for, such Indebtedness. "Refinanced"
or "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of the Company or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with the Indenture, including Indebtedness
that Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the
direct or indirect holders of its Capital Stock (other than dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock) and dividends or distributions payable solely to the Company or a
Restricted Subsidiary, and other than pro rata dividends or other
distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to
minority stockholders (or owners of an equivalent interest in the case of a
Subsidiary that is an entity other than a corporation)), (ii) the purchase,
redemption or other acquisition or retirement for value of any Capital Stock
of the Company held by any Person or of any Capital Stock of a Restricted
Subsidiary held by any Affiliate of the Company (other than a Restricted
Subsidiary and other than pro rata purchases, redemptions, acquisitions or
retirements made by a Subsidiary that is not a Wholly-Owned Subsidiary),
including the exercise of any option to exchange any Capital Stock (other than
into Capital Stock of the Company that is not Disqualified Stock), (iii) the
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition) or (iv) the making of any Investment in any Person (other than a
Permitted Investment). Any purchase or redemption of Capital Stock by an
employee stock ownership or benefit plan shall not constitute a Restricted
Payment except to the extent, if any, that such purchase or redemption is
financed by the Company or its Restricted Subsidiaries.
"Restricted Subsidiary" means any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" of any Person means (i) Indebtedness of
such Person, whether outstanding on the Issue Date or thereafter Incurred and
(ii) accrued interest (including interest accruing on or after the filing of
any petition in bankruptcy or for reorganization relating to the Company to
the extent post-filing interest is allowed in such proceeding) in respect of
(A) indebtedness for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable unless, in the case of (i) and (ii), in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are subordinate in right of
payment to the Notes; provided, however, that Senior Indebtedness shall not
include (1) any obligation of such Person to any Subsidiary of such Person,
(2) any liability for Federal, state local or other taxes owed or owing by
such Person, (3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities), (4) any Indebtedness of such Person
(and any accrued interest in respect thereof) which is subordinate or junior
in any respect to any other Indebtedness or other obligation of such Person or
(5) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Indenture.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of
the total voting power of shares of Capital Stock or other interests
(including membership or partnership interests) entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries
of such Person or (iii) one or more Subsidiaries of such Person.
"Subsidiary Guaranty" means the Guarantee by a Restricted
Subsidiary of the Company's obligations with respect to the Notes. The form of
such Guarantee is provided for in the Indenture. Each Subsidiary Guaranty will
be limited in amount to an amount not to exceed the maximum amount that can be
guaranteed by the applicable Restricted Subsidiary without rendering the
Subsidiary Guaranty, as it relates to such Restricted Subsidiary, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer
or similar laws affecting the rights of creditors generally.
"Temporary Cash Investments" means any of the following: (i)
any investment in U.S. Government Obligations; (ii) investments in time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank or trust
issuer which is organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States, and
which bank or trust issuer has capital, surplus and undivided profits
aggregating in excess of $50.0 million (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money market fund sponsored by a registered broker dealer or mutual fund
distributor; (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above;
(iv) investments in commercial paper, maturing not more than 90 days after the
date of acquisition, issued by corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America or any foreign country recognized by the United States of America with
a rating at the time as of which any investment therein is made of "P-1" (or
higher) according to Moody's Investors Service, Inc., or "A-1" (or higher)
according to Standard & Poor's Ratings Group; and (v) investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by
Moody's Investors Service, Inc.
"Treasury Rate" means the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15 (519) which has become publicly available at least two business days
prior to such redemption or repurchase date (or, if such Statistical Release
is no longer published, any publicly available source or similar market data))
most nearly equal to the period from such redemption or repurchase date to the
Stated Maturity of the Notes; provided, however, that if the period from such
redemption or repurchase date to the Stated Maturity of the Notes is less than
one year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien
on any property of, the Company or any other Subsidiary of the Company that is
not a Subsidiary of the Subsidiary to be so designated; provided, however, that
either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, such
designation would be permitted under the covenant described under "--Certain
Covenants-Limitation on Restricted Payments". The Board of Directors may
designate any Unrestricted Subsidiary to a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (x) the
Company could Incur $1.00 of additional Indebtedness under paragraph (a) of
the covenant described under "--Certain Covenants-Limitation on Indebtedness"
and (y) no Default shall have occurred and be continuing. Any such designation
by the Board of Directors shall be made by the Company to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the Company's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or one or more Wholly Owned Subsidiaries.
BOOK-ENTRY, DELIVERY AND FORM
General
Each of the Old Notes was issued in the form of one or more
fully registered Old Notes in global form ("Old Global Notes"). All Exchange
Notes issued in the Exchange Offer for Old Notes represented by Old Global
Notes will be represented by one or more Exchange Notes in global form (the
"Global Exchange Note," and together with the Old Global Notes, the "Global
Notes"), which will be deposited with, or on behalf of, the DTC and registered
in the name of the DTC or its nominee.
Holders of Exchange Notes who elect to take physical delivery
of their certificates instead of holding their interest through the Global
Exchange Note (collectively referred to herein as the "Non-Global Holders")
will be issued in registered form a certificated Exchange Note ("Certificated
Exchange Note"). Upon the transfer of any Certificated Exchange Note initially
issued to a Non-Global Holder, such Certificated Exchange Note will, unless
the transferee requests otherwise or the Global Exchange Note has previously
been exchanged in whole for Certificated Exchange Notes, be exchanged for an
interest in the Global Exchange Note.
Global Notes
Upon deposit of the Global Exchange Note, DTC will credit, on
its book-entry registration and transfer system interests in the Global
Exchange Note to the accounts of institutions that have accounts with DTC
(including Euroclear and Cedel) ("participants"). Ownership of beneficial
interests in the Global Exchange Note will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in the Global Exchange Note will be shown on, and the transfer of
that ownership will be effected only through, records maintained by DTC (with
respect to participants' interests) for the Global Exchange Note, or by
participants or persons that hold interests through participants (with respect
to beneficial interests of persons other than participants). The laws of some
jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and laws may
impair the ability to transfer or pledge beneficial interests in the Global
Exchange Note.
So long as DTC, or its nominee, is the registered holder of any
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole legal owner and holder of such Notes represented by such Global Notes for
all purposes under the Indenture and the Notes. Except as set forth below,
owners of beneficial interests in Global Notes will not be entitled to have
such Global Notes represented thereby registered in their names, will not
receive or be entitled to receive physical delivery of certificates
representing Notes in definitive, fully registered form bearing a legend
containing the applicable restrictions on transfers ("Definitive Notes") in
exchange therefor and will not be considered to be the owners or holders of
such Global Notes represented thereby for any purpose under the Notes or the
Indenture. The Company understands that under existing industry practice, in
the event an owner of a beneficial interest in a Global Note desires to take
any action that DTC, as the holder of such Global Note, is entitled to take,
DTC would authorize the participants to take such action, and that the
participants would authorize beneficial owners owning through such
participants to take such action or would otherwise act upon the instructions
of beneficial owners owning through them.
Any payment of principal, interest or Special Interest due on
the Notes on any interest payment date or at maturity will be made available
by the Company to the Trustee by such date. As soon as possible thereafter,
the Trustee will make such payments to DTC or its nominee, as the case may be,
as the registered owner of the Global Notes representing such Notes in
accordance with existing arrangements between the Trustee and DTC.
The Company expects that DTC or its nominee, upon receipt of
any payment of principal, interest or Special Interest in respect of the
Global Notes, will credit immediately the accounts of the related participants
with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records
of DTC. The Company also expects that payments by participants to owners of
beneficial interests in the Global Notes held through such participants will
be governed by standing instructions and customary practices, as is now the
case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such
participants.
None of the Company, the Trustee, or any payment agent for the
Global Notes will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in any of the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for
other aspects of the relationship between DTC and its participants or the
relationship between such participants and the owners of beneficial interests
in the Global Securities owning through such participants.
As long as the Notes are represented by a Global Note, DTC's
nominee will be the holder of the Notes and therefore will be the only entity
that can exercise a right to repayment or repurchase of the Notes. See
"Description of Notes--Repurchase of Notes Upon a Change in Control." Notice
by participants, or by owners of beneficial interests in a Global Note held
through such participants, of the exercise of the option to elect repayment of
beneficial interests in Notes represented by a Global Note must be transmitted
to DTC in accordance with its procedures on a form required by DTC and
provided to participants. In order to ensure that DTC's nominee will timely
exercise a right to repayment with respect to a particular Note, the
beneficial owner of such Note must instruct the broker or other participant to
exercise a right to repayment. Different firms have cut-off times for
accepting instructions from their customers and, accordingly, each beneficial
owner should consult the broker or other participant through which it holds an
interest in a Note in order to ascertain the cut-off time by which such an
instruction must be given in order for timely notice to be delivered to DTC.
The Company will not be liable for any delay in delivery of notices of the
exercise of the option to elect repayment.
Unless and until exchanged in whole or in part for Notes in
definitive form in accordance with the terms of the Notes, the Global Notes
may not be transferred except as a whole by DTC to a nominee of DTC, or by a
nominee of DTC to DTC or another nominee of DTC, or by DTC or any such nominee
to a successor of DTC or a nominee of each successor.
Although DTC has agreed to the foregoing procedures in order
to facilitate transfers of interests in the Global Notes among its
participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by
DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations. The
Company and the Trustee may conclusively rely on, and shall be protected in
relying on, instructions from DTC for all purposes.
Definitive Notes
Upon transfer of Old Notes in definitive, fully registered form
bearing a legend containing restrictions on transfers ("Definitive Old Notes")
to a Qualified Institutional Buyer, such Definitive Notes will be transferred
to the corresponding Old Global Note. Old Global Notes and the Global Exchange
Note shall be exchangeable for corresponding Definitive Old Notes and
Certificated Exchange Notes, respectively, registered in the name of persons
other than DTC or its nominee if (A) DTC (i) notifies the Company that it is
unwilling or unable to continue as DTC for any of the Global Notes or (ii) at
any time ceases to be a clearing agency registered under the Exchange Act, (B)
there shall have occurred and be continuing an Event of Default (as defined in
the Indenture) with respect to the Notes or (C) the Company executes and
delivers to the Trustee an order that the Global Notes shall be so
exchangeable. Any Definitive Notes will be issued only in fully registered
form and shall be issued without coupons in denominations of $1,000 and
integral multiples thereof. Any Definitive Notes issued in exchange for a
Global Note will be registered in such names and in such denominations as DTC
shall request.
The Clearing System
DTC has advised the Company as follows: DTC is a
limited-purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities of participants and to facilitate the clearance
and settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of participants,
thereby eliminating the need for physical movement of securities certificates.
DTC's participants include securities brokers and dealers (which may include
the Initial Purchaser), banks, trust companies, clearing corporations and
certain other organizations. Access to DTC's book-entry system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, whether
directly or indirectly.
Settlement
Initial settlement in the Notes will be in same-day funds.
Investors holding their Notes through DTC will follow settlement practices
applicable to United States corporate debt obligations. The Indenture will
require that payments in respect of Notes (including principal, premium,
interest and Special Interest) be made by wire transfer of same-day funds to
the accounts specified by the holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered address.
DESCRIPTION OF CAPITAL STOCK
Pursuant to TWA's Certificate of Incorporation, the Company
has the authority to issue 287.5 million shares of capital stock, consisting
of 150 million shares of Common Stock, and 137.5 million additional shares of
preferred stock. The Certificate of Incorporation authorizes the Board of
Directors to establish one or more series of preferred stock and to establish
such relative voting, dividend, redemption, liquidation, conversion and other
powers, preferences, rights, qualifications, limitations and restrictions as
the Board of Directors may determine without further approval of the
stockholders of the Company. The issuance of preferred stock by the Board of
Directors could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more
difficult for a person or group to gain control of the Company. See "Certain
Provisions of the Certificate of Incorporation, the By-laws and Delaware Law."
The issuance of any series of preferred stock, and the
relative powers, preferences, rights, qualifications, limitations and
restrictions of such series, if and when established, will depend upon, among
other things, the future capital needs of the Company, the then existing
market conditions and other factors that, in the judgment of the Board of
Directors, might warrant the issuance of preferred stock. At the date of this
Offering Memorandum, there are no plans, agreements or understandings relative
to the issuance of any additional series of preferred stock other than the
Series A Preferred Stock issuable pursuant to the Rights.
Description of Common Stock
The holders of the Common Stock are entitled to one vote per
share on all matters voted on by stockholders, including elections of
directors, and, except for the voting rights of the holders of Employee
Preferred Stock (who are entitled to elect a total of four directors to the
Board) and, under certain circumstances, the 1997 Preferred Stock and 8%
Preferred Stock, and as otherwise required by law or provided in any
resolution adopted by the Board of Directors with respect to any series of the
preferred stock, the holders of such shares exclusively possess all voting
power. The Certificate of Incorporation does not provide for cumulative
voting in the election of directors but the Board is classified, which means
that the holders of a majority of the shares entitled to vote at a meeting at
which a quorum is present can elect all of the directors of the class then to
be elected (except that the holders of a majority of the shares of Employee
Preferred Stock are exclusively entitled to elect four labor directors) and
the holders of the remaining shares would not be able to elect any directors
at that meeting. Subject to any preferential rights of the 8% Preferred
Stock, the 1997 Preferred Stock or any other outstanding series of Preferred
Stock entitled to vote in the election of directors, the holders of Common
Stock are entitled to such dividends as may be declared from time to time by
the Board of Directors from funds available therefor, and upon liquidation are
entitled to receive pro rata all assets of the Company available for
distribution to such holders. The holders of Common Stock have no preemptive
rights and no rights to convert their shares of Common Stock into any other
security. It is not presently anticipated that dividends will be paid on the
Common Stock in the foreseeable future. All outstanding shares of Common
Stock are fully paid and nonassessable, and the shares of Common Stock
issuable upon conversion of the 1997 Preferred Stock and the 8% Preferred
Stock and, if issued, upon conversion of the 9 1/4% Convertible Subordinated
Debentures due 2007 (the "2007 Debentures") and the 8% Convertible
Subordinated Debentures due 2006 (the "2006 Debentures") will be, upon
issuance, fully paid and nonassessable. As of May 29, 1998, 52,242,014 shares
of Common Stock were issued and outstanding and were held by approximately
21,581 holders of record.
Rights Plan
The Board of Directors of the Company declared a dividend
distribution of one right (a "Right") for each outstanding share of Common
Stock and Employee Preferred Stock (collectively, the "Voting Stock") payable
to holders of record as of the close of business on January 12, 1996 (the
"Record Date") and, thereafter, all Common Stock issued by the Company has had
an equivalent number of Rights attendant to it. Each Right entitles the
holder to purchase, after the Distribution Date (as defined below), from the
Company one one-hundredth of a share of Series A Preferred Stock of the
Company at a price of $47.50 (the "Purchase Price"). The description and
terms of the Rights are set forth in a Rights Agreement, dated as of December
19, 1995 between the Company and American Stock Transfer & Trust Company, as
Rights Agent (the "Rights Agent") as supplemented. The Rights Plan is set
forth in full in the Rights Agreement and the description thereof herein is
qualified in its entirety by reference to such Rights Agreement.
Until the earlier to occur of (a) the tenth day after public
announcement that any person or group has become the beneficial owner of at
least 15% of the Company's Voting Stock (other than pursuant to a "Permitted
Offer," as defined below) and (b) the tenth business day after the date of the
commencement of a tender or exchange offer (other than a Permitted Offer) by
any person which would, if consummated, result in such person becoming the
beneficial owner of at least 20% of the Voting Stock (the earlier of such
dates being hereinafter called the "Distribution Date"), the Rights will be
evidenced, with respect to any of the Voting Stock certificates outstanding as
of the Record Date, by such Voting Stock certificates.
Each share of Voting Stock issued or delivered by the Company
after the Record Date but prior to the earlier of the Distribution Date or the
expiration of the Rights shall be accompanied by one Right.
The Rights Agreement provides that, until the Distribution
Date, the Rights will be transferred with and only with the Voting Stock.
Until the Distribution Date (or earlier redemption or expiration of the
Rights), the surrender or transfer of any certificates for Voting Stock in
respect of which Rights have been issued will also constitute the transfer of
the Rights associated with the Voting Stock represented by such certificates.
As soon as practicable after the Distribution Date, separate certificates
evidencing the Rights (the "Right Certificates") will be mailed to holders of
record of the Voting Stock as of the close of business on the Distribution
Date and such separate Right Certificates alone will evidence the Rights.
No Right is exercisable at any time prior to the Distribution
Date. The Rights will expire on January 12, 2006 (the "Final Expiration
Date") unless earlier exchanged or redeemed by the Company as described below.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including without limitation the right to
vote or to receive dividends.
Upon exercise, each Right shall be converted into one
one-hundredth of a share of the Series A Preferred Stock. Holders of shares
of Series A Preferred Stock are entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available therefor, quarterly
dividends in an amount per share equal to the greater of (a) $1.00 and (b) 100
times the aggregate per share amount of all cash dividends or other
distributions (other than dividends payable solely in shares of Common Stock),
declared on the Common Stock since the first dividend payment date with respect
to the Series A Preferred Stock. Dividends payable on the Series A Preferred
Stock are cumulative. In addition, in the event the Company enters into any
consolidation, merger, combination or other transaction in which shares of
Common Stock are exchanged for or changed into other stock or securities,
shares of Series A Preferred Stock shall be similarly exchanged for or changed
into 100 times the aggregate amount of stock, securities, cash or other
consideration.
Subject to the rights of holders of the 1997 Preferred Stock
and the 8% Preferred Stock, holders of shares of Series A Preferred Stock are
entitled to 100 votes on all matters submitted to a vote of the stockholders
of TWA, voting together as a single class, except as otherwise required by
applicable law. In the event dividends payable on the Series A Preferred
Stock shall be in arrears in an amount equal to six quarterly payments, all
holders of the Series A Preferred Stock together with other holders of
preferred stock entitled to vote, shall, voting together as a single class be
entitled to elect one director to the Company's Board of Directors.
In the event that any person or group (an "Acquiring Person")
becomes the beneficial owner of at least 15% of the Company's Voting Stock,
then each Right (other than Rights beneficially owned by the Acquiring Person
and certain affiliated persons) will entitle the holder to elect to receive,
without payment of the Purchase Price, a number of shares of the Company's
Common Stock having a market value equal to the Purchase Price. The term
"Acquiring Person" does not include (i) the Company, any of its subsidiaries
or any employee benefit plan of the Company, except for any such employee
benefit plan acting in concert with a third party (other than another employee
benefit plan of the Company) or (ii) any person or group which becomes the
beneficial owner of at least 15% of the Voting Stock pursuant to a "Permitted
Offer" (as defined below).
"Permitted Offer" means a tender or exchange offer by a Person
for all outstanding shares of Voting Stock, which is made at a price and on
such other terms determined by at least a majority of the Continuing Directors
(as defined below) to be in the best interests of the Company and its
stockholders.
In the event that, after any person has become an Acquiring
Person, (i) the Company is involved in a merger or other business combination
in which the Company is not the surviving corporation or its Voting Stock is
exchanged for other securities or assets or (ii) the Company and/or one or
more of its subsidiaries sell or otherwise transfer assets or earning power
aggregating more than 50% of the assets or earning power of the Company and
its subsidiaries, taken as a whole, then each Right will entitle the holder to
purchase, for the Purchase Price, a number of shares of common stock of the
other party to such business combination or sale (or in certain circumstances,
an affiliate) having a market value of two times the Purchase Price.
At any time after any person has become an Acquiring Person
(but before any person becomes the beneficial owner of at least 50% of the
Voting Stock), a majority of the Company's Continuing Directors may exchange
all or part of the Rights (other than the Rights beneficially owned by the
Acquiring Person and certain affiliated persons) for shares of Common Stock at
an exchange ratio of one share of Common Stock per Right.
"Continuing Director" means (i) any member of the Board of
Directors who was a member of the Board prior to the time an Acquiring Person
becomes such or (ii) any person subsequently elected to the Board if he is
recommended or approved by a majority of the Continuing Directors or, in the
case of a successor to a director elected by holders of a series of Employee
Preferred Stock, if such person is elected pursuant to the applicable terms of
such Employee Preferred Stock. Continuing Directors do not include an
Acquiring Person, an affiliate or associate of an Acquiring Person or any
representative or nominee of the foregoing.
The Company may redeem the Rights, in whole but not in part, at
a price of $.01 per Right at any time prior to the close of business on the
tenth day after public announcement that any person has become an Acquiring
Person (subject to extension by a majority of the Continuing Directors).
After the Distribution Date, the Rights Agreement may be
amended in any respect that does not adversely affect the Rights holders
(other than any Acquiring Person and certain affiliated persons). In addition,
after any person has become an Acquiring Person, the Rights Agreement may be
amended only with the approval of a majority of the Continuing Directors.
Description of Employee Preferred Stock
Pursuant to the '95 Reorganization, the Company issued an
aggregate of 6,425,118 shares of Employee Preferred Stock to employee stock
trusts for the benefit of certain domestic employees of the Company then
represented by ALPA, IFFA and IAM pursuant to the terms of the '94 Labor
Agreements (collectively, the "Employee Stock Trusts"). The Employee Preferred
Stock was issued in three series designated ALPA Preferred Stock, IAM
Preferred Stock and IFFA Preferred Stock. Except for an exclusive right to
elect a certain number of directors to the Board of Directors and the
liquidation preference described below under "--Liquidation Preference and
Other Rights," the Employee Preferred Stock is the functional equivalent of
Common Stock. The Employee Preferred Stock is junior to the 1997 Preferred
Stock and the 8% Preferred Stock, as to the payment of dividends and the
distribution of assets upon Liquidation.
Dividends
Subject to the issuance by the Company of preferred stock with
senior rights (including the 1997 Preferred Stock and the 8% Preferred Stock),
the holders of the Employee Preferred Stock are entitled to receive, when, as
and if declared by the Board of Directors out of funds legally available
therefor, dividends payable in cash, stock or otherwise. No dividends may be
paid on the Common Stock unless an equivalent dividend is paid on the Employee
Preferred Stock, and no dividends may be paid on the Employee Preferred Stock
unless an equivalent dividend is paid on the Common Stock. It is not presently
anticipated that dividends will be paid on the Employee Preferred Stock in the
foreseeable future.
Liquidation Preference and Other Rights
Subject to the issuance by the Company of preferred stock with
senior rights (including the 1997 Preferred Stock and the 8% Preferred Stock),
upon any liquidation of the Company, holders of the Employee Preferred. Stock
will be entitled to a liquidation preference equal to $.01 per share from
TWA's net assets before any amounts are paid to, or on account of, the holders
of Common Stock, and thereafter the remaining net assets of the Company will
be distributed pro rata to the holders of the Employee Preferred Stock, the
Common Stock and other equity securities of the Company which rank on a parity
with such stock and with respect to such rights, all in accordance with their
respective rights and interests. The Employee Preferred Stock does not have
redemption rights.
Automatic Conversion
Each share of Employee Preferred Stock will automatically
convert into one share of Common Stock upon the withdrawal of such share of
Employee Preferred Stock from the Employee Stock Trust in which such share is
held.
Voting
So long as any shares of ALPA Preferred Stock are outstanding,
the holders of the ALPA Preferred Stock are entitled to one vote per share (i)
on each matter submitted to a vote at a meeting of stockholders other than the
election of directors and (ii) for the ALPA Director (defined below) to be
elected at an annual meeting of stockholders. Such holders have the exclusive
right to elect to the Board one director (the "ALPA Director"), which director
shall be a Class II director.
So long as any shares of IFFA Preferred Stock are outstanding,
the holders of the IFFA Preferred Stock are entitled to one vote per share (i)
on each matter submitted to a vote at a meeting of stockholders other than the
election of directors and (ii) for the IFFA Director (defined below) to be
elected at an annual meeting of stockholders. Such holders have the exclusive
right to elect to the Board one director (the "IFFA Director"), which director
shall be a Class II director.
So long as any shares of IAM Preferred Stock are outstanding,
the holders of the IAM Preferred Stock are entitled to one vote per share (i)
on each matter submitted to a vote at a meeting of stockholders other than the
election of directors and (ii) for the IAM Directors (defined below) to be
elected at an annual meeting of stockholders. Such holders have the exclusive
right to elect to the Board two directors (the "IAM Directors"), one of which
directors shall be a Class II director and one of which shall be a Class III
director.
Amendment
The Certificate of Designations, Preferences and Rights
relating to each series of Employee Preferred Stock may be amended only upon
the unanimous approval of the holders of the outstanding shares of such series
of Employee Preferred Stock.
Description of the 8% Preferred Stock
The 8% Preferred Stock ranks on a parity with the 1997
Preferred Stock and on a parity with all other Preferred Stock, the terms of
which expressly provide that it ranks on a parity with the 8% Preferred Stock
with respect to dividends and amounts payable upon Liquidation. The 8%
Preferred Stock ranks senior to the Common Stock, the Series A Preferred
Stock, if issued, and the Employee Preferred Stock with respect to payment of
dividends and amounts payable upon Liquidation.
Dividends
The holders of the 8% Preferred Stock are entitled to receive
cumulative cash dividends at the rate of 8% per annum (equivalent to $4.00 per
share per annum), when, as and if declared by the Board of Directors out of
funds legally available therefor. Dividends and liquidated damages, if any,
are payable quarterly in arrears on March 15, June 15, September 15 and
December 15 of each year (and, in the case of any accrued but unpaid
dividends, at such additional times and for such interim periods, if any, as
determined by the Board of Directors) to the holders of record on the record
dates, which shall be not more than 30 days nor less than 10 days preceding
the payment dates. Dividends on the 8% Preferred Stock commenced to accrue on
March 18, 1996
If dividends are not paid in full upon the 8% Preferred Stock
and any other preferred stock ranking on a parity as to dividends with the 8%
Preferred Stock, all dividends declared upon shares of 8% Preferred Stock and
such other preferred stock ranking on a parity as to dividends with the 8%
Preferred Stock will be declared pro rata so that in all cases the amount of
dividends declared per share on the 8% Preferred Stock and such other
preferred stock bear to each other the same ratio that accrued and unpaid
dividends per share on the shares of the 8% Preferred Stock and such other
preferred stock bear to each other. Except as set forth above, unless full
cumulative dividends or the 8% Preferred Stock have been paid and funds set
aside, and all liquidated damages, if any, paid, dividends (other than
dividends paid solely in Common Stock or other stock ranking junior as to
dividends and liquidation preference) may not be paid or declared and set
aside for payment and other distributions may not be made upon the Common
Stock or on any other stock of the Company ranking junior to or on a parity
with the 8% Preferred Stock as to dividends and liquidation preference. Under
such circumstances, such stock may not be redeemed, purchased, or otherwise
acquired for any consideration by the Company.
Conversion Rights
Each share of 8% Preferred Stock may be converted at any time
at the option of the holder, unless previously redeemed or exchanged, into
fully paid, nonassessable shares of Common Stock at an initial conversion
price of $20.269 per share of Common Stock (equivalent to a conversion rate of
approximately 2.467 shares of Common Stock for each share of 8% Preferred
Stock), subject to adjustments in certain circumstances. The right to convert
8% Preferred Stock called for redemption will expire at the close of business
on the fifth business day prior to the redemption date. Whenever the Company
issues shares of Common Stock upon conversion of 8% Preferred Stock, the
Company will, subject to certain conditions, issue, together with each share
of Common Stock, one Right, entitling the holder to purchase one one-hundredth
of a share of Series A Preferred Stock under certain circumstances.
No fractional shares of Common Stock will be issued upon
conversion but, in lieu thereof, an appropriate amount will be paid in cash
based on the closing price on the last trading day before the conversion date.
The conversion price is subject to adjustment upon the occurrence of certain
events.
Optional Redemption by the Company
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 a redemption price of $52.80
in 1999 and at a redemption price decreasing by $0.40 increments each March 15
thereafter until 2006, from which time the redemption price shall be and
remain $50.00, in each case, plus accrued and unpaid dividends thereon to the
date fixed for redemption.
Liquidation Rights
Upon any Liquidation of the Company, and after provision is
made for any preferential amounts to which the holders of any senior preferred
stock may be entitled, holders of 8% Preferred Stock will be entitled to
receive from the Company's assets available for distribution to all
stockholders $50.00 per share plus all accrued and unpaid dividends through
the date of distribution or determination whether or not declared, and
liquidated damages, if any, before any distribution is made on the Employee
Preferred Stock or Common Stock, Series A Preferred Stock (if issued) or any
other capital stock ranking junior to the 8% Preferred Stock and will be
entitled to such amount on a parity with the 1997 Preferred Stock and every
other series of the Company's preferred stock that ranks on a parity with the
8% Preferred Stock in respect of distributions of assets upon Liquidation.
Neither a consolidation or merger of the Company with another corporation nor
a sale or transfer of all or substantially all of the Company's assets for
cash, securities or other property will be considered a liquidation,
dissolution or winding up of the Company for these purposes.
Voting Rights
Except as indicated below or otherwise required by law, holders
of 8% Preferred Stock have no voting rights. If at any time the equivalent of
six quarterly dividends payable on the 8% Preferred Stock are accrued and
unpaid, the holders of all outstanding shares of 8% Preferred Stock and any
stock ranking on a parity as to dividends with the shares of 8% Preferred
Stock and having similar voting rights then exercisable, voting separately as
a class without regard to series, will be entitled to elect at the next annual
or special meeting of the stockholders of the Company, two directors to serve
until all dividends accumulated and unpaid have been paid or declared and
funds set aside to provide for payment in full. In exercising any such vote,
each outstanding share of 8% Preferred Stock will be entitled to one vote,
excluding shares held by the Company or any entity controlled by the Company,
which shares shall have no vote.
Exchange Provisions
Provided that all accrued and unpaid dividends and liquidated
damages, if any, then owing on the 8% Preferred Stock have been paid, the 8%
Preferred Stock is exchangeable in whole, but not in part, at the Company's
option for the Company's 2006 Debentures on any dividend payment date,
beginning on March 15, 1998, at the rate of $50.00 principal amount thereof
for each share of 8% Preferred stock outstanding at the time of exchange. The
2006 Debentures are issuable in denominations of $1,000 and integral multiples
thereof. The 2006 Debentures, if issued, will be unsecured, subordinated
obligations of the Company and will mature on March 15, 2006. The 2006
Debentures are convertible into fully paid non assessable shares of Common
Stock and may be redeemed on and after March 15, 1999 at the option of the
Company.
Description of the 1997 Preferred Stock
The 1997 Preferred Stock ranks on a parity with the 8%
Preferred Stock and on a parity with all other Preferred Stock, the terms of
which expressly provide that it ranks on a parity with the 1997 Preferred
Stock with respect to dividends and amounts payable upon Liquidation. The 1997
Preferred Stock ranks senior to the Common Stock, the Series A Preferred
Stock, if issued, and the Employee Preferred Stock with respect to payment of
dividends and amounts payable upon Liquidation.
Dividends
The holders of the 1997 Preferred Stock are entitled to receive
cumulative cash dividends at the rate of 9 1/4% per annum (equivalent to
$4.625 per share per annum), when, as and if declared by the Board of
Directors out of funds legally available therefor. Dividends and liquidated
damages, if any, are payable quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year (and, in the case of any accrued but
unpaid dividends, at such additional times and for such interim periods, if
any, as determined by the Board of Directors) to the holders of record on the
record dates, which shall be not more than 30 days nor less than 10 days
preceding the payment dates. Dividends on the 1997 Preferred Stock commenced
accruing on December 2, 1997.
If dividends are not paid in full upon the 1997 Preferred Stock
and any other preferred stock ranking on a parity as to dividends with the
1997 Preferred Stock, all dividends declared upon shares of 1997 Preferred
Stock and such other preferred stock ranking on a parity as to dividends with
the 1997 Preferred Stock will be declared pro rata so that in all cases the
amount of dividends declared per share on the 1997 Preferred Stock and such
other preferred stock bear to each other the same ratio that accrued and
unpaid dividends per share on the shares of the 1997 Preferred Stock and such
other preferred stock bear to each other. Except as set forth above, unless
full cumulative dividends or the 1997 Preferred Stock have been paid and funds
set aside, and all liquidated damages, if any, paid, dividends (other than
dividends paid solely in Common Stock or other stock ranking junior as to
dividends and liquidation preference) may not be paid or declared and set
aside for payment and other distributions may not be made upon the Common Stock
or on any other stock of the Company ranking junior to or on a parity with the
1997 Preferred Stock as to dividends and liquidation preference. Under such
circumstances, such stock may not be redeemed, purchased, or otherwise
acquired for any consideration by the Company.
Conversion Rights
Each share of 1997 Preferred Stock may be converted at any time
at the option of the holder, unless previously redeemed or exchanged, into
fully paid, nonassessable shares of Common Stock at an initial conversion
price of $7.90 per share of Common Stock (equivalent to a conversion rate of
approximately 6.329 shares of Common Stock for each share of 1997 Preferred
Stock), subject to adjustments in certain circumstances. The right to convert
1997 Preferred Stock called for redemption will expire at the close of
business on the second business day prior to the redemption date. Whenever the
Company issues shares of Common Stock upon conversion of 1997 Preferred Stock,
the Company will, subject to certain conditions, issue, together with each
share of Common Stock, one Right, entitling the holder to purchase one
one-hundredth of a share of Series A Preferred Stock under certain
circumstances.
No fractional shares of Common Stock will be issued upon
conversion but, in lieu thereof, an appropriate amount will be paid in cash
based on the closing price on the last trading day before the conversion date.
The conversion price is subject to adjustment upon the occurrence of certain
events.
Optional Redemption by the Company
The 1997 Preferred Stock may not be redeemed prior to December
15, 2000. On or after December 15, 2000, the 1997 Preferred Stock may be
redeemed, in whole or in part, at the option of the Company, at a redemption
price of $53.24 in 2000 and at a redemption price decreasing by approximately
$0.46 each December 15 thereafter until 2007, from which time the redemption
price shall be and remain $50.00, in each case, plus accrued and unpaid
dividends thereon to the date fixed for redemption.
Liquidation Rights
Upon any Liquidation of the Company, and after provision is
made for any preferential amounts to which the holders of any senior preferred
stock may be entitled, holders of 1997 Preferred Stock will be entitled to
receive from the Company's assets available for distribution to all
stockholders $50.00 per share plus all accrued and unpaid dividends through
the date of distribution or determination whether or not declared, and
liquidated damages, if any, before any distribution is made on the Employee
Preferred Stock or Common Stock, Series A Preferred Stock (if issued) or any
other capital stock ranking junior to the 1997 Preferred Stock and will be
entitled to such amount on a parity with the 8% Preferred Stock and every
other series of the Company's preferred stock that ranks on a parity with the
1997 Preferred Stock in respect of distributions of assets upon Liquidation.
Neither a consolidation or merger of the Company with another corporation nor
a sale or transfer of all or substantially all of the Company's assets for
cash, securities or other property will be considered a liquidation,
dissolution or winding up of the Company for these purposes.
Voting Rights
Except as indicated below or otherwise required by law, holders
of 1997 Preferred Stock have no voting rights. If at any time the equivalent
of six quarterly dividends payable on the 1997 Preferred Stock are accrued and
unpaid, the holders of all outstanding shares of 1997 Preferred Stock and any
stock ranking on a parity as to dividends with the shares of 1997 Preferred
Stock and having similar voting rights then exercisable, voting separately as
a class without regard to series, will be entitled to elect at the next annual
or special meeting of the stockholders of the Company, two directors to serve
until all dividends accumulated and unpaid have been paid or declared and
funds set aside to provide for payment in full. In exercising any such vote,
each outstanding share of 1997 Preferred Stock will be entitled to one vote,
excluding shares held by the Company or any entity controlled by the Company,
which shares shall have no vote.
Exchange Provisions
Provided that all accrued and unpaid dividends and liquidated
damages, if any, then owing on the 1997 Preferred Stock have been paid, the
1997 Preferred Stock is exchangeable in whole, but not in part, at the
Company's option for the 2007 Debentures on any dividend payment date,
beginning on December 15, 1999, at the rate of $50.00 principal amount thereof
for each share of 1997 Preferred Stock outstanding at the time of exchange.
The 2007 Debentures are issuable in denominations of $1,000 and integral
multiples thereof. The 2007 Debentures, if issued, will be unsecured,
subordinated obligations of the Company and will mature on December 15, 2007.
The 2007 Debentures are convertible into fully paid non assessable shares of
Common Stock and may be redeemed on and after December 15, 2000 at the option
of the Company.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
THE BY-LAWS AND DELAWARE LAW
The Certificate of Incorporation and the By-laws contain
certain provisions that could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company first to negotiate with the Company. The
Company believes that the benefits of increased protection of the Company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
In addition, pursuant to the '95 Reorganization and in connection with the
adoption of the '94 Labor Agreements, the Company adopted certain amendments,
both to the Certificate of Incorporation and the By-laws, relating to
corporate governance matters. These amendments are designed to enhance the
input of the Company's union employees or the directors nominated by them in
the governance of the Company and to limit the ability to change the
provisions of the Certificate of Incorporation in general and the By-laws in
particular without broad support from the Company's voting stockholders. Such
provisions will also make it more difficult to enact any change in the By-laws
or to take any of the specified actions, if such changes or actions are
opposed by a substantial constituency, including the Company's employees who
are represented by organized labor. The description set forth below is
intended as a summary only and is qualified in its entirety by reference to
the Certificate of Incorporation and the By-laws.
Board of Directors
The Certificate of Incorporation and the By-laws provide that
the number of directors constituting the entire Board of Directors will be
fifteen. The By-laws also provide for the Board of Directors to be divided
into three classes consisting of five directors each, with the term of each
class expiring in a different year. Subject to any rights of holders of any
class or series of the Company's preferred stock, a majority of the remaining
directors then in office has the sole authority to fill any vacancies on the
Board of Directors, provided, however, that any vacancies arising during the
first or second term of a director will be filled by a nominee of the
remaining directors who were nominated by the same Original Nominating Entity
(as defined below) as the vacating director in accordance with the Certificate
of Incorporation. See "Business--Employees" and "Description of Capital
Stock--Description of Employee Preferred Stock." Any director elected to fill
a vacancy will hold office for the remainder of the full term of the class of
directors in which the vacancy occurred and until the director's successor is
elected and qualified. The Certificate of Incorporation provides that
directors may be removed only by the affirmative vote of at least a majority
of the voting power of all the then outstanding shares of stock entitled to
vote generally in the election of directors, voting together as a single
class. The affirmative vote of at least 80% of the Voting Stock, voting
together as a single class, is required to amend or repeal, or adopt any
provision inconsistent with, the provision of the Certificate of Incorporation
relating to the number, election and terms of directors.
"Original Nominating Entity" means, as applicable, each of the
management of the Company, ALPA, IAM and IFFA. Upon being certified to replace
IFFA as the bargaining representative for the Company's flight attendants, the
IAM became the nominating entity with respect to the director to be elected by
holders of the IFFA Preferred Stock.
Stockholder Actions and Special Meetings
The Certificate of Incorporation provides that stockholder
action can be taken only at an annual or special meeting of stockholders, and
prohibits, subject to the rights of holders of any class or series of the
Company's preferred stock to the contrary, stockholder action by written
consent in lieu of a meeting. The Certificate of Incorporation and By-laws
provide that, subject to the rights of holders of any series of preferred
stock, special meetings of stockholders can be called only by (i) the Chairman
of the Board of Directors of the Company, (ii) the Corporate Secretary of the
Company within ten calendar days after receipt of the written request of a
majority of the total number of directors that the Company would have if there
were no vacancies, and (iii) the Board of Directors after receipt by the
Company of a written request executed by the holders of at least 35% of the
outstanding Voting Stock of the Company, provided, however, that no separate
special meeting will be required to be convened if the Board of Directors
calls an annual or special meeting to be held no later than ninety (90)
calendar days after receiving the request for a meeting and the purposes of
such annual or special meeting of stockholders called by the Board of
Directors include the purposes specified in the request. Business permitted to
be conducted at a special meeting of stockholders is limited to the business
(x) specified in the notice of meeting given by or at the direction of the
chairman of the meeting or a majority of the entire Board of Directors or (y)
otherwise properly brought before the meeting by the chairman of the meeting
or at the direction of a majority of the entire Board of Directors. Moreover,
the chairman of the annual or special meeting of the stockholders will
determine whether any business sought to be brought before the meeting is
properly brought.
Pursuant to the Certificate of Incorporation, the By-laws
establish an advance notice procedure with regard to the nomination, other
than by or at the direction of the Board of Directors, of candidates for
election as directors and with regard to business to be brought before an
annual meeting of stockholders of the Company.
Amendment of the Certificate of Incorporation and By-laws
The Certificate of Incorporation contains provisions requiring
the affirmative vote of the holders of at least 80% of the Voting Stock,
voting together as a single class, to amend certain provisions of the
Certificate of Incorporation, primarily those related to anti-takeover
provisions. In addition, the Certificate of Incorporation requires the
affirmative vote of at least three-fourths of its issued and outstanding
Voting Stock, voting as a single class and not as separate classes, to amend
the By-laws by stockholder action. "Voting Stock" means the outstanding
shares of all classes and series of capital stock of the Company entitled to
vote generally in the election of directors of the Company and does not
include any class or series of preferred stock of the Company unless the
certificate of designations, preferences and rights for such class or series
specifically states that such class or series shall be deemed "Voting Stock"
for purposes of the Certificate of Incorporation. Employee Preferred Stock has
been deemed Voting Stock and the 1997 Preferred Stock and the 8% Preferred
Stock are not Voting Stock. See "Description of Capital Stock."
Blocking Coalition
Pursuant to the '94 Labor Agreements and in connection with the
'95 Reorganization, the Company amended the By-laws to provide that certain
actions (as set forth in the next paragraph) may not be approved by the Board
of Directors if votes are cast against such actions by directors sufficient to
constitute a "Blocking Coalition." A Blocking Coalition is defined as the
negative votes of (i) a total of the four directors elected by the holders of
the Employee Preferred Stock plus (ii) the negative votes of any two of the
Company's other directors.
Actions subject to disapproval by the Blocking Coalition
include: (a) any sale, transfer or disposition, in a single or series of
transactions, of at least 20% of the Company's assets, except for transactions
in the ordinary course of business including aircraft transactions as part of
a fleet management plan; (b) any merger of the Company into or with, or
consolidation of the Company with any other entity; (c) any business
combination within the meaning of Section 203 of the DGCL; (d) any dissolution
or liquidation of the Company; (e) any filing of a petition for bankruptcy,
reorganization or receivership under any state or federal bankruptcy,
reorganization or insolvency law; (f) any repurchase, retirement or redemption
of the Company's capital stock or other equity securities prior to their
scheduled maturity or expiration, except for redemptions out of the proceeds
of any substantially concurrent offering of comparable or junior securities
and mandatory redemptions of any redeemable preferred stock of the Company;
(g) any acquisition of assets, not related to the Company's current business
as an air carrier, in a single transaction or a series of related transactions
exceeding $50.0 million adjusted annually by the consumer price index; or (h)
any sale of the Company's capital stock or securities convertible into capital
stock of the Company to any person if (i) at the time of issuance or (ii)
assuming conversion of all outstanding securities of the Company convertible
into capital stock, such person or entity would beneficially own at least 20%
of the capital stock of the Company.
Super Majority Voting Provisions
At all times before September 1, 2000, the Company must obtain
the approval of at least two-thirds of the issued and outstanding Voting Stock
of the Company, voting as a single class and not as separate classes, for the
holders of such Voting Stock to approve certain actions, unless such matters
have been approved by a vote of at least 80% of the Board of Directors then in
office. Actions requiring such approval are the following: (i) any merger of
the Company into or with, or consolidation of the Company with, any other
entity; (ii) any business combination within the meaning of Section 203 of the
DGCL; (iii) any dissolution or liquidation of the Company; or (iv) any
repurchase, retirement or redemption of the Company's capital stock or other
equity securities prior to their scheduled maturity or expiration, except for
redemptions out of the proceeds of any substantially concurrent offering of
comparable or junior securities, and mandatory redemptions of any redeemable
preferred stock of the Company.
Preferred Stock
The Company believes that the ability of the Board of Directors
to issue one or more series of preferred stock of the Company provides TWA
with increased flexibility in structuring possible future financings and in
meeting other corporate needs that might arise. The authorized shares of
preferred stock, as well as shares of Common Stock, will be available for
issuance without further action by TWA's stockholders, unless such action is
required by applicable law or the rules of any stock exchange on which TWA
securities may be listed. If the approval of TWA's stockholders is not
required for the issuance of shares of preferred stock or Common Stock, the
Board of Directors does not intend to seek stockholder approval. Although the
Board of Directors has no intention of doing so, it could issue a series of
preferred stock that could, depending on the terms of such series, impede the
completion of a merger, tender offer or other takeover attempt. The Board of
Directors will make any determination to issue such shares based on its
judgment as to the best interests of TWA and its stockholders. The Board of
Directors, in so acting, could issue preferred stock having terms that could
discourage an acquisition attempt or other transaction that some, or a
majority, of the stockholders might believe to be in their best interests or
in which stockholders might receive a premium for their stock over the then
current market price of such stock.
Rights to Purchase Stock
The Rights are intended to protect TWA's stockholders from
certain non-negotiated takeover attempts which present the risk of a change of
control on terms which may be less favorable to TWA's stockholders than would
be available in a transaction negotiated with and approved by the Board of
Directors of the Company. Although there can be no certainty as to the results
of any particular negotiation, the Board of Directors believes that the
interests of the stockholders are best served if any acquisition of TWA or a
substantial percentage of the Common Stock results from arms-length
negotiations and reflects the Board's or stockholders' careful consideration
of the proposed terms of a transaction. In particular, the Rights are intended
to help (a) reduce the risk of coercive, two-tiered, front-end loaded or
partial offers which may not offer fair value to all stockholders, (b)
mitigate against market accumulators who through open market or private
purchases may achieve a position of substantial influence or control without
paying to selling or remaining stockholders a fair control premium, and (c)
deter market accumulators who are simply interested in putting a company "in
play". See "Description of Capital Stock--Rights Plan."
Anti-Takeover Statute
Section 203 of the DGCL is applicable to corporate takeovers in
Delaware. Subject to certain exceptions set forth therein, Section 203 of the
DGCL provides that a corporation shall not engage in any business combination
with any "interested stockholder" for a three-year period following the date
that such stockholder becomes an interested stockholder unless (a) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (b) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares) or (c) on or subsequent to such date, the business combination
is approved by the board of directors of the corporation and by the
affirmative vote of at least 662/3% of the outstanding voting stock which is
not owned by the interested stockholder. Except as specified therein, an
interested stockholder is defined to include any person that is the owner of
15% or more of the outstanding voting stock of the corporation, or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation, at any time within three
years immediately prior to the relevant date, and the affiliates and
associates of such person. Under certain circumstances, Section 203 of the
DGCL makes it more difficult for an "interested stockholder" to effect various
business combinations with a corporation for a three-year period, although the
stockholders may, by adopting an amendment to the corporation's certificate of
incorporation or by-laws, elect not to be governed by this section, effective
twelve months after adoption. The Certificate of Incorporation and the By-laws
do not exclude TWA from the restrictions imposed under Section 203 of the
DGCL, but do provide that a business combination within the meaning of Section
203 of the DGCL (i) may be approved without the approval of at least 662/3% of
the Voting Stock if the business combination is approved by at least 80% of
the directors then in office and (ii) may not be approved if votes are cast
against the action by the Blocking Coalition. It is anticipated that the
provisions of Section 203 of the DGCL and the provisions of the Certificate of
Incorporation may encourage companies interested in acquiring TWA to negotiate
in advance with the Board of Directors of TWA since the stockholder approval
requirement would be avoided if 80% of the directors then in office approve
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of material United States
federal income tax considerations applicable to the initial holders of the Old
Notes who purchased the Old Notes at their "issue price," that is, the first
price at which a substantial amount of the Old Notes is sold for money to the
public (not including bond houses, brokers or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers). This
summary is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), regulations, rulings and decisions currently in effect,
all of which are subject to change (possibly with retroactive effect). The
discussion does not purport to deal with all aspects of the United States
federal taxation that may be relevant to particular investors in light of
their particular circumstances (for example, to persons holding Notes as part
of a conversion transaction or as part of a hedge or hedging transaction, or
as a position in a straddle for tax purposes), nor does it discuss the United
States federal income tax considerations applicable to certain types of
investors subject to special treatment under the federal income tax laws (for
example, insurance companies, tax-exempt organizations, financial institutions
and persons who are not United States Holders or United States Alien Holders
(each as defined below)). In addition, the discussion does not consider the
effect of any foreign, state, local or other tax laws that may be applicable
to a particular investor. The discussion assumes that investors hold the Notes
as "capital assets" within the meaning of Section 1221 of the Code. The
Company intends to treat the Notes as indebtedness and not as equity for
United States federal income tax purposes, and the United States federal
income tax considerations described below are based on that characterization.
Such treatment, however, is not binding on the Internal Revenue Service (or
the courts), and there can be no assurance that the Internal Revenue Service
would not argue (or that a court would not hold) that the Notes should be
treated as equity for federal income tax purposes.
Prospective investors considering the Exchange Offer should
consult their tax advisors with regard to the application of the United States
federal income tax laws to their particular situations as well as any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.
As used herein, the term "United States Holder" means an owner
of a Note that is, for United States federal income tax purposes, (i) a
citizen or resident of the United States, (ii) a corporation created or
organized in or under the laws of the United States or of any political
subdivision thereof, or (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of its source. The
term also includes certain former citizens and certain former long-term
residents of the United States.
As used herein, the term "United States Alien Holder" means an
owner of a Note that is, for United States federal income tax purposes, (i) a
nonresident alien individual, (ii) a foreign corporation, (iii) a nonresident
alien fiduciary of a foreign estate or trust or (iv) a foreign partnership one
or more of the members of which is, for United States federal income tax
purposes, a nonresident alien individual, a foreign corporation or a
nonresident alien fiduciary of a foreign estate or trust.
Tax Consequences to United States Holders
Exchange Offer
The exchange of the Old Notes for Exchange Notes pursuant to
the Exchange Offer will not result in any United States federal income tax
consequences to the United States Holders. When a United States Holder
exchanges an Old Note for an Exchange Note pursuant to the Exchange Offer, the
Holder will have the same adjusted tax basis and holding period in the
Exchange Note as in the Old Note immediately before the exchange.
Interest on a Note
The Old Notes were not issued with original issue discount for
United States federal income tax purposes. Accordingly, interest and Special
Interest, if any, on a Note will generally be taxable to a United States
Holder as ordinary interest income at the time it accrues or is received in
accordance with the United States Holder's method of accounting for United
States federal income tax purposes.
Sale or Retirement of a Note
Upon the sale or retirement of a Note, a United States Holder
will recognize taxable gain or loss equal to the difference between the amount
realized on the sale or retirement and such Holder's adjusted tax basis in the
Note.
Backup Withholding and Information Reporting
Certain noncorporate United States Holders may be subject to
backup withholding at a rate of 31% on payments of principal, premium and
interest (including Special Interest and/or original issue discount, if any)
on, and the proceeds of disposition of, a Note. Backup withholding will apply
only if the United States Holder (i) fails to furnish its Taxpayer
Identification Number ("TIN") which, for an individual, would be his Social
Security number, (ii) furnishes an incorrect TIN, (iii) is notified by the
Internal Revenue Service that it has failed to properly report payments of
interest or dividends or (iv) under certain circumstances, fails to certify,
under penalties of perjury, that it has furnished a correct TIN and has not
been notified by the Internal Revenue Service that it is subject to backup
withholding for failure to report interest and dividend payments. United
States Holders should consult their tax advisors regarding their qualification
for exemption from backup withholding and the procedure for obtaining such an
exemption if applicable.
The amount of any backup withholding from a payment to a United
States Holder will be allowed as a credit against such Holder's United States
federal income tax liability and may entitle such Holder to a refund, provided
that the required information is furnished to the Internal Revenue Service.
Tax Consequences to United States Alien Holders
Under present United States federal law, and subject to the
discussion below concerning backup withholding, payments of principal,
interest (including Special Interest, if any) and premium on the Notes by the
Company or any paying agent to any United States Alien Holder, and gain
realized on the sale, exchange or other disposition of such Note, will not be
subject to United States federal income or withholding tax, provided that: (i)
such Holder does not own, actually or constructively, 10 percent or more of
the total combined voting power of all classes of stock of the Company
entitled to vote, is not a controlled foreign corporation related, directly or
indirectly, to the Company through stock ownership, and is not a bank
receiving interest described in Section 881(c)(3)(A) of the Code; (ii) the
statement requirement set forth in Section 871(h) or Section 881(c) of the
Code has been fulfilled with respect to the beneficial owner, as discussed
below; (iii) such Holder is not an individual who is present in the United
States for 183 days or more in the taxable year of disposition, or such
individual does not have a "tax home" (as defined in Section 911(d)(3) of the
Code) or an office or other fixed place of business in the United States; and
(iv) such payments and gain are not effectively connected with the conduct by
such Holder of a trade or business in the United States.
As noted above, the Company intends to treat the Notes as
indebtedness for United States federal income tax purposes. No assurance can
be given, however, that Company's treatment will not be challenged by the
Internal Revenue Service. If the Notes were ultimately treated as equity
rather than debt for United States federal income tax purposes, the portfolio
interest exception would not apply and withholding tax at a flat rate of 30%
(or a lower rate under an applicable income tax treaty) would be imposed on
the payments of interest and Special Interest, if any, on Notes to the extent
of the Company's current or accumulated earnings and profits or on the entire
amounts of the payments if the withholding agent does not know or cannot
reasonably estimate the amount of such earnings and profits. Further, any such
withholding could commence when the Internal Revenue Service first asserted
that the Notes constituted equity; in such event, if the Internal Revenue
Service did not ultimately prevail, the United States Alien Holders would be
able to recover the tax withheld by filing a claim for refund with the
Internal Revenue Service.
Certain Certification Requirements
Sections 871(h) and 881(c) of the Code require that, in order
to obtain the portfolio interest exemption from the withholding tax described
in the paragraphs above, either the beneficial owner of the Note, or a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"Financial Institution") and that is holding the Note on behalf of such
beneficial owner, file a statement with the withholding agent to the effect
that the beneficial owner of the Note is not a United States Holder. Under
current United States Treasury Regulations, such requirement will be fulfilled
if the beneficial owner of a Note certifies on Internal Revenue Service Form
W-8, under penalties of perjury, that it is not a United States Holder and
provides its name and address, and any Financial Institution holding the Note
on behalf of the beneficial owner files a statement with the withholding agent
to the effect that it has received such a statement from the Holder (and
furnishes the withholding agent with a copy thereof). Under recently finalized
United States Treasury Regulations, which are generally applicable to payments
made after December 31, 1998, certain United States Alien Holders would also
need to provide their United States taxpayer identification numbers on such
forms in order to fulfill such requirement.
If a United States Alien Holder of a Note is engaged in a
trade or business in the United States, and if interest on the Note is
effectively connected with the conduct of such trade or business, the United
States Alien Holder, although exempt from the withholding tax discussed in the
preceding paragraphs, will generally be subject to regular United States
income tax on interest and on any gain realized on the sale, exchange or other
disposition of a Note in the same manner as if it were a United States Holder.
In lieu of the certificate described in the preceding paragraph, such a Holder
will be required to provide to the withholding agent a properly executed
Internal Revenue Service Form 4224 (or the successor W-8 Form), in order to
claim an exemption from withholding tax. Under recently finalized United States
Treasury Regulations, a United States Alien Holder may also need to provide a
United States taxpayer identification number on such form in order to fulfill
such requirement. In addition, if such United States Alien Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% (or such
lower rate provided by an applicable treaty) of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments. For
purposes of the branch profits tax, interest on and any gain recognized on the
sale, exchange or other disposition of a Note will be included in the
effectively connected earnings and profits of such United States Alien Holder
if such interest or gain, as the case may be, is effectively connected with
the conduct by the United States Alien Holder of a trade or business in the
United States.
Estate Taxes
Under Section 2105(b) of the Code, a Note held by an
individual who is not a citizen or resident of the United States at the time
of his death will not be subject to United States federal estate tax as a
result of such individual's death, provided that the individual does not own,
actually or constructively, 10 percent or more of the total combined voting
power of all classes of stock of the Company entitled to vote and, at the time
of such individual's death, payments with respect to such Note would not have
been effectively connected to the conduct by such individual of a trade or
business in the United States.
As noted above, the Company intends to treat the Notes as
indebtedness for United States federal income tax purposes. No assurance can
be given, however, that the Company's treatment will not be challenged by the
Internal Revenue Service. If the Notes were ultimately treated as equity
rather than debt for United States federal income tax purposes, a United
States Alien Holder who is treated as the owner of, or has made certain
lifetime transfers of, an interest in the Notes will be required to include
the value thereof in his or her gross estate for United States federal estate
tax purposes, and may be subject to United States federal estate tax unless an
applicable estate tax treaty provides otherwise.
Backup Withholding and Information Reporting
Under current Treasury Regulations, backup withholding (31%)
will not apply to payments by the Company made on a Note if the certifications
required by Sections 871(h) and 881(c) of the Code are received, provided in
each case that the Company or such paying agent, as the case may be, does not
have actual knowledge that the payee is a United States person.
Under current Treasury Regulations, payments on the sale,
exchange or other disposition of a Note made to or through a foreign office of
a broker generally will not be subject to backup withholding. However, if such
broker is a United States person, a controlled foreign corporation for United
States tax purposes, a foreign person 50 percent or more of whose gross income
is effectively connected with a United States trade or business for a
specified three-year period or another United States related person described
in Section 1.6049-5(c)(5) of the Treasury Regulations, information reporting
will be required unless the broker has in its records documentary evidence
that the beneficial owner is not a United States person and certain other
conditions are met or the beneficial owner otherwise establishes an exemption.
Under recently finalized Treasury Regulations, backup withholding may apply to
any payment made after December 31, 1998 which such broker is required to
report if such broker has actual knowledge that the payee is a United States
person. Payments to or through the United States office of a broker will be
subject to backup withholding and information reporting unless the Holder
certifies, under penalties of perjury, that it is not a United States person
or otherwise establishes an exemption.
United States Alien Holders of Notes should consult their tax
advisors regarding the application of information reporting and backup
withholding in their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if available.
Any amounts withheld from a payment to a United States Alien Holder under the
backup withholding rules will be allowed as a credit against such Holder's
United States federal income tax liability and may entitle such Holder to a
refund, provided that the required information is furnished to the Internal
Revenue Service.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own
account ("Participating Broker-Dealer") pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. This Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer in connection
with resales of Exchange Notes received in exchange for Old Notes where such
Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any Participating Broker-Dealer for use in
connection with any such resale. In addition, until , 1998
(90 days after the date of this Prospectus), all dealers effecting
transactions in the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of
Exchange Notes by Participating Broker-Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Participating Broker-Dealer or the purchasers of any such Exchange Notes. Any
Participating Broker-Dealer that resells Exchange Notes that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such Exchange Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on
any such resale of Exchange Notes and any commission or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the reasonable expenses of
one counsel for the holders of the Notes) other than commissions or concessions
of any brokers or dealers and will indemnify the holders of the Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be
passed upon for the Company by Davis Polk & Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of
December 31, 1996 and 1997 and for each of the periods in the three year
periods ended December 31, 1997 included in this Prospectus, have been audited
by KPMG Peat Marwick LLP, independent auditors, as set forth in their report
appearing herein and are included in reliance upon the report of such firm
given and upon their authority as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP refers to the application of fresh start
reporting in connection with the '95 Reorganization. See the Consolidated
Financial Statements.
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
Financial Statements:
Independent Auditors' Report.........................................F-2
Statements of Consolidated Operations for the Years
Ended December 31, 1997 and 1996, the Four Months
Ended December 31, 1995, and the Eight Months Ended
August 31, 1995......................................................F-3
Consolidated Balance Sheets, December 31, 1997 and 1996..............F-4
Statements of Consolidated Cash Flows for the Years
Ended December 31, 1997 and 1996, the Four Months
Ended December 31, 1995, and the Eight Months Ended
August 31, 1995......................................................F-6
Consolidated Statements of Shareholders' Equity
(Deficiency) for the Years Ended December 31, 1997 and
1996, the Four Months Ended December 31, 1995, and the
Eight Months Ended August 31, 1995...................................F-8
Notes to Consolidated Financial Statements...........................F-9
Unaudited Statements of Consolidated Operations for
the Three Months Ended March 31, 1998 and 1997......................F-45
Consolidated Balance Sheets, March 31, 1998 and
December 31, 1997 (unaudited).......................................F-46
Unaudited Statements of Consolidated Cash Flows for
the Three Months Ended March 31, 1998 and 1997......................F-48
Notes to Unaudited Consolidated Financial Statements................F-50
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, 1997 and 1996,
and the related statements of consolidated operations, cash flows and
shareholders' equity (deficiency) for the years ended December 31, 1997 and
1996, the four months ended December 31, 1995 and the eight months ended
August 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
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, 1997 and 1996,
and the results of their operations and their cash flows for the years ended
December 31, 1997 and 1996, the four months ended December 31, 1995 and the
eight months ended August 31, 1995, in conformity with generally accepted
accounting principles.
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.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
March 4, 1998
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
For the Years Ended December 31, 1997 and 1996, the Four Months Ended December
31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
----------------------------------------------- ----------------
Year Year Four Months Eight Months
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger.................................................. $2,924,042 $3,077,905 $943,077 $1,929,166
Freight and mail........................................... 126,730 153,076 48,384 94,784
All other.................................................. 277,180 323,426 107,013 194,405
---------- ---------- -------- ----------
Total.................................................... 3,327,952 3,554,407 1,098,474 2,218,355
---------- ---------- -------- ----------
Operating expenses:
Salaries, wages and benefits............................... 1,224,116 1,254,341 373,041 755,708
Earned stock compensation (Note 12)........................ 4,199 9,056 2,192 55,767
Aircraft fuel and oil...................................... 480,853 585,163 161,799 296,833
Passenger sales commissions................................ 242,135 268,131 80,045 185,981
Aircraft maintenance materials and repairs................. 138,353 208,183 51,998 95,657
Depreciation and amortization.............................. 150,381 161,822 55,168 106,474
Operating lease rentals.................................... 370,827 302,990 96,393 182,548
Passenger food and beverages............................... 83,241 110,092 34,676 68,137
Special charges (Note 16).................................. -- 85,915 -- 1,730
All other.................................................. 663,107 767,241 232,716 454,878
---------- ---------- -------- ----------
Total.................................................... 3,357,212 3,752,934 1,088,028 2,203,713
---------- ---------- -------- ----------
Operating income (loss)..................................... (29,260) (198,527) 10,446 14,642
---------- ---------- -------- ----------
Other charges (credits):
Interest expense (contractual interest of $141,967 for the
eight months ended August 31, 1995)...................... 114,066 126,822 45,917 123,247
Interest and investment income............................. (12,555) (21,309) (7,484) (10,366)
Disposition of assets, gains and losses - net (Note 15).... (16,004) 1,135 (3,330) 206
Reorganization items (Note 19)............................. -- -- -- 242,243
Other charges and credits - net (Note 17).................. (25,432) (30,598) 7,611 (2,379)
---------- ---------- -------- ----------
Total.................................................... 60,075 76,050 42,714 352,951
---------- ---------- -------- ----------
Income (loss) before income taxes and extraordinary
items.................................................... (89,335) (274,577) (32,268) (338,309)
Provision (credit) for income taxes (Note 5)............... 527 450 1,370 (96)
---------- ---------- -------- ----------
Loss before extraordinary items............................ (89,862) (275,027) (33,638) (338,213)
Extraordinary items, net of income taxes (Note 14)......... (20,973) (9,788) 3,500 140,898
---------- ---------- -------- ----------
Net loss................................................... (110,835) (284,815) (30,138) (197,315)
Preferred stock dividend requirements...................... 16,119 36,649 4,751 11,554
---------- ---------- -------- ----------
Loss applicable to common shares........................... $(126,954) $(321,464) $(34,889) $(208,869)
========== ========== ======== ==========
Per share amounts:
Loss before extraordinary item and special dividend
requirement.............................................. $ (1.98) $ (6.60) $ (1.15)
Extraordinary item and special dividend requirement........ (0.39) (0.67) 0.10
---------- ---------- --------
Net loss................................................... $ (2.37) $ (7.27) $ (1.05)
========== ========== ========
</TABLE>
See notes to consolidated financial statements
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Amounts in Thousands)
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $237,765 $181,586
Receivables, less allowance for doubtful accounts, $9,334 in 1997 and
$12,939 in 1996 (Note 8).................................................... 176,333 239,496
Spare parts, materials and supplies, less allowance for obsolescence,
$19,176 in 1997 and $29,463 in 1996 (Note 8)................................ 96,108 111,239
Prepaid expenses and other................................................... 122,751 93,424
------------ ------------
Total............................................................... 632,957 625,745
------------ ------------
Property (Notes 8, 9 & 18):
Property owned:
Flight equipment.......................................................... 569,063 339,150
Prepayments on flight equipment........................................... 15,431 39,072
Land, buildings and improvements.......................................... 62,854 59,879
Other property and equipment.............................................. 64,131 60,750
------------ ------------
Total owned property................................................ 711,479 498,851
Less accumulated depreciation............................................. 114,921 71,810
------------ ------------
Property owned - net................................................ 596,558 427,041
------------ ------------
Property held under capital leases:
Flight equipment.......................................................... 166,358 172,812
Land, buildings and improvements.......................................... 49,443 54,761
Other property and equipment.............................................. 7,704 6,570
------------ ------------
Total property held under capital leases............................ 223,505 234,143
Less accumulated amortization............................................. 78,298 46,977
------------ ------------
Property held under capital leases - net ........................... 145,207 187,166
------------ ------------
Total property - net................................................ 741,765 614,207
------------ ------------
Investments and other assets:
Investments in affiliated companies (Note 4)................................. 117,293 108,173
Investments, receivables and other (Note 9).................................. 162,969 149,028
Routes, gates and slots - net................................................ 377,691 401,659
Reorganization value in excess of amounts allocable to
identifiable assets - net................................................... 741,173 783,127
------------ ------------
Total............................................................... 1,399,126 1,441,987
------------ ------------
$ 2,773,848 $ 2,681,939
============ ============
See notes to consolidated financial statements
</TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Amounts in Thousands Except Per Share Amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 8)................................... $ 51,392 $ 92,447
Current obligations under capital leases (Note 9)............................... 37,068 42,501
Advance ticket sales............................................................ 223,197 241,516
Accounts payable, principally trade............................................. 250,551 216,675
Accounts payable to affiliated companies (Note 4)............................... 6,261 4,894
Accrued expenses:
Employee compensation and vacations earned...................................... 119,572 116,846
Contributions to retirement and pension trusts (Note 6) ........................ 13,469 14,091
Interest on debt and capital leases............................................. 32,018 39,420
Taxes........................................................................... 14,146 19,018
Other accrued expenses.......................................................... 189,271 174,753
--------- ---------
Total accrued expenses...................................................... 368,476 364,128
--------- ---------
Total....................................................................... 936,945 962,161
--------- ---------
Long-term liabilities and deferred credits:
Long-term debt, less current maturities (Note 8)................................ 736,540 608,485
Obligations under capital leases, less current obligations (Note 9)............. 182,922 220,790
Postretirement benefits other than pensions (Note 6)............................ 485,787 471,171
Noncurrent pension liabilities (Note 6)......................................... 30,011 30,716
Other noncurrent liabilities and deferred credits............................... 133,359 150,511
--------- ---------
Total....................................................................... 1,568,619 1,481,673
--------- ---------
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 39
9 1/4% cumulative convertible exchangeable preferred stock, $50 liquidation
preference; 1,725 shares issued and outstanding ................................ 17 --
Employee preferred stock, $0.01 liquidation preference; special voting rights;
shares issued and outstanding: 1997-6,472; 1996-5,681........................... 65 57
Common stock, $0.01 par value; shares issued and outstanding: 1997-51,393;
1996-41,763..................................................................... 514 418
Additional paid-in capital......................................................... 693,437 552,544
Accumulated deficit ............................................................... (425,788) (314,953)
--------- ---------
Total....................................................................... 268,284 238,105
--------- ---------
$2,773,848 $2,681,939
========== ==========
See notes to consolidated financial statements
</TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Years Ended December 31, 1997 and 1996, the Four Months
Ended December 31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
--------------------------------------------- --------------
Year Year Four Months Eight Months
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................................................... $(110,835) $(284,815) $(30,138) $(197,315)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Employee earned stock compensation............................. 4,199 9,056 2,192 55,767
Depreciation and amortization ................................. 150,381 161,822 55,168 106,474
Amortization of discount and expenses on debt ................. 14,461 14,744 3,063 12,472
Extraordinary loss (gain) on extinguishment of debt............ 20,973 9,788 (3,500) (140,898)
Interest paid in common stock.................................. 4,125 11,332 11,587 --
Equity in undistributed earnings of affiliates not
consolidated................................................. (9,404) (10,017) 12,169 (2,339)
Revenue from Icahn ticket program.............................. (115,991) (71,534) (4,356) --
Net gains-losses on disposition of assets ..................... (16,004) 1,135 (3,330) 206
Non-cash special charges....................................... -- 85,915 -- --
Reorganization items .......................................... -- -- -- 242,243
Change in operating assets and liabilities:
Decrease (increase) in:
Receivables................................................. 65,336 3,927 69,121 (62,094)
Inventories................................................. 13,496 (4,897) 510 5,866
Prepaid expenses and other current assets................... (9,227) (28,288) 23,241 (8,894)
Other assets ............................................... (10,910) 111 (3,088) (1,586)
Increase (decrease) in:
Accounts payable and accrued expenses....................... 42,480 83,840 (41,989) 108,669
Advance ticket sales........................................ (41,301) 19,698 (39,350) 81,598
Benefits, other noncurrent liabilities and deferred
credits................................................... (1,541) (7,505) (6,387) (28,160)
--------- --------- -------- ---------
Net cash provided (used) ................................... 238 (5,688) 44,913 172,009
--------- --------- -------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of property ................................. 22,749 3,234 7,069 2,221
Capital expenditures............................................. (74,025) (121,547) (42,973) (16,554)
Return of pre-delivery deposits related to leased aircraft....... 5,565 -- -- --
Net decrease (increase) in investments, receivables and other.... (10,553) 10,941 842 26,064
--------- --------- -------- ---------
Net cash provided (used).................................... (56,264) (107,372) (35,062) 11,731
--------- --------- -------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt issued.............................. 270,608 2,750 22,100 --
Proceeds from warrants issued ................................... 7,076 -- -- --
Proceeds from sale and leaseback of certain aircraft............. 17,600 13,800 -- --
Repayments on long-term debt and capital lease obligations....... (257,838) (117,203) (39,654) (62,158)
Refund from retirement of 1967 bonds............................. 5,318 -- -- --
Net proceeds from sale of preferred stock........................ 82,231 186,163 -- --
Net proceeds from exercise of equity rights, warrants
and options.................................................... 2,686 1,034 51,930 --
Redemption of 12% Preferred Stock ............................... -- (81,749) -- --
Cash dividends paid on preferred stock........................... (15,476) (14,489) -- --
--------- --------- -------- ---------
Net cash provided (used).................................... 112,205 (9,694) 34,376 (62,158)
--------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents................ 56,179 (122,754) 44,227 121,582
Cash and cash equivalents at beginning of period.................... 181,586 304,340 260,113 138,531
--------- --------- -------- ---------
Cash and cash equivalents at end of period.......................... $237,765 $181,586 $304,340 $260,113
========= ========= ======== =========
See notes to consolidated financial statements
</TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Years Ended December 31, 1997 and 1996,
the Four Months Ended December 31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands)
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
-------------------------------------------------- --------------
Year Year Four Months Eight Months
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Cash Paid During the Period for:
Interest .......................................... $ 96,865 $102,311 $27,318 $ 55,878
======== ======== ======= ========
Income taxes ...................................... $ 14 $ 159 $ 7 $ 39
======== ======== ======= ========
Information About Noncash Operating, Investing
and Financing Activities:
Promissory notes issued to finance aircraft
acquisition..................................... $177,469 $ 10,565 $ -- $ --
======== ======== ======= ========
Promissory notes issued to finance aircraft
predelivery payments........................... $ 6,237 $ 19,862 $ -- $ 12,690
======== ======== ======= ========
Property acquired and obligations recorded
under new capital lease transactions........... $ 1,138 $ 4,266 $ -- $ 12,690
======== ======== ======= ========
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 ................ $ 48,835 $ 41,021 $ -- $ --
Common stock issued, at fair value .......... 56,028 49,182 -- --
-------- -------- ------- --------
Extraordinary loss .......................... $ 7,193 $ 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
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 1997 and 1996, the Four Months
Ended December 31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
12% 8% 9 1/4% Employee
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance, December 31, 1994 .................................. $ 125 $ -- $ -- $ --
Net loss for the eight months ended August 31, 1995 ......... -- -- -- --
Eliminate Predecessor equity accounts in connection with
fresh start reporting ...................................... (125) -- -- --
Record additional excess of reorganization value over
identifiable assets ........................................ -- -- -- --
Issuance of Common and Employee Preferred Stock pursuant to
Plan of Reorganization..................................... -- -- -- 53
--------- --------- --------- ---------
Balance, August 31, 1995 .................................... -- -- -- 53
REORGANIZED COMPANY:
Equity rights exercised ..................................... -- -- -- --
Interest on 12% Notes paid in Common Stock .................. -- -- -- --
Options and warrants exercised .............................. -- -- -- --
Earned Stock Compensation ................................... -- -- -- --
Amortization of the excess of redemption value over carrying
value of Mandatorily Redeemable 12% Preferred Stock ........ -- -- -- --
Net loss for the four months ended December 31, 1995 ........ -- -- -- --
--------- --------- --------- ---------
Balance, December 31, 1995 .................................. -- -- -- 53
Warrants exercised .......................................... -- -- -- --
Options exercised ........................................... -- -- -- --
Earned Stock Compensation ................................... -- -- -- --
Allocation of employee preferred stock to ALPA ESOP ......... -- -- -- 6
Conversion of employee preferred stock to Common Stock ...... -- -- -- (2)
Net proceeds from issuance of 8% preferred stock ............ -- 39 -- --
Dividends on 8% preferred stock paid in cash ................ -- -- -- --
Dividends on mandatorily redeemable 12% preferred stock
paid in Common Stock ....................................... -- -- -- --
Dividends on mandatorily redeemable 12% preferred stock
paid in cash ............................................... -- -- -- --
Amortization of the excess of redemption value over carrying
value of mandatorily redeemable 12% preferred stock ........ -- -- -- --
Excess of cash paid for early redemption of mandatorily
redeemable 12% preferred stock over carrying value ......... -- -- -- --
Common Stock issued in exchange for 12% notes ............... -- -- -- --
Interest on 12% Notes paid in Common Stock .................. -- -- -- --
Net loss for 1996 ........................................... -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31, 1996 .................................. -- 39 -- 57
Options exercised ........................................... -- -- -- --
Earned stock compensation ................................... -- -- -- --
Allocation of employee preferred stock to ALPA ESOP ......... -- -- -- 6
Conversion of employee preferred stock to Common Stock ...... -- -- -- (6)
Common Stock issued in exchange for 12% Reset Notes ......... -- -- -- --
Net proceeds from issuance of 9 1/4% preferred stock ........ -- -- 17 --
Dividends on 8% preferred stock paid in cash ................ -- -- -- --
Interest on 12% Reset Notes paid in Common Stock ............ -- -- -- --
Issuance of warrants with 12% Senior Secured Notes Due 2002 . -- -- -- --
Issuance of employee fill-up shares ......................... -- -- -- 8
Net loss for 1997 ........................................... -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31, 1997 .................................. $ -- $ 39 $ 17 $ 65
========== ========== ========== ==========
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
--------- ----------- ------------ ----------
<C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance, December 31, 1994 .................................. $ 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 ...................................... (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...................................... 172 269,775 -- 270,000
--------- --------- --------- ----------
Balance, August 31, 1995 .................................... 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 .................................. 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) -- --
Conversion of employee preferred stock to Common Stock ...... 2 -- -- --
Net proceeds from issuance of 8% preferred stock ............ -- 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 .................................. 418 552,544 (314,953) 238,105
Options exercised ........................................... 6 3,098 -- 3,104
Earned stock compensation ................................... -- 2,941 -- 2,941
Allocation of employee preferred stock to ALPA ESOP ......... -- (6) -- --
Conversion of employee preferred stock to Common Stock ...... 6 -- -- --
Common Stock issued in exchange for 12% Reset Notes ......... 77 55,951 -- 56,028
Net proceeds from issuance of 9 1/4% preferred stock ..... -- 82,214 -- 82,231
Dividends on 8% preferred stock paid in cash ................ -- (15,476) -- (15,476)
Interest on 12% Reset Notes paid in Common Stock ............ 6 4,119 -- 4,125
Issuance of warrants with 12% Senior Secured Notes Due 2002 . -- 7,076 -- 7,076
Issuance of employee fill-up shares ......................... 1 976 -- 985
Net loss for 1997 ........................................... -- -- (110,835) (110,835)
--------- --------- --------- ----------
Balance, December 31, 1997 .................................. $ 514 $ 693,437 $(425,788) $ 268,284
========= ========= ========= =========
</TABLE>
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. However, beginning in the third
quarter of 1996, the Company's operating performance substantially
deteriorated. Management believes that certain strategic initiatives
undertaken by the Company beginning in late 1996 have contributed to the
improved financial and operating results. TWA's management began to implement
such strategic initiatives in response to a significant deterioration in the
Company's operating performance and financial condition during the second half
of 1996. This deterioration was primarily caused by (i) an overly aggressive
expansion of TWA's capacity and planned flight schedule, particularly during
the 1996 summer season, which forced the Company to rely disproportionately on
lower-yield 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 operations during the summer
of 1996; 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 and adversely affected the
Company's yields and unit costs. 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.
Management believes that certain strategic initiatives
undertaken by the Company beginning in late 1996 and continuing throughout
1997 have contributed to the Company's improved financial and operating
results. The primary focus of the Company's strategic initiatives was to
reestablish TWA's operational reliability and schedule integrity and overall
product quality in order to attract higher-yield passengers and enhance
overall productivity, which was intended to improve the Company's financial
results. As the initial steps in implementing this strategy, the Company
temporarily reduced its flight schedule during the first quarter of 1997 to
more closely match aircraft available for active service and worked to reduce
the number of aircraft in maintenance backlog by increasing overtime and
maintenance capacity made available by terminating an unprofitable aircraft
maintenance contract with the U.S. government. The other key initiatives
which TWA began implementing in late 1996 included: (i) acceleration of the
Company's fleet renewal plan; (ii) a restructuring of TWA's operations at JFK;
(iii) a focus on improving productivity; (iv) implementation of a series of
revenue-enhancing marketing initiatives; and (v) implementation of a number of
employee-related initiatives to reinforce the Company's focus on operational
performance.
TWA has significantly enhanced its operational reliability and
schedule integrity since the first quarter of 1997. According to statistics
reported to the DOT, TWA improved from tenth among the 10 largest U.S.
scheduled commercial airlines in domestic on-time performance in 1996 to
second in 1997. TWA also canceled 5,413 fewer flights in 1997 than in 1996,
improving its percentage of scheduled flights completed to 98.0% compared to
96.2% for 1996. Primarily as a result of the Company's improved operational
performance during 1997, passenger load factors and passenger revenue per
available seat mile reflected improvement compared to 1996.
For the full year ended December 31, 1997, the Company's
financial results reflected operating revenues of $3,328.0 million (a decrease
of $226.4 million from operating revenues of $3,554.4 million for the full
year 1996), an operating loss of $29.3 million (an improvement of $169.2
million over the full year 1996 operating loss of $198.5 million, which
included special charges of $85.9 million), and a net loss of $110.8 million
(including a non-cash extraordinary loss of $21.0 million related to the early
extinguishment of debt), an improvement of $174.0 million over a net loss of
$284.8 million (which included a non-cash extraordinary loss of $9.8 million
and special charges of $85.9 million) for 1996. The reduction in full-year
operating revenues for 1997 resulted from the planned reduction in capacity as
the Company replaced older L-1011 and B-747 aircraft with new B-757, B-767 and
MD-80 aircraft on many routes. The Company's first quarter operating results
have historically been considerably less favorable than other quarters and
typically reflect substantial operating and net losses. Notwithstanding
actions taken to date and planned by management to improve the Company's
future operating results and performance, the Company anticipates reporting
operating and net losses in the first quarter of 1998, which losses may be
substantial.
On December 31, 1997, the Company's total cash and cash
equivalents balance was approximately $237.8 million. This balance
represented an increase of approximately $56.2 million from the Company's
corresponding cash balance at December 31, 1996. This increase in the
Company's cash balance resulted primarily from the proceeds of various capital
market offerings during 1997 and asset dispositions offset by capital
expenditures and debt repayments. In March 1997, the Company raised
approximately $47.2 million in net proceeds from the issuance of 50,000 Units,
with each Unit consisting of (i) one 12% Senior Secured Note due 2002, in the
principal amount of $1,000, and (ii) one Redeemable Warrant to purchase 126.26
shares of Common Stock at an exercise price of approximately $7.92 per share.
In December 1997, the Company raised net proceeds of $82.2 million from the
sale of the 9 1/4% Preferred Stock, net proceeds of $133.5 million from the
sale of the 11 1/2% Notes, a portion of the proceeds of which was used to
repay the 12% Reset Notes, and net proceeds of $97.0 million from the sale of
the Receivables Securitization Notes, a portion of the proceeds of which was
used to repay the outstanding balance of the Icahn Loans. In March 1998, the
Company completed the sale of $150.0 million in 11 3/8% Senior Notes due 2006
resulting in net proceeds to the Company of $144.9 million. The Company
intends to use the net proceeds for certain capital expenditures including
pre-delivery deposits on new aircraft acquisitions, and for working capital
and other general corporate purposes.
Each of the Company's union contracts became amendable as of
August 31, 1997, and negotiations have begun with respect to all three 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 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,
1997 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.
The Company 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 capital sources or from the sale of
assets. As a result of the financings consummated in the fourth quarter of
1997 and the repayment of certain debt in connection therewith, certain assets
were released from collateral liens and are currently unencumbered. Further
pledging of these unencumbered assets, however, may be limited by negative
pledge restrictions in outstanding indebtedness. Substantially all of TWA's
other strategic assets have been pledged to secure various issues of
outstanding indebtedness of the Company. To the extent that the pledged
assets are sold, the applicable financing agreements generally require the
sale proceeds to be applied to repay the corresponding indebtedness. 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.
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. Additionally, certain of the Company's major competitors
have established or announced plans to establish alliances with one or more
foreign or domestic carriers to expand their international operations and
increase the domestic market presence. 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 most 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, 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 30 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, 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>
1997 1996
-------- --------
<S> <C> <C>
Routes......................... $248,100 $248,100
Gates.......................... 83,649 86,649
Slots.......................... 95,800 95,800
-------- --------
427,549 430,549
Accumulated Amortization....... 49,858 28,890
-------- --------
$377,691 $401,659
======== ========
</TABLE>
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, 1997 and 1996 was
$97,891,000 and $55,937,000, respectively.
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 discounted 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 131,000 and 180,000 vouchers were outstanding at December 31,
1997 and 1996, respectively.
(i) Interest Capitalized: Interest cost associated with funds expended for the
acquisition of qualifying assets is capitalized. Interest capitalized was
$4,784,000 in 1997 and $5,463,000 in 1996. 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 expense and reduced through a
reduction in operating lease rentals over the terms of the respective
aircraft leases. At December 31, 1997 and 1996, the unamortized balances of
the deferred credits were $23,154,000 and $31,408,000, 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 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS No. 128"), which specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS").
SFAS No. 128 replaces the presentation of primary EPS with a presentation of
basic EPS and fully diluted EPS with diluted EPS. Basic EPS, unlike primary
EPS, excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. As a result of
the losses reported in the periods presented, the adoption of SFAS No. 128
did not impact previously reported earnings per share data.
In computing the loss applicable to common shares for 1997 and 1996 and the
four months ended December 31, 1995, the net loss has been increased by
dividend requirements on the 9 1/4% Cumulative Convertible Exchangeable
Preferred Stock from the date of issuance in December 1997, 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 (47.1 million in 1997, 38.5
million in 1996 and 28.0 million in 1995) and Employee Preferred Stock (6.4
million in 1997, 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. Diluted EPS has not been presented as the impact of stock
options, warrants, conversion of preferred stock or potential issuances of
additional Employee Preferred Stock would have been anti-dilutive. For a
description of securities which represent potential common shares and which
could materially dilute basic EPS in the future, see Notes 11, 12, & 13.
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, 1997 most of the
Company's receivables were related to tickets sold to individual passengers
through the use of major credit cards (40%) or to tickets sold by other
airlines (14%) 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.
(t) New Accounting Standards: The FASB recently issued SFAS No. 130,
Reporting Comprehensive Income, SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, and SFAS No. 132, Employers'
Disclosure about Pensions and Other Postretirement Benefits. SFAS No. 130
provides for the reporting and presentation of comprehensive income and its
components. SFAS No. 131 establishes standards for defining operating
segments and reporting certain information about such segments. SFAS No. 132
revised disclosure requirements relative to pension and other postretirement
benefits. Since these statements only impact how financial information is
disclosed in interim and annual periods, the adoption of these standards in
1998 will not impact the Company's financial condition or results of
operations.
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.
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," 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.
Ticket sales under the Ticket Program, which commenced in
September 1995, were $236.1 million in 1997, $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 $129.9 million in 1997,
$76.9 million in 1996 and $8.8 million in 1995. Of these amounts, $116.0
million, $71.5 million and $4.4 million is included as passenger revenues for
1997, 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. Through December 31, 1997,
approximately $118.6 million of such proceeds had been applied to the
principal balance of the Icahn Loans, and $76.7 million had been applied to
the PBGC Notes, which resulted in an $11.5 million extraordinary charge
related to the early extinguishment of PBGC Notes ($9.9 million in 1997 and
$1.6 million in 1996) (See Note 14). On December 30, 1997, TWA completed a
$100 million private placement of 9.8% Airline Receivable Asset Backed Notes
due 2001. Proceeds from this financing were used, in part, to retire the
remaining balance of Icahn Loans, including approximately $71.4 million of
principal and $2.7 million in accrued interest.
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
purchased 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 System Tickets through travel agents or directly
to the general public. Karabu, however, has been marketing System Tickets
through travel agents and directly to the general public. 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 or directly to
the general public. In December 1995, the Company filed a lawsuit against
Karabu, Mr. Icahn and affiliated companies seeking damages and to enjoin
further violations of the Ticket Agreement. Mr. Icahn countered by
threatening to file his own lawsuit and declare a default on the Icahn Loans,
which financing was secured by receivables and certain flight equipment
pledged under one or more security agreements (the "Karabu Security
Agreements"). Mr. Icahn's position was based on a variety of claims related
to his various interpretations of the Karabu Security Agreements as well as
with respect to certain alleged violations of the Ticket Agreement by the
Company. 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. In response to
such lawsuit, Karabu and another Icahn-affiliated company asserted
counterclaims alleging that the Company had breached its obligations under the
Ticket Agreement by, among other things, seeking to restrict Karabu and
Icahn-affiliated companies from selling System Tickets through travel agents
or directly to the general public. If Karabu's interpretation as to sales of
System Tickets through travel agents or directly to the general public 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 collected that could reduce
overall passenger yields on a continuing basis during the term of the Ticket
Agreement. The trial of this case was completed on January 7, 1998. A
decision regarding this matter is pending.
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 $11,305,000
for the year ended December 31, 1997, $11,919,000 for the year ended December
31, 1996, $(11,535,000) for the four months ended December 31, 1995 and
$3,607,000 for the eight months ended August 31, 1995, 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, 1997 and 1996, the unamortized balance of this
excess amounted to approximately $30.1 million and $32.0 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 (amounts in
thousands):
<TABLE>
<S> <C>
Year Ended December 31, 1997........................ $48,902
Year Ended December 31, 1996........................ $54,611
Four Months Ended December 31, 1995................. $16,566
Eight Months Ended August 31, 1995.................. $29,604
</TABLE>
Summary financial data for Worldspan is as follows (amounts in
thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
Current assets........................ $220,602 $172,368
-------- --------
Non-current assets.................... 360,728 384,653
-------- --------
Total assets......................... $581,330 $557,021
======== ========
Current liabilities................... $128,159 $126,774
Non-current liabilities............... 102,957 125,255
Partners' equity...................... 350,214 304,992
-------- --------
Total liabilities and equity......... $581,330 $557,021
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................ $578,340 $548,419 $498,138
Costs and expenses...... 533,119 500,743 529,852
-------- -------- --------
Net income (loss)...... $ 45,221 $ 47,676 $(31,714)
======== ======== ========
</TABLE>
5. Income Taxes:
Income tax liabilities at December 31, 1997 and 1996, included
in other noncurrent liabilities, consist of the following (in millions):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current taxes........................... $ -- $ --
Deferred taxes:
Federal................................ 10.7 10.7
Other income and franchise taxes....... 0.3 0.3
-------- --------
Total income tax liability.............. $ 11.0 $ 11.0
======== ========
</TABLE>
Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1997 and 1996 are as follows (in
millions):
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits, other than pensions..... $199.8 $198.5
Pension obligations.............................. 51.0 82.3
Employee compensation and other benefits......... 40.0 36.5
Capital leases, net.............................. 58.8 54.3
Net operating loss carryforwards................. 337.7 247.1
Other, net....................................... 77.9 84.0
------ ------
Total deferred tax assets...................... 765.2 702.7
------ ------
Deferred tax liabilities:
Property and spare parts, net.................... (45.0) (34.6)
Routes, gates, and slots, net.................... (149.2) (158.7)
Investment in affiliate.......................... (46.1) (42.7)
------ ------
Total deferred tax liabilities................. (240.3) (236.0)
------ ------
Net deferred tax asset before valuation allowance. 524.9 466.7
Deferred tax asset valuation allowance........... (535.9) (477.7)
------ ------
Net deferred tax 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.
A summary of the provision (credit) for income taxes is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------- --------------
Year Ended Four Months Eight Months
------------------------------ Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Current, primarily foreign........................... $527 $450 $1,370 $(96)
Deferred............................................. -- -- -- --
---- ---- ------ ----
Total provision (benefit) for income taxes, net..... $527 $450 $1,370 $(96)
==== ==== ====== ====
</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 (amounts in thousands):
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------- --------------
Year Ended Four Months Eight Months
------------------------------ Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Income tax benefit at United States statutory rates.. $(31,268) $(93,652) $(11,294) $(118,408)
Amortization of reorganization value in excess of
amounts allocable to identifiable assets............ 14,684 14,683 4,894 1,976
Meals and entertainment disallowance................. 4,124 4,257 1,419 2,838
Foreign and state taxes.............................. 527 450 1,370 (96)
Net operating loss not benefited and other items..... 12,460 74,712 4,981 113,594
-------- -------- -------- ---------
Income tax expense (benefit)........................ $ 527 $ 450 $ 1,370 $ (96)
======== ======== ======== =========
</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 ("NOLs") amounting to approximately $855 million at December 31,
1997 expiring in 2008 through 2012 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. Changes in ownership in
future periods 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 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 (amounts in thousands):
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------- --------------
Year Ended Four Months Eight Months
------------------------------ Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Service cost........................ $ 875 $577 $274 $ 493
Interest cost....................... 4,652 992 583 1,040
Actual return on assets............. (4,592) (505) (100) (200)
Net amortization and deferral....... (289) (355) -- --
------- ---- ---- ------
Net pension expense................ $ 646 $709 $757 $1,333
======= ==== ==== ======
</TABLE>
Actuarial assumptions used for determining pension costs were:
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------- --------------
Year Ended Four Months Eight Months
------------------------------ Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Discount rate for interest cost.................. 7.50% 7.50% 7.00% 8.50%
Rate of increase in future compensation levels... 5.50% 5.50% 5.50% 5.50%
Expected long-term rate of return on plan assets. 9.00% 9.00% 11.00% 11.00%
</TABLE>
The funded status (with benefit obligations determined using
the current estimated discount rate of 7.25% and 7.50% at December 31, 1997
and 1996, respectively) and amounts recognized in the Consolidated Balance
Sheets at December 31, 1997 and 1996, for defined benefit plans covering
foreign employees, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
Plans in Which Plans in Which
--------------------------------- ---------------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits Exceed
Benefits Assets Benefits Assets
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................... $47,979 $12,108 $44,200 $7,153
Nonvested benefit obligation........................ -- 431 -- 1,198
------- ------- ------- ------
Accumulated benefit obligation...................... 47,979 12,539 44,200 8,351
Projected benefit obligation more than
accumulated benefit obligation.................... 4,273 8,832 3,983 5,882
------- ------- ------- ------
Projected benefit obligation........................ 52,252 21,371 48,183 14,233
Plan assets at fair value(a)......................... 54,366 -- 50,703 --
------- ------- ------- ------
Projected benefit obligation more (less) than plan
assets at fair value................................ (2,114) 21,371 (2,520) 14,233
Unrecognized net gain (loss)......................... 6,578 4,176 7,307 11,696
------- ------- ------- ------
Pension liability (asset) recognized in Consolidated
Balance Sheets..................................... $4,464 $25,547 $4,787 $25,929
======= ======= ======= =======
</TABLE>
- ----------
(a) Plan assets are invested in cash equivalents, international stocks, fixed
income securities and real estate.
(b) 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 $53.4 million, $58.0
million, $14.1 million and $26.8 million for the years ended December 31,
1997, December 31, 1996, the four months ended December 31, 1995 and the eight
months ended August 31, 1995, 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 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, 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Actives fully eligible..................... $184 $163
Other actives.............................. 130 144
Retirees................................... 215 225
---- ----
Total APBO................................ 529 532
Unrecognized cumulative loss.................. (12) (29)
---- ----
Accrued postretirement benefit cost........... $517 $503
==== ====
</TABLE>
The components of net periodic postretirement benefit cost are
as follows (in millions):
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------- --------------
Year Ended Four Months Eight Months
------------------------------ Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Service Cost........... $ 9.9 $10.0 $ 3.0 $ 5.4
Interest Cost.......... 39.0 35.4 11.0 25.5
----- ----- ----- -----
Total............... $48.9 $45.4 $14.0 $30.9
===== ===== ===== =====
</TABLE>
The discount rate used to determine the APBO was 7.25% at
December 31, 1997 and 7.50% at December 31, 1996. The discount rate used to
determine net periodic postretirement benefit costs was 7.50% for the year
ended December 31, 1997, 7.0% for the year ended December 31, 1996, 7.0% for
the four months ended December 31, 1995 and 8.5% for the eight months ended
August 31, 1995. 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, 1997 would be increased by approximately 6.5% and
1997 periodic postretirement benefit cost would increase approximately 4.0%.
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, which to date has
not been determined. The National Transportation Safety Board held hearings
relating to the crash in December 1997 and is continuing its investigation.
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. 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 October 22, 1991, a 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 and claimed that the
cash undertaking constituted a preference payment. Following prolonged
litigation with respect to jurisdiction, the United States Supreme Court
determined that the entire 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. On January 20, 1998, the
Court of Appeals for the Third Circuit reversed the District Court and
affirmed the findings of the Bankruptcy Court. Travellers sought
reconsideration by the Third Circuit which reconsideration was denied.
Travellers has advised they will appeal this decision. TWA has agreed that
amounts received pursuant to this proceeding will be applied to reduce the
PBGC Notes or contributed to the settlement trust established for defined
benefit pension plans covering certain TWA employees.
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
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 its 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 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. A final order has not yet been entered; however, an
interim order approving the settlement has been entered.
On November 9, 1995, ValuJet Air Lines, Inc., now known as
AirTran Airlines, Inc. ("ValuJet") instituted a lawsuit against TWA and 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 the 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.
ValuJet has settled its claim with Delta and appealed the grant of summary
judgment to the 11th Circuit Court of Appeals. Settlement discussions are
ongoing. The Company does not expect that the resolution of this matter will
have a material adverse effect on its results of operations or financial
position.
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 DOJ 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.
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 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 believe
that the liquidation of TWE has had or will have a material adverse impact on
the financial position or results of operations of TWA.
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 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 liability in 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 it
believes 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 scale adjustments
afforded to non-contract employees, employees previously represented by the
IFFA have asserted and won an arbitration ruling with respect to the
comparability of wage concessions made in 1994 that, if sustained, would
require that the Company provide additional compensation to such employees.
The Company estimates that at December 31, 1997 such additional compensation
that would be payable pursuant to the arbitration ruling would be
approximately $12.0 million. The Company denies any such obligation and is
pursuing an appeal of the arbitration ruling and a court award affirming the
ruling. Effective September 1, 1997, the Company also reduced the overall
compensation and benefits package for non-contract employees so as to offset,
in the Company's view, any claims by such employees previously represented by
IFFA for any retroactive or prospective wage increases. As such, no liability
has been recorded by the Company.
In connection with the '95 Reorganization, the Company entered
into a letter agreement with employees represented by 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 ALPA. The defined
thresholds were exceeded during the measurements periods through December 31,
1996 and no amount was therefore owed to ALPA as of that date. A payment of
approximately $2.6 million was due under the agreement on August 14, 1997 for
the period January through June 1997. The Company made this payment in
January 1998. Management estimates that its aggregate obligation for 1997
will be approximately $9.1 million.
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.
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,
---------------------------
1997 1996
------------- ----------
(Amounts in Thousands)
<S> <C> <C>
9.80% Airline Receivable Asset Backed Notes, Series 1997-1(a)................. $100,000 $ --
12% Senior Secured Notes due 2002(b).......................................... 43,254 --
11 1/2% Senior Secured Notes due 2004(c)...................................... 138,360 --
12% Senior Secured Reset Notes due 1998(d).................................... -- 111,799
8% IAM Backpay Notes(e)....................................................... 13,354 12,090
PBGC Notes(f)................................................................. 141,243 198,672
Icahn Financing Facilities(g)................................................. -- 125,102
Equipment Trust Certificates(h)............................................... -- 8,963
Various Secured Notes, 4.0% to 12.4%, due 1998-2001(i)........................ 43,799 75,478
Installment Purchase Agreements, 10.0% to 10.53%, due 1998-2003(j)............ 267,199 109,034
Predelivery Financing Agreements(k)........................................... 3,166 19,862
IRS Deferral Note(l).......................................................... 6,333 8,708
WORLDSPAN Note(m)............................................................. 31,224 31,224
-------- ---------
Total long-term debt..................................................... 787,932 700,932
Less current maturities.................................................. 51,392 92,447
-------- ---------
Long-term debt, less current maturities....................................... $736,540 $608,485
======== ========
</TABLE>
(a) In December 1997, TWA agreed to sell certain receivables on an ongoing
basis to Constellation Finance LLC ("Constellation"), a special purpose
limited liability company wholly owned by TWA, and TWA agreed to service the
related receivables. Concurrently, the 9.80% Airline Receivable Asset Backed
Notes, Series 1997-1 were issued in December 1997 by Constellation in the
principal amount of $100.0 million. Interest on the 1997-1 Notes is payable
monthly on the 15th day of each month at the rate of 9.80% per annum. No
principal payments are due under the 1997-1 Notes until January 2001, except
under certain circumstances. The terms of the 1997-1 Notes provide for the
maintenance of certain minimum levels of receivables as defined, or in the
event of a deficiency, the deposit of funds with the trustee in the amount
of such deficiency. At December 31, 1997, $9.7 million was held by the
Company Trustee and is included in the accompanying balance sheet as prepaid
expenses and other current assets. This amount was returned by the Company
Trustee to the Company by January 9, 1998 at which time the deficiency was
eliminated.
(b) The 12% Senior Secured Notes due 2002 were issued in March 1997 in the
principal amount of $50.0 million. The notes are reflected net of the
unamortized discount of $6.7 million at December 31, 1997, to reflect an
effective interest rate of approximately 16.4%. Interest is payable
semi-annually on April 1 and October 1. The notes are not redeemable prior
to their maturity on April 1, 2002. The notes are secured by (i) TWA's
beneficial interest in certain take-off and landing slots at three
high-density, capacity-controlled airports, (ii) certain ground equipment at
certain domestic airports and (iii) all stock of (a) a subsidiary holding
the leasehold interest in a hangar at Los Angeles International Airport and
(b) three subsidiaries holding leasehold interests in gates and related
support space at certain domestic airports.
(c) The 11 1/2% Senior Secured Notes due 2004 were issued in December 1997
in the principal amount of $140.0 million. The notes are reflected net of
the unamortized discount of $1.6 million at December 31, 1997, to reflect an
effective interest rate of approximately 11.7%. Interest is payable
semi-annually in arrears on each June 15 and December 15, commencing June
15, 1998. The Company purchased $23.1 million of U.S. Government Obligations
with a portion of the net proceeds from the sale of the notes which was
deposited in an escrow account to fund interest payments through June 15,
1999. The notes are secured by a lien on (i) a pool of aircraft spare parts,
(ii) TWA's beneficial interest in 30 take-off and landing slots at Ronald
Reagan Washington National Airport and (iii) securities pledged to provide
for the first three scheduled interest payments.
(d) The 12% Senior Secured Reset Notes due 1998 were scheduled to 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.
During 1996 and continuing through August 1997, 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 $97.1 million principal amount of 12% Senior Secured Reset
Notes and $2.9 million in accrued interest thereon in exchange for the
issuance of approximately 12.2 million shares of Company Common Stock.
The remaining outstanding notes were retired in December 1997 with a portion
of the proceeds related to the issuance of 11 1/2% Senior Secured Notes.
The principal balance remaining at retirement was $72.5 million. As a result
of the privately negotiated exchanges and the retirement of the balance of
the 12% Senior Secured Reset Notes, certain slots, equipment, subsidiary
stock and spare parts were released and used to secure the 12% Senior
Secured Notes and the 11 1/2% Senior Secured Notes. A number of aircraft
and engines were also released and remain free and clear.
(e) The 8% IAM Backpay Notes have a stated principal amount of $22.0 million
at December 31, 1997 and 1996. The notes are reflected net of the
unamortized discount of $8.7 million and $9.9 million at December 31, 1997
and 1996, respectively, which reflects an effective interest rate of
approximately 24.4% at December 31, 1997. 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 liens on one JT8D engine and one JT9D engine.
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) The PBGC Notes have a stated unpaid principal balance of $158.7 million
and $232.9 million at December 31, 1997 and 1996, respectively. The notes
are reflected net of unamortized discounts of $17.4 million and $34.3
million at December 31, 1997 and 1996, 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). Such prepayments would result in
extraordinary charges related to the early extinguishment of debt. 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.
(g) The Icahn Financing Facilities include a $75 million Asset Based Facility
and a $125 million Receivables Facility, the remaining outstanding balance
of which was retired in December 1997 in conjunction with the issuance of
the 9.8% Airline Receivable Asset Backed Notes due 2001. The principal
balance of the Icahn Financing Facilities had been reduced to $71.4 million
by the election of Karabu to apply the purchase price for tickets purchased
under the Ticket Agreement to a reduction of the Icahn Loans. Collateral for
the Icahn Loans included a number of aircraft, engines, and related
equipment, along with substantially all of the Company's receivables, which
were released on retirement of the Facilities on December 30, 1997.
(h) The Equipment Trust Certificates paid interest semi-annually at a rate of
11% per annum and were subject to mandatory redemptions beginning in April
1994 and continuing until September 1997. The certificates were retired on
March 31, 1997. The certificates were secured by certain aircraft, engines
and other equipment which also secured the 12% Senior Secured Reset Notes.
(i) Various Secured Notes represent borrowings to finance the purchase or
lease of certain flight equipment and other property.
(j) 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.
(k) 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
July 1998 and continuing through September 1999. Interest is payable
quarterly at a rate of LIBOR plus 3.5%.
(l) 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.
(m) 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.
(n) At December 31, 1997, aggregate principal payments due for long-term debt
for the succeeding five years were as follows:
<TABLE>
<CAPTION>
(Amounts in
Year Thousands)
- ---- ----------
<S> <C>
1998.............................. $ 51,392
1999.............................. 126,851
2000.............................. 80,973
2001.............................. 184,848
2002.............................. 88,829
</TABLE>
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.
Certain of the Company's long-term debt agreements contain
various covenants which limit, among other things, the incurrence of
additional indebtedness, the payment of dividends on capital stock, certain
investments, transactions with affiliates, incurrence of liens and sale and
leaseback transactions, and sale of assets. The Company was in compliance
with these covenants as of December 31, 1997.
9. Leases and Related Guarantees:
Sixteen of the aircraft in the Company's fleet at December 31,
1997 were leased under capital leases. The remaining lease periods for these
aircraft range from zero to nine 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 1998 will be approximately $36.3 million for the
15 aircraft held under capital leases (one lease expired on December 31, 1997).
One hundred forty-four of the aircraft in TWA's fleet at
December 31, 1997 were leased under operating leases. Other than four leases
on a month-to-month basis, the remaining lease periods range from two months
to eighteen 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, 1997, the Company's contingent indemnification
obligations in connection with the tax benefit transfers were collateralized by
bank letters of credit aggregating $9,803,000 for which the Company has posted
$9,803,000 in cash collateral to secure its reimbursement obligations and the
bank letters of credit. In addition, the Company has pledged $4,398,000 in
cash collateral to secure its obligation with respect to four of the tax
benefit transfers and has pledged flight equipment having a net book value of
$23,147,000 to secure its obligation with respect to two of the tax benefit
transfers.
At December 31, 1997 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
---------- ---------
(Amounts in Thousands)
<S> <C> <C>
Year
1998.................................................................. $ 54,660 $ 393,686
1999.................................................................. 52,360 378,166
2000.................................................................. 49,314 356,681
2001.................................................................. 45,008 334,295
2002.................................................................. 27,109 292,216
Subsequent............................................................ 60,064 1,782,677
-------- ----------
Total................................................................ $3,537,721
==========
288,515
Less imputed interest................................................. 68,525
--------
Present value of capital leases....................................... 219,990
Less current portion.................................................. 37,068
--------
Obligations under capital leases, less current portion................ $182,922
========
</TABLE>
Included in the Minimum Lease Payments for Operating Leases are
increased rental rates related to lessor financing of engine hush-kits for 25
aircraft. 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, accordingly, 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 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 287.5 million shares of
capital stock, consisting of 150 million shares of Common 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 1,742,920 and 1,742,922 Seven Year Warrants
outstanding at December 31, 1997 and 1996, respectively. All warrants to
purchase shares of Common Stock for nominal consideration had been exercised at
December 31, 1997.
In March 1997, the Company issued 50,000 Redeemable Warrants in
conjunction with the sale of $50.0 million 12% Senior Secured Notes Due 2002.
The Warrants are exercisable commencing on the first anniversary of the date
of original issuance through their expiration on April 1, 2002 and entitles
the holders thereof to purchase 126.26 shares of Common Stock per Warrant at
an exercise price of approximately $7.92 per share.
In December 1997, the Company completed an offering, pursuant
to Rule 144A of the Securities Act of 1933, of 1,725,000 shares of its
9 1/4% Cumulative Convertible Exchangeable Preferred Stock, with a
liquidation preference of $50 per share. Each share of the 9 1/4%
Preferred Stock may be converted at any time at the option of the holder,
unless previously redeemed or exchanged, into shares of the Company's Common
Stock at a conversion price of $7.90 per share (equivalent to a conversion
rate of approximately 6.329 shares of Common Stock for each share of 9 1/4%
Preferred Stock), subject to adjustment.
The 9 1/4% Preferred Stock may not be redeemed prior to
December 15, 2000. On or after December 15, 2000, the 9 1/4% Preferred
Stock may be redeemed in whole or in part, at the option of the Company, at
specified redemption prices. The 9 1/4% Preferred Stock may be exchanged,
in whole but not in part, at the option of the Company, for the Company's
9 1/4% Convertible Subordinated Debentures due 2007 on any dividend payment
date beginning on December 15, 1999 at the rate of $50 principal amount of
Debentures for each share of 9 1/4% Preferred Stock outstanding at the time
of exchange; provided that all accrued and unpaid dividends on the 9 1/4%
Preferred Stock to the date of exchange have been paid or set aside for
payment and certain other conditions are met.
The Company was required to file a registration statement (the
"Shelf Registration Statement") with the Securities and Exchange Commission to
register resales of 9 1/4% Preferred Stock, the Debentures and the
underlying shares of Common Stock issuable upon conversion thereof. In
addition the Company must use its reasonable best efforts to cause the Shelf
Registration Statement to be effective until the earlier of (i) the sale of
all securities covered by the registration or (ii) two years after the date of
original issuance.
In March 1996, the Company completed an offering, pursuant to
Rule 144A of the Securities 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. Pursuant to the registration rights agreement
between the Company and the initial purchasers of the 8% Preferred Stock, the
Company filed a shelf registration statement effective August 16, 1996 to
register resales of the 8% Preferred Stock, the Debentures (as defined below)
and the underlying shares of Common Stock issuable upon conversion thereof.
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 at the option of the Company, in whole
but not in part, 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 on the 8% Preferred Stock to the date of exchange, whether
or not earned or declared, have been paid or set aside for payment and certain
other conditions are met.
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 that 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 distributed to an
employee benefit plan (the "ESOP") one-third of the shares annually beginning
August 1995. Accordingly, operating results for 1997, 1996, the four months
ended December 31, 1995 and the eight months ended August 31, 1995 include
charges of approximately $3.9 million, $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.
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.
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 an ESIP pursuant to which the Company would grant, commencing
in 1997, to certain trusts established for the benefit of its union and
non-union employees certain additional shares of Common Stock and Employee
Preferred Stock. The ESIP provides that the first stock grant under the plan
would be made on July 15, 1997 in an amount sufficient to increase the
employee ownership of the combined total number of then outstanding shares of
Common Stock and Employee Preferred Stock by 2.0% if the average closing price
of the Common Stock exceeded a target price of $11.00 per share during the
period from January 1, 1997 to July 14, 1997. If the target price of $11.00
per share is not exceeded, the grant would instead be made, if at all, on July
15 of the next year (up to and including July 15, 2002) in which the market
price of the Common Stock exceeds such target price prior to July 14 of that
year. In each of 1998 through 2002, additional shares of Employee Preferred
Stock and Common Stock will become subject to grant under this program in an
amount sufficient to increase the employee ownership by 1.5% in 1998, 1.5% in
1999, 1.0% in 2000, 1.0% in 2001 and 1.0% in 2002 (subject to adjustment as
described below) based on the combined total number of shares of Common Stock
and Employee Preferred Stock outstanding as of the applicable July 15 grant
date, with the target price applicable to the additional shares to be issued
in such year equal to $12.10 in 1998, $13.31 in 1999, $14.64 in 2000, $16.11
in 2001 and $17.72 in 2002. Each such grant is cumulative and, where the
applicable target price is not met in the initial grant year, the applicable
grant is carried forward and is subject to grant in future years up to and
including July 15, 2002 in the manner described above. To prevent against the
dilutive effect of certain stock issuances, the ESIP provides for an
adjustment (the "Adjustment") to the grants described above 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% Reset Notes or the Mandatorily
Redeemable 12% Preferred Stock. To the extent that a sale of additional
capital stock for cash results in a decline in the percentage of employee
ownership of the combined total number of shares of Common Stock and Employee
Preferred Stock below a level equal to the Adjusted Base Ownership Percentage
(as defined in the ESIP), one-quarter of the difference between the new
percentage of employee ownership and the level just determined (but in no
event greater than 1.0% in each year) would be added to the amount of Employee
Preferred Stock to be granted to union employees and Common Stock to be
granted 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. Furthermore, if TWA issues additional shares of Common Stock with an
aggregate value of more than $20 million to third parties for cash or a
reduction in debt at a price equal to or greater than $11.00 per share (the
"Equity Issuance Acceleration Trigger"), the last two scheduled grants under
the ESIP are to be aggregated and these shares allocated equally to the
remaining installments in the program. In addition, pursuant to the ESIP,
employees have the right commencing as of 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 then
current market price. Should all of the target prices be met or exceeded
within the time periods specified and should the entire discount stock
purchase option be exercised, the various employee stock trusts would receive
a total of 10.0% (as adjusted as described below) of the outstanding stock,
with the exact amount issued dependent upon the outstanding shares as of the
date of each grant and option exercise.
The ESIP separately 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 Employee Preferred Stock and Common Stock such that the employees
will retain the same level of ownership. Union representatives and the
Company agreed to a one-time distribution pursuant to this provision of the
ESIP in an aggregate amount of 525,856 shares of Employee Preferred Stock and
Common Stock. As part of that agreement, since additional ESIP shares were
not issued to the employees in July 1997, an additional 405,750 shares of
Employee Preferred Stock and Common Stock were issued to the employee trusts
and, to the extent that additional shares are granted under the ESIP, the
Company will receive a credit towards the new grant for these previously
issued shares, in that amount.
While the $11.00 target price was not exceeded as of July 15,
1997 and no target price grant was made on that date, on February 17, 1998,
the Average Closing Price for the Company's Common Stock did exceed the $11.00
target price with respect to the first scheduled grant. As a result, the
initial grant in an amount sufficient to increase the employee ownership by
2.0% based on the then outstanding Common Stock and Employee Preferred Stock
will be made on July 15, 1998. Based on the current outstanding Voting Equity
(as defined in the ESIP) of 57,890,907 shares, the number of shares of
Employee Preferred Stock and Common Stock to be issued to the employees under
the ESIP on that date is 1,515,472. TWA is entitled to a credit against this
number in the amount of 405,750 shares due to the prior grant to employees as
described above. On March 4, 1998, the Average Closing Price for the Company's
Common Stock did exceed the $12.10 target price with respect to the 1998 grant
of 1.5%. As a result, the 1998 grant in an amount sufficient to increase the
employee ownership by 1.5% based on the then outstanding Common Stock and
Employee Preferred Stock will also be made on July 15, 1998. Based on the
current outstanding Voting Equity, the number of additional shares of Employee
Preferred Stock and Common Stock to be issued to the employees under the ESIP
on that date for the 1998 grant is 1,172,354 shares. The number of shares to
be granted could be increased if the last two grants are accelerated pursuant
to the Equity Issuance Acceleration Trigger. Furthermore, based on issuances
of Common Stock to date, the Adjustment has resulted in a revised grant
schedule of 1.5% in 1998, 1.84% in 1999, 1.34% in 2000, 1.34% in 2001 and
1.34% in 2002. Assuming the consummation of a planned transaction involving the
issuance of Common Stock, the grants for the years 1999-2002 would further
increase pursuant to the Adjustment to: 1.91% in 1999, 1.41% in 2000, 1.41% in
2001 and 1.41% in 2002. Finally, in the event that the planned transaction
is consummated and that the price per share is in excess of $11.00, the Equity
Issuance Acceleration Trigger will be met and the final two scheduled
installments will be aggregated and these shares will be allocated equally to
the remaining installments in the program. As a result, the remaining grants
would be as follows: 2.705% in 1997 (already vested and payable on July 15,
1998); 2.205% on July 15, 1998 (already vested and payable on July 15, 1998);
2.615% on July 15, 1999 if the target price exceeds $13.31 and 2.115% on July
15, 2000 if the target price exceeds $14.64. Shares granted or purchased at a
discount under the ESIP will generally result in a charge to earnings in an
amount equal to the fair value of shares granted and the discount for shares
purchased at the time when such shares are earned.
13. Stock Option Plans:
The Company's 1994 Key Employee Stock Incentive Plan (the
"KESIP"), as amended, provides for the award of incentive and nonqualified
stock options for up to 14% of the Common Stock and Employee Preferred Stock
outstanding as of the start of each fiscal year (approximately 7.0 million
shares at January 1, 1998). Generally, 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, 1997 and 1996, and changes during the years ended on those dates
is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 2,026,384 $5.61 2,228,000 $ 4.68 1,398,576 $4.64
Granted................................ 2,027,155 6.80 453,000 11.65 829,424 4.74
Exercised.............................. (565,545) 4.66 (191,316) 4.64 -- --
Forfeited.............................. (145,814) 7.88 (463,300) 7.43 -- --
--------- --------- ---------
Outstanding at end of year............. 3,342,180 6.39 2,026,384 5.51 2,228,000 4.68
========= ========= =========
Options exercisable at year-end........ 1,812,020 1,302,700 475,516
Weighted average fair value of options
granted during the year............... $3.32 $6.79 $3.03
</TABLE>
The per share weighted average fair value of options granted
during 1997, 1996, and 1995 were estimated using the Black Scholes option
pricing model assuming risk-free interest rates of 5.97%, 6.6%, and 6.0% in
1997, 1996 and 1995, respectively, an expected volatility factor of 67.14% in
1997 and 85.00% in 1996 and 1995 and an expected life of three years.
The following table summarizes information about fixed stock
options at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Range of Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
------------------------ ----------- ---------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 4.64 to 6.78 2,158,350 3.12 years $ 5.31 1,625,485 $ 5.11
7.06 to 8.12 833,350 5.19 years 7.47 12,575 8.01
8.47 to 15.81 339,380 5.42 years 10.24 166,820 11.88
16.25 to 18.37 11,100 3.05 years 17.85 7,140 18.10
--------- ---------
$ 4.64 to 18.37 3,342,180 1,812,020
====== ===== ========= =========
</TABLE>
As permitted under Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 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 No. 123 in 1997 and 1996 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 pro forma net loss, and net loss per common share for 1997,
1996 and the four months ended December 31, 1995 would approximate the amounts
below (in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended Year Ended Four Months Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------- ------------------------- --------------------------
As Reported Pro forma As Reported Pro forma As Reported Pro forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss..................... $(110,835) $(114,942) $(284,815) $(285,716) $(30,138) $(30,350)
Net loss per common share.... $ (2.37) $ (2.45) $ (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 and $0.02
million for the year ended December 31, 1996 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. There were no such charges in 1997. 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 1997 and 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 $51.8
million, in 1997, and $45.3 million, in 1996, in 12% Senior Secured Reset
Notes and approximately $1.4 million, in 1997, and $1.5 million, in 1996, in
accrued interest thereon in exchange for the issuance of approximately 7.7
million, in 1997, and 4.5 million, in 1996, in shares of Company Common Stock.
As a result of the exchange of the 12% Senior Secured Reset Notes, the Company
recorded an extraordinary non-cash charge of $7.2 million in 1997 and $8.2
million in 1996 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.
During December 1997, the Company prepaid the remaining 12%
Senior Secured Reset Notes, incurring an extraordinary non-cash charge of $3.9
million relative to the write off of the unamortized discount on the Notes.
The Company recorded extraordinary charges of approximately
$9.9 million in 1997 and $1.6 million in 1996 due to the early extinguishment
of a portion of the PBGC Notes as a result of Karabu applying approximately
$90.4 million in 1997 and $6.4 million in 1996 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 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.
15. Disposition of Assets:
Disposition of assets resulted in net losses of approximately
$1.1 million and $0.2 million during 1996 and for the eight months ended
August 31, 1995, respectively, and net gains of $16.0 million and $3.3 million
during 1997 and for the four months ended December 31, 1995, respectively.
In 1997, TWA recorded gains of $7.4 million in connection with
the sale of three gates at Newark International Airport and $8.6 million in
connection with the sale of spare flight equipment, aircraft, engines and
other miscellaneous property.
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 of $0.8 million 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.
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 management's 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 $36 million over the next six 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.
17. Other Charges and Credits-net:
<TABLE>
<CAPTION>
(Amounts in Thousands) Predecessor
Reorganized Company Company
-------------------------------------------- --------------
Year Year Four Months Eight Months
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Expenses associated with the restructuring of debt and
flight equipment leases.................................... $ -- $ -- $3,000 $11,000
Provisions for losses resulting from claims and litigation
judgments against TWA...................................... 143 235 26 351
Foreign currency transaction (gains) losses-net............. 578 (642) 1,156 384
Finance charge income earned on receivables carried by
TWA........................................................ (8,112) (8,030) (2,662) (6,198)
Credits related to settlement of various contract disputes,
litigation and other matters............................... (289) (2,500) -- --
Credits related to vendor discounts applied................. (5,412) (7,074) (2,282) (4,109)
Equity in (earnings)/losses of TWA's investment in
Worldspan (Note 4)......................................... (11,305) (11,919) 11,535 (3,607)
Miscellaneous other nonoperating charges (credits)-net...... (1,035) (668) (3,162) (200)
-------- -------- ------ -------
Total Other Charges and Credits-net........................ $(25,432) $(30,598) $7,611 $(2,379)
======== ======== ====== =======
</TABLE>
18. Aircraft Commitments:
TWA has entered into agreements with, 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 $1.0 billion. The agreements, as amended,
require the delivery of the aircraft in 2001 and 2002 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.
In February 1996, TWA executed definitive agreements providing
for the operating lease of 10 new B-757 aircraft, all of which have been
delivered. These aircraft have an initial lease term of 10 years. Although
individual aircraft rentals escalate over the term of the leases, aggregate
rental obligations are estimated to average approximately $59 million per
annum over the lease terms. 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 million. The agreement also provides for the purchase of
up to ten additional aircraft. As of February 1, 1998, TWA had taken delivery
of five of such aircraft and had five on firm order. 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. Four of the
five aircraft already delivered were manufacturer financed and one was leased.
TWA has obtained commitments for debt financing for approximately 80% of the
total costs associated with the acquisition of four of the remaining five
aircraft which have not been delivered and obtained commitments for 100% lease
financing of the total costs of the remaining fifth aircraft. Such
commitments are subject to, among other things, so-called material adverse
change clauses which make the availability of such debt and lease financing
dependent upon the financial condition of the Company.
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>
1998.................. $ 52.1 $ 48.5
1999.................. 52.4 194.0
2000.................. -- --
2001.................. 610.7 --
2002.................. 272.0 --
</TABLE>
During 1997, TWA reached agreements for the lease of two new
B-767-300ER aircraft, one of which has been delivered in March 1998 and the
second is scheduled to be delivered in April 1998. The longer-range 300ER
series aircraft will be utilized on TWA's international routes.
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 quarter of 1997 and the first
quarter of 1999. The Company has taken delivery of seven of the MD-83
aircraft and expects to take delivery of six additional planes during the
remainder of 1998 and two additional planes in 1999.
On February 25, 1998, the Company's Board of Directors approved
letters of intent to acquire 24 new MD-83 aircraft from the manufacturer. The
proposed long-term leasing arrangement provides for delivery of the aircraft in
1999. Although the Company anticipates that rental payments for such aircraft
would represent a substantial financial commitment, it is not possible to
accurately estimate the amount of such payments at this time. There can be no
assurance that such aircraft acquisition program will be concluded or as to
the final terms of any such program.
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.
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 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.
20. Supplemental Financial Information (Unaudited):
Selected consolidated financial data (unaudited) for each
quarter within 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Operating revenues.............................. $762,306 $844,442 $ 908,381 $ 812,823
======== ======== ========== =========
Operating income (loss)......................... $(99,486) $ 5,932 $ 63,757 $ 537
======== ======== ========== =========
Disposition of assets, gains (losses) - net..... $ 9,350 $ 3,030 $ 2,828 $ 796
======== ======== ========== =========
Income (loss) before extraordinary items........ $(70,032) $(11,995) $ 13,276 $ (21,111)
======== ======== ========== =========
Extraordinary items............................. $ (1,532) $ (2,405) $ (6,985) $ (10,051)
======== ======== ========== =========
Net income (loss)............................... $(71,564) $(14,400) $ 6,291 $ (31,162)
======== ======== ========== =========
Per share amounts:
Basic:
Earnings (loss) before extraordinary items... $ (1.51) $ (0.31) $ 0.17 $ (0.44)
======== ======== ========== =========
Extraordinary items.......................... $ (0.03) $ (0.05) $ (0.13) $ (0.18)
======== ======== ========== =========
Net income (loss)............................ $ (1.54) $(0.36) $ 0.04 $ (0.62)
======== ======== ========== =========
Diluted(a):
Net income (loss)............................ $ (1.54) $(0.36) $ 0.04 $ (0.62)
======== ======== ========== =========
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 items........ $(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:
Basic:
Earnings (loss) before extraordinary items
and special dividend requirements.......... $ (0.98) $ 0.48 $ (0.24) $ (5.51)
======== ======== ========== =========
Extraordinary items and special dividend
requirements............................... $ (0.48) $ -- $ (0.16) $ (0.05)
======== ======== ========== =========
Net income (loss)............................ $ (1.46) $ 0.48 $ (0.40) $ (5.56)
======== ======== ========== =========
Diluted(a)
Net income (loss)............................ $ (1.46) $0.44 $ (0.40) $ (5.56)
======== ======== ========== =========
</TABLE>
- ------------
(a) Amounts have been restated pursuant to SFAS No. 128.
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 include an
adjustment to reduce aircraft fuel and oil costs by approximately $8.8
million, as a result of federal fuel excise taxes paid which were refunded to
the Company.
21. Foreign Operations:
TWA conducts operations in various foreign countries,
principally in Europe and the Middle East. Operating revenues from foreign
operations were approximately $518.1 million in 1997, $719.2 million in 1996,
$228.7 million in the four months ended December 31, 1995 and $474.4 million
in the eight months ended August 31, 1995.
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,
1997 and 1996.
(a) Cash, cash equivalents and receivables: The carrying amounts
of these assets are estimated to approximate fair value due to the
generally short maturities of these instruments.
(b) Other investments and receivables: The carrying amounts 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
amounts of these liabilities are estimated to approximate fair value
due to the generally short maturities of these instruments.
(d) Debt: On December 31, 1997, none of TWA's debt was publicly
traded, while at December 31, 1996, the Company's publicly-traded debt
had a carrying value of $111.8 million and a market value of $126.0
million. The Company believes the fair value of the remaining debt
which had an aggregate carrying value of approximately $787.9 million
and $589.1 million at December 31, 1997 and 1996, respectively, was
approximately $800.4 million and $466.4 million on those dates.
In connection with credit card sales, the Company has agreed to
maintain specified levels of deposits or a letter of credit. At December 31,
1997, a letter of credit of $15.0 million had been issued for the Company's
benefit to provide the required level of deposits. Additionally, in 1997, a
letter of credit in the amount of $2.6 million was issued to secure the
Company's obligations under certain workers compensation agreements.
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
For the Three Months Ended March 31, 1998 and 1997
(Amounts in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Operating revenues:
Passenger.................................................. $ 676,443 $ 671,845
Freight and mail........................................... 27,444 31,489
All other.................................................. 61,502 58,972
----------- -----------
Total.................................................... 765,389 762,306
----------- -----------
Operating expenses:
Salaries, wages and benefits............................... 297,784 315,308
Earned stock compensation ................................. 26,502 1,280
Aircraft fuel and oil...................................... 92,428 129,946
Passenger sales commissions................................ 51,540 57,571
Aircraft maintenance materials and repairs................. 34,661 43,743
Depreciation and amortization.............................. 39,181 38,770
Operating lease rentals.................................... 103,906 85,823
Passenger food and beverages............................... 21,572 20,452
All other.................................................. 166,522 168,899
----------- -----------
Total.................................................... 834,096 861,792
----------- -----------
Operating loss.............................................. (68,707) (99,486)
----------- -----------
Other charges (credits):
Interest expense........................................... 30,215 28,397
Interest and investment income............................. (4,699) (2,951)
Disposition of assets, gains and losses-- net ............. (6,997) (9,350)
Other charges and credits -- net .......................... (7,668) (10,389)
----------- -----------
Total.................................................... 10,851 5,707
----------- -----------
Loss before income taxes and extraordinary items............ (79,558) (105,193)
Provision (credit) for income taxes ........................ (25,418) (35,161)
----------- -----------
Loss before extraordinary items............................. (54,140) (70,032)
Extraordinary items, net of income taxes ................... (1,380) (1,532)
----------- -----------
Net loss.................................................... (55,520) (71,564)
Preferred stock dividend requirements....................... 5,863 3,869
----------- -----------
Loss applicable to common shares............................ $ (61,383) $ (75,433)
=========== ===========
Per share amounts:
Loss before extraordinary items ........................... $ (1.04) $ (1.51)
Extraordinary items........................................ (0.02) (0.03)
----------- -----------
Net loss................................................... $ (1.06) $ (1.54)
=========== ===========
</TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(Amounts in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 346,134 $ 237,765
Receivables, less allowance for doubtful accounts,
$9,149 in 1998 and $9,334 in 1997 ....................... 252,523 176,333
Spare parts, materials and supplies, less allowance for
obsolescence, $16,500 in 1998 and $19,176 in 1997 ....... 95,480 96,108
Prepaid expenses and other................................ 166,454 122,751
---------- ----------
Total............................................ 860,591 632,957
---------- ----------
Property:
Property owned:
Flight equipment....................................... 520,671 569,063
Prepayments on flight equipment........................ 22,738 15,431
Land, buildings and improvements....................... 63,687 62,854
Other property and equipment........................... 66,824 64,131
---------- ----------
Total owned property............................. 673,920 711,479
Less accumulated depreciation.......................... 105,151 114,921
---------- ----------
Property owned -- net............................ 568,769 596,558
---------- ----------
Property held under capital leases:
Flight equipment....................................... 166,358 166,358
Land, buildings and improvements....................... 49,431 49,443
Other property and equipment........................... 8,407 7,704
---------- ----------
Total property held under capital leases......... 224,196 223,505
Less accumulated amortization.......................... 86,247 78,298
---------- ----------
Property held under capital leases -- net ....... 137,949 145,207
---------- ----------
Total property -- net.......................... 706,718 741,765
---------- ----------
Investments and other assets:
Investments in affiliated companies ...................... 121,836 117,293
Investments, receivables and other ....................... 182,522 162,969
Routes, gates and slots -- net............................ 372,349 377,691
Reorganization value in excess of amounts allocable
to identifiable assets -- net............................ 730,685 741,173
---------- ----------
Total............................................ 1,407,392 1,399,126
---------- ----------
$2,974,701 $2,773,848
========== ==========
See notes to consolidated financial statements
</TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(Amounts in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt ................................... $ 49,203 $ 51,392
Current obligations under capital leases ............................... 36,576 37,068
Advance ticket sales.................................................... 315,318 223,197
Accounts payable, principally trade..................................... 281,843 250,551
Accounts payable to affiliated companies .............................. 6,601 6,261
Accrued expenses:
Employee compensation and vacations earned.............................. 146,506 119,572
Contributions to retirement and pension trusts ......................... 11,880 13,469
Interest on debt and capital leases..................................... 30,767 32,018
Taxes................................................................... 17,423 14,146
Other accrued expenses.................................................. 175,945 189,271
---------- ----------
Total accrued expenses.............................................. 382,521 368,476
---------- ----------
Total............................................................... 1,072,062 936,945
---------- ----------
Long-term liabilities and deferred credits:
Long-term debt, less current maturities ................................ 855,771 736,540
Obligations under capital leases, less current obligations ............. 174,520 182,922
Postretirement benefits other than pensions ............................ 489,750 485,787
Noncurrent pension liabilities ........................................ 30,246 30,011
Other noncurrent liabilities and deferred credits....................... 145,201 133,359
---------- ----------
Total............................................................... 1,695,488 1,568,619
---------- ----------
Shareholders' equity:
8% cumulative convertible exchangeable preferred stock,
$50 liquidation preference; 3,869 shares issued and outstanding ........ 39 39
9 1/4% cumulative convertible exchangeable preferred stock,
$50 liquidation preference; 1,725 shares issued and outstanding ........ 17 17
Employee preferred stock, $0.01 liquidation preference;
special voting rights; shares issued and outstanding: 1998--6,020;
1997--6,472............................................................. 60 65
Common stock, $0.01 par value; shares issued and outstanding:
1998--51,946; 1997--51,393.............................................. 519 514
Additional paid-in capital................................................. 687,824 693,437
Accumulated deficit ....................................................... (481,308) (425,788)
---------- ----------
Total............................................................... 207,151 268,284
---------- ----------
$2,974,701 $2,773,848
========== ==========
See notes to consolidated financial statements
</TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................... $(55,520) $(71,564)
Adjustments to reconcile net loss to net cash used by operating activities:
Employee earned stock compensation............................................... 26,502 1,280
Depreciation and amortization ................................................... 39,181 38,770
Amortization of discount and expense on debt .................................... 2,758 3,556
Extraordinary loss on extinguishment of debt..................................... 1,380 1,532
Interest paid in common stock.................................................... -- 4,125
Equity in undistributed earnings of affiliates not consolidated.................. (4,556) (4,704)
Revenue from Icahn ticket program................................................ (38,788) (24,202)
Net (gains)-losses on disposition of assets ..................................... (6,997) (9,350)
Change in operating assets and liabilities:
Decrease (increase) in:
Receivables.................................................................... (65,721) (14,684)
Inventories.................................................................... 73 5,917
Prepaid expenses and other current assets...................................... (37,739) (88,961)
Other assets .................................................................. 811 (8,658)
Increase (decrease) in:
Accounts payable and accrued expenses ......................................... 27,265 (1,787)
Advance ticket sales........................................................... 85,233 104,137
Other noncurrent liabilities and deferred credits.............................. (17,881) (16,543)
-------- --------
Net cash used .............................................................. (43,999) (81,136)
-------- --------
Cash flows from investing activities:
Proceeds from sales of property ................................................... 12,809 14,300
Capital expenditures, including aircraft pre-delivery deposits..................... (26,005) (13,602)
Net decrease (increase) in investments, receivables and other...................... 4,626 18,279
-------- --------
Net cash provided (used).................................................... (8,570) 18,977
-------- --------
Cash flows from financing activities:
Net proceeds from long-term debt and warrants issued............................... 144,938 47,175
Proceeds from sale and leaseback of certain aircraft and engines................... 43,176 --
Repayments on long-term debt and capital lease obligations......................... (21,543) (31,546)
Refund due to retirement of 1967 bonds............................................. -- 5,318
Cash dividends paid on preferred stock............................................. (6,151) (3,869)
Net proceeds from exercise of warrants and options............................. 518 17
-------- --------
Net cash provided .......................................................... 160,938 17,095
-------- --------
Net increase (decrease) in cash and cash equivalents................................ 108,369 (45,064)
Cash and cash equivalents at beginning of period.................................... 237,765 181,586
-------- --------
Cash and cash equivalents at end of period.......................................... $346,134 $136,522
======== ========
See notes to consolidated financial statements
</TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
(Amounts in Thousands)
(Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
------- -------
<S> <C> <C>
Cash paid during the period for:
Interest ....................................................... $30,215 $34,624
======= =======
Income taxes ................................................... $ 4 $ 6
======= =======
Information about noncash operating, investing and financing activities:
Promissory notes issued to finance aircraft acquisition ........... $ -- $37,340
======= =======
Promissory notes issued to finance aircraft predelivery payments .. $ 3,182 $ 1,532
======= =======
Aircraft held for sale reclassified from Property to Investments,
Receivables and Other............................................ $19,003 $ --
======= =======
Property acquired and obligations recorded under new capital lease
transactions .................................................... $ 703 $ 373
======= =======
Exchange of long-term debt for common stock:
Debt canceled including accrued interest,
net of unamortized discount .................................... $ -- $ 9,330
======= =======
Common Stock issued, at fair value ................................ $ -- $10,862
======= =======
Extraordinary loss ................................................ $ -- $ 1,532
======= =======
</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.
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of
Trans World Airlines, Inc. ("TWA" or the "Company") and its subsidiaries. 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).
The unaudited consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission but do not include all information and
footnotes required by generally accepted accounting principles pursuant to
such rules and regulations. The consolidated financial statements include all
adjustments, which are of a normal recurring nature and are necessary, in the
opinion of management, for a fair presentation of the results for these
interim periods. These consolidated financial statements and related notes
should be read in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. The consolidated balance sheet at December 31,
1997 has been derived from the audited consolidated financial statements at
that date. Certain amounts previously reported have been reclassified to
conform with the current presentation.
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 has historically experienced
seasonal changes with the second and third quarters of the calendar year
historically producing substantially better operating results than the first
and fourth quarters. Accordingly, the results for the three months ended
March 31, 1998 should not be read as indicators of future results for the full
year.
2. Income Taxes
The income tax benefits recorded for the three months ended March
31, 1998 and 1997 reflect quarterly effective tax rates and management's current
expectation of full year 1998 pre-tax profits. Considering the high level of
non-deductible expenses in relation to expected annual income (which results in
both a high effective tax rate and the potential for significant changes in the
effective rate from relatively small changes in pretax income levels), the
income tax benefits recorded for the first quarters of 1998 and 1997 were based
upon the quarterly allocable portion of certain non-deductible expenses,
primarily amortization of reorganization value in excess of amounts allocable to
identifiable assets, and statutory tax rates.
3. Extraordinary Items
In the three months ended March 31, 1998 the Company recorded
extraordinary non-cash charges of $1.4 million related to the early
extinguishment of a portion of the promissory notes issued to the Pension
Benefit Guaranty Corporation (the "PBGC Notes") as a result of Karabu Corp.
("Karabu"), a company controlled by Carl Icahn, applying approximately $35.2
million in ticket proceeds as prepayments on the PBGC Notes. Additional
prepayments could arise from the election of Karabu to apply future ticket
proceeds to a reduction of the PBGC Notes. Such prepayments would result in
extraordinary non-cash charges related to the early extinguishment of debt.
In the three months ended March 31, 1997 the Company
consummated a series of privately negotiated exchanges with a significant
holder of its 12% Senior Secured Reset Notes which resulted in the return to
the Company of $10.3 million in 12% Senior Secured Reset Notes and
approximately $69,000 in accrued interest thereon in exchange for the issuance
of approximately 1.7 million shares of Common Stock. As a result of the
exchange of the 12% Senior Secured Reset Notes, the Company recorded an
extraordinary non-cash charge of $1.5 million in the first quarter of 1997
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
the exchanges) and the carrying value of the 12% Senior Secured Reset Notes
retired. During December 1997, the Company prepaid the remaining 12% Senior
Secured Reset Notes.
4. Loss Per Share
In computing the loss applicable to common shares for the three
months ended March 31, 1998, the net loss has been increased by dividend
requirements on the 8% Cumulative Convertible Exchangeable Preferred Stock
(the "8% Preferred Stock") and the 9 1/4% Cumulative Convertible Exchangeable
Preferred Stock ("9 1/4 Preferred Stock"). 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 (51.6 million
for the three months ended March 31, 1998) and Employee Preferred Stock (6.3
million for the three months ended March 31, 1998) 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 Common Stock or Employee Preferred Stock as the impact
would have been anti-dilutive.
The loss applicable to common shares for the three months ended
March 31, 1997 was similarly computed with the net loss being increased by
dividend requirements on the 8% Preferred Stock. In computing the related net
loss per share, the loss applicable to common shares was divided by the
aggregate average number of outstanding shares of Common Stock (43.1 million)
and Employee Preferred Stock (5.9 million). No effect was given to stock
options, warrants or potential issuances of additional Common Stock or
Employee Preferred Stock as the impact would have been anti-dilutive.
5. Property
In March 1998, the Company reclassified the net book value of
its remaining owned L-1011 and B-747 aircraft fleet, aggregating $19.0
million, to Investments, Receivables and Other as such assets are currently
held for sale.
6. Recent Financings
In March 1998, the Company completed a Rule 144 A/Regulations S
offering of $150.0 million principal amount of 11 3/8% Senior Notes due 2006
(the "11 3/8% Notes") resulting in net proceeds to TWA of approximately $144.9
million (net of discounts, commissions and estimated expenses). The notes
represent senior unsecured obligations of the Company. The indenture contains
certain covenants which, among other things, may limit (i) the incurrence of
additional indebtedness or issuance of additional preferred stock, (ii) the
payment of dividends on or retirement of capital stock, (iii) certain
investments, (iv) certain transactions with affiliates, (v) the sale of assets
and (vi) certain other transactions by or through restricted subsidiaries.
The Company intends to use the net proceeds from this offering for certain
capital expenditures including pre-delivery deposits on new aircraft
acquisitions, and for working capital and other general corporate purposes.
On April 21, 1998, the Company consummated a private placement
of $43.2 million aggregate principal amount of 11 3/8% Senior Secured Notes
due 2003 (the "11 3/8% Secured Notes") and $31.8 million principal amount of
Mandatory Conversion Equity Notes due 1999 (the "Equity Notes"). The Company
did not directly receive any cash proceeds from these transactions but rather
delivered the 11 3/8% Secured Notes and the Equity Notes to the "Owner
Trustee" in payment for three Boeing 767-231 ETOPS airframes and six
associated engines which had an aggregate purchase price of $75.0 million, and
which were previously leased to the Company. Upon termination of the operating
leases for the aircraft, the Company received approximately $6.0 million
relating to security and maintenance deposits previously held by the aircraft
lessor.
7. Contingencies
There has not been any significant change in the status of the
contingencies reflected in the Notes to consolidate financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which, among other matters, described various contingencies
and other legal actions against TWA, except as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Legal Proceedings."
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
Under the Delaware General Corporation Law (the "DGCL"),
directors, officers, employees and other individuals may be indemnified
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement in connection with specified actions, suits or proceedings,
whether civil, criminal, administrative or investigative (other than a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of TWA and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. A similar standard of care is applicable
in the case of a derivative action, except that indemnification only extends
to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such an action, and the DGCL requires court approval
before there can be any indemnification of expenses where the person seeking
indemnification has been found liable to TWA.
The eleventh article of TWA's Third Amended and Restated
Certificate of Incorporation ("Article Eleventh") provides that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to, or testifies in, any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative in nature,
by reason of the fact that such person is or was a director, officer, employee
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding to the full extent permitted by law, and the Company may
adopt By-Laws or enter into agreements with any such person for the purpose of
providing for such indemnification.
To the extent that a director or officer of the Company has
been successful on the merits or otherwise (including without limitation
settlement by nolo contendere) in defense of any action, suit or proceeding
referred to in the immediately preceding paragraph, or in defense of any
claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
Expenses incurred by an officer, director, employee or agent in
defending or testifying in a civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified by the Company against such expenses as authorized by Article
Eleventh and the Company may adopt By-Laws or enter into agreements with such
persons for the purpose of providing for such advances.
The indemnification permitted by Article Eleventh shall not be
deemed exclusive of any other rights to which any person may be entitled under
any agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in such person's official capacity and as to action in
another capacity while holding an office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such person.
The Company shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership,
joint venture, employee benefit plan trust or other enterprise, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Company would have the power to indemnify such person against such liability
under the provisions of Article Eleventh or otherwise.
If the DGCL is amended to further expand the indemnification
permitted to directors, officers, employees or agents of the Company, then the
Company shall indemnify such persons to the fullest extent permitted by the
DGCL, as so amended.
The obligations of the Company to indemnify any person serving
as one of its directors, officers or employees as of or following the
Company's '93 Reorganization, by reason of such person's past or future
service in such a capacity, or as a director, officer or employee of another
corporation, partnership or other legal entity, to the extent provided in
Article Eleventh or in similar constituent documents or by statutory law or
written agreement of or with the Company, shall be deemed and treated as
executory contracts assumed by the Company pursuant to the Company's '93
Reorganization. Accordingly, such indemnification obligations survive and were
unaffected by the entry of the order confirming the Company's '93
Reorganization. The obligations of the Company to indemnify any person who, as
of the '93 Reorganization, was no longer serving as one of its directors,
officers or employees, which indemnity obligation arose by reason of such
person's prior service in any such capacity, or as a director, officer or
employee of another corporation, partnership or other legal entity, to the
extent provided in the certificate of incorporation, by-laws or other
constituent documents or by statutory law or written agreement of or with TWA
were terminated and discharged pursuant to Section 502(e) of the United States
Bankruptcy Code or otherwise, as of the date the '93 Reorganization was
confirmed. Nothing contained in the Second Amended and Restated Certificate of
Incorporation of the Company shall be deemed to reinstate any obligation of
the Corporation to indemnify any person or entity, which was otherwise
released under or in connection with the Comprehensive Settlement Agreement
entered into pursuant to the '93 Reorganization.
ITEM 21. Exhibits
(a) Exhibits
*2.1 --Joint Plan of Reorganization, dated May 12, 1995 (Appendix B to the
Registrant'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 12/31/95 Form 10-K)
*3(i) --Third Amended and Restated Certificate of Incorporation of the
Registrant (Exhibit 3(i) to the Registrant's Registration Statement
on Form S-4, Registration Number 333-26645)
*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 Trans World 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 Trans World 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 --Trans World Airlines, Inc. 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 --Registration Rights Agreement, dated November 3, 1993, between TWA
and the Initial Significant Holders (Exhibit 4.9 to 9/93 10-Q)
*4.8 --Indenture between TWA and Harris Trust and Savings Bank, dated
November 3, 1993 relating to TWA's 8% Senior Secured Notes Due 2000
(Exhibit 4.11 to 9/93 10-Q)
*4.9 --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)
*4.10 --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)
*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, No. 333-04977)
*4.15 --Indenture dated as of March 31, 1997 between TWA and First Security
Bank, National Association relating to TWA's 12% Senior Secured
Notes due 2002 (Exhibit 4.15 to Registrant's Registration Statement
on Form S-4, No. 333-26645)
*4.16 --Form of 12% Senior Secured Note due 2002 (contained in Indenture
filed as Exhibit 4.15 to 12/31/97 Form 10-K)
*4.17 --Registration Rights Agreement dated as of March 31, 1997 between the
Company and the Initial Purchaser relating to the 12% Senior Secured
Notes due 2002 and the warrants to purchase 126.26 shares of TWA
Common Stock (Exhibit 4.17 to Registrant's Registration Statement on
Form S-4, No. 333-26645)
*4.18 --Warrant Agreement dated as of March 31, 1997 between the Company and
American Stock Transfer & Trust Company, as Warrant Agent, relating
to warrants to purchase 126.26 shares of TWA Common Stock (Exhibit
4.18 to Registrant's Registration Statement on Form S-4, No.
333-26645)
*4.19 --Form of Indenture relating to TWA's 9 1/4% Convertible Subordinated
Debentures due 2007 (Exhibit 4.19 to Registrant's Registration
Statement on Form S-3, No. 33-44689)
*4.20 --Registration Rights Agreement dated as of December 2, 1997 between
the Company and the Initial Purchasers (Exhibit 4.20 to Registrant's
Registration Statement on Form S-3, No. 33-44689)
*4.21 --Indenture dated as of December 9, 1997 by and between TWA and First
Security Bank, National Association, as Trustee, relating to TWA's
11 1/2% Senior Secured Notes due 2004 (Exhibit 4.21 to Registrant's
Registration Statement on Form S-3, No. 33-44661)
*4.22 --Form of 11 1/2% Senior Secured Note due 2004 (contained in Indenture
filed as Exhibit 4.21 to 12/31/97 Form 10-K)
*4.23 --Registration Rights Agreement dated as of December 9, 1997 among the
Company and Lazard Freres & Co. LLC and PaineWebber Incorporated, as
initial purchasers, relating to TWA's 11 1/2% Senior Secured Notes
due 2004 (Exhibit 4.23 to Registrant's Registration Statement on
Form S-3, No. 33-44661)
*4.24 --Sale and Service Agreement dated as of December 30, 1997 between TWA
and Constellation Finance LLC, as purchaser, relating to TWA's
receivables (Exhibit 4.24 to Registrant's Registration Statement on
Form S-3, No. 33-44661)
** 4.25 --Registration Rights Agreement dated as of March 3, 1998 between the
Company and the Initial Purchaser
** 4.26 --Indenture dated as of March 3, 1998 by and between TWA and First
Security Bank, National Association, as Trustee, relating to TWA's
11 3/8% Senior Notes due 2006
** 4.27 --Aircraft Sale and Note Purchase Agreement dated as of April 9, 1998
among TWA, First Security Bank, National Association, as Owner
Trustee and Seven Sixty Seven Leasing, Inc.
** 4.28 --Indenture dated as of April 21, 1998 by and between TWA and First
Security Bank, National Association, as Trustee, relating to TWA's
11 3/8% Senior Secured Notes due 2003
** 4.29 --Form of 11 3/8% Senior Secured Notes due 2003 (contained as Exhibit
1 to Rule 144A/Regulation S Appendix to Indenture in Exhibit 4.28)
** 4.30 --Form of Mandatory Conversion Equity Note due 1999 (contained as
Exhibit A to Indenture in Exhibit 4.28)
** 5 --Opinion of Davis Polk & Wardwell, Counsel of the Registrant,
regarding the validity of the securities being registered
*10.1.1 --Asset Purchase Agreement, dated as of November 4, 1993, between TWA
and St. Louis (Exhibit 10.2 to 9/93 10-Q)
*10.1.2 --Equipment Operating Lease Agreement, dated November 4, 1993, between
TWA and St. Louis (Exhibit 10.2 to 9/93 10-Q)
*10.1.3 --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)
*10.1.4 --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)
*10.2.1 --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)
*10.2.2 --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)
*10.3 --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)
*10.4.1 --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)
*10.4.2 --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)
*10.4.3 --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)
*10.4.4 --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)
*10.5.1 --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)
*10.5.2 --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)
*10.5.3 --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)
*10.5.4 --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)
*10.6.1 --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)
*10.6.2 --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)
*10.6.3 --Lease Agreement 108, dated October 5, 1993, between Pacific AirCorp
747, Inc. and TWA with respect to aircraft N93108 (Exhibit 10.7 to
9/93 10-Q)
*10.7 --'92 Labor Agreements (Exhibits 2.1, 2.2 and 2.3 to 9/92 8-K)
*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 (Exhibit 10.9.1 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*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
(Exhibit 10.20.1 to Registrant's Registration Statement on Form S-4,
No. 33-84944)
*10.11.2 --Lease Agreement 927, dated as of December 15, 1993, between Pacific
AirCorp DC9, Inc. and TWA with respect to aircraft N927L (Exhibit
10.20.2 to Registrant's Registration Statement on Form S-4, No.
33-84944)
*10.11.3 --Lease Agreement 928, dated as of December 15, 1993, between Pacific
AirCorp DC9, Inc. and TWA with respect to aircraft N928L (Exhibit
10.20.3 to Registrant's Registration Statement on Form S-4, No.
33-84944)
*10.12.1 --Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.),
Inc. dated March 31, 1994, with respect to aircraft N950U (Exhibit
10.21.1 to Registrant's Registration Statement on Form S-4, No.
33-84944)
*10.12.2 --Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.),
Inc., dated March 31, 1994, with respect to aircraft N953U (Exhibit
10.21.2 to Registrant's Registration Statement on Form S-4, No.
33-84944)
*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
(Exhibit 10.21.3 to Registrant's Registration Statement on Form S-4
No. 33-84944)
*10.12.4 --Aircraft Purchase Agreement between TWA and McDonnell Douglas
Finance Corporation, dated March 31, 1994, with respect to aircraft
N951U (Exhibit 10.21.4 to Registrant's Registration Statement on
Form S-4, No. 33-84944)
*10.12.5 --Aircraft Purchase Agreement between TWA and McDonnell Douglas
Finance Corporation, dated March 31, 1994, with respect to aircraft
N952U (Exhibit 10.21.5 to Registrant's Registration Statement on
Form S-4, No. 33-84944)
*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 (Exhibit 10.21.6 to Registrant's Registration Statement on
Form S-4, No. 33-84944)
*10.13.1 --Aircraft Purchase Agreement, dated March 31, 1994, between McDonnell
Douglas Finance Corporation and TWA with respect to aircraft N306TW
(formerly N534AW) (Exhibit 10.22.1 to Registrant's Registration
Statement on Form S-4, No. 33-84944)
*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) (Exhibit 10.22.2
to Registrant's Registration Statement on Form S-4, No. 33-84944)
*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) (Exhibit 10.22.3 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*10.14 --Commuter Air Service Agreement dated July 22, 1992, between TWA and
Trans World Express, Inc. (Exhibit 10.23 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.15 --Commuter Air Service Agreement dated October 27, 1993, between TWA
and Alpha Air (Exhibit 10.24 to Registrant's Registration Statement
on Form S-4, No. 33-84944)
*10.16 --Air Service Agreement dated October 1, 1994, between TWA and Trans
States Airlines, Inc. (Exhibit 10.25 to Registrant's Registration
Statement on Form S-4, No. 33-84944)
*10.17 --Consulting Agreement between TWA and Fieldstone, Private Capital
Group, L.P. dated July 11, 1994 (Exhibit 10.26 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.18 --Consulting Agreement dated July 15, 1994, between TWA and Simat,
Helliesen & Eichner, Inc. (Exhibit 10.27 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.19.1 --Agreement for Purchase and Sale dated as of August 29, 1994, between
TWA and Browsh & Associates, Inc. (Exhibit 10.28.1 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.19.2 --Agreement for Purchase and Sale dated as of August 29, 1994, between
TWA and Travel Marketing Holding Corporation (Exhibit 10.28.2 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*10.20.1 --Addendum to Stock Purchase Agreement (identified in 10.29.2) dated
October 31, 1994 (Exhibit 10.29.3 to 9/94 10-Q)
*10.20.2 --Addendum to Stock Purchase Agreement (identified in 10.29.2) dated
November 2, 1994 (Exhibit 10.29.4 to 9/94 10-Q)
*10.21.1 --Form of Agreement dated as of August 31, 1994, between TWA and the
Air Line Pilots Association, International (Exhibit 10.31.1 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*10.21.2 --Form of Agreement dated as of September 1, 1994, between TWA and the
International Association of Machinists and Aerospace Workers
(Exhibit 10.31.2 to Registrant's Registration Statement on Form S-4,
No. 33-84944)
*10.21.3 --Form of Agreement dated as of September 1, 1994, between TWA and the
Independent Federation of Flight Attendants (Exhibit 10.31.3 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*10.21.4 --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)
*10.22.1 --Trust Agreement dated as of August 24, 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
(Exhibit 10.32.1 to Registrant's Registration Statement on Form S-4,
No. 33-84944)
*10.22.2 --Stock Pledge and Intercreditor Agreement dated as of August 24, 1994
among TWA, TWA Stock Holding Company, Inc. and United States Trust
Company of New York (Exhibit 10.32.2 to Registrant's Registration
Statement on Form S-4, No. 33-84944)
*10.23.1 --Key Employee Stock Incentive Plan (Exhibit 10.33.1 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.23.2 --Form of Option Agreements for options issued pursuant to the 1994
Key Employee Stock Incentive Plan (Exhibit 10.33.2 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.24 --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)
*10.24.1 --Karabu Ticket Program Agreement between TWA and Karabu Corp. dated
as of June 14, 1995 (Exhibit 10.37.1 to 12/95 10-K)
*10.25 --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)
*10.26 --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)
*10.27 --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)
*10.28 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and Elliott Associates L.P., a Delaware limited partnership
(Exhibit 10.41 to 9/95 10-Q)
*10.29 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and Westgate International L.P., a Cayman Islands limited
partnership (Exhibit 10.42 to 9/95 10-Q)
*10.30 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and United Equities (Commodities) Company, a New York general
partnership (Exhibit 10.43 to 9/95 10-Q)
*10.31 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and Grace Brothers, Ltd., an Illinois limited partnership
(Exhibit 10.44 to 9/95 10-Q)
*10.32 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and First Capital Alliance, L.P., an Illinois limited
partnership (Exhibit 10.45 to 9/95 10-Q)
*10.33 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and Romulus Holdings Corp. a Delaware Corporation (Exhibit 10.46
to 9/95 10-Q)
*10.34 --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 12/31/95 Form 10-K/A)
*10.35 --Employee Stock Incentive Program dated as of August 23, 1995 by TWA
(Exhibit 10.49 to 12/31/95 Form 10-K)
*10.36 --Trans World Airlines, Inc. 1995 Outside Directors' Stock Ownership
and Stock Option Plan (Exhibit 10.51 to Registrant's Registration
Statement on Form S-3, No. 333-04977)
*10.37 --Letter Agreement dated July 30, 1996 between Trans World Airlines,
Inc. and Robert A. Peiser (Exhibit 10.52 to Registrant's
Registration Statement on Form S-3, No. 333-04977)
*10.38 --Letter Agreement dated July 26, 1996 between Trans World Airlines,
Inc. and Mark J. Coleman (Exhibit 10.53 to Registrant's Registration
Statement on Form S-3, No. 333-04977)
*10.39 --Agreement dated as of September 3, 1996 between the Company and
Roden A. Brandt (Exhibit 10.6 to 9/96 Form 10-Q)
*10.40 --Letter Agreement dated January 6, 1997 between the Company and
Edward Soule (Exhibit 10.33 to 12/31/96 Form 10-K)
*10.41 --Agreement dated as of October 1, 1996 between the Company and
Michael J. Palumbo (Exhibit 10.34 to 12/31/96 Form 10-K)
*10.42 --Agreement dated as of November 11, 1996 between the Company and
Jeffrey H. Erickson (Exhibit 10.35 to 12/31/96 Form 10-K)
*10.43 --Consulting Agreement between the Company and David M. Kennedy dated
as of June 6, 1997 (Exhibit 10.1 to 6/97 Form 10-Q)
*10.44 --Separation Agreement dated July 25, 1997 between the Company and
Charles J. Thibaudeau (Exhibit 10.2 to 6/97 form 10-Q)
*10.45 --Agreement between the Company and Gerald L. Gitner dated as of
February 12, 1997 (Exhibit 10.1 to 9/97 Form 10-Q)
*10.46.1 --Pledge and Security Agreement dated as of December 9, 1997 from the
Company to First Security Bank, National Association, as Collateral
Agent, in connection with the 11(1)/(2)% Senior Secured Notes due
2004 (Exhibit 10.46.1 to Registrant's Registration Statement on Form
S-4, No. 333-44661)
*10.46.2 --Acquired Slot Trust Agreement Declaration of Trust dated as of
December 9, 1997 between the Company and First Security Bank,
National Association, as Slot Trustee, in connection with the
11(1)/(2)% Senior Secured Notes due 2004 (Exhibit 10.46.2 to
Registrant's Registration Statement on Form S-4, No. 333-44661)
*10.46.3 --Master Sub-License Agreement dated as of December 9, 1997 between
the Company and First Security Bank, National Association, in
connection with the 11(1)/(2)% Senior Secured Notes due 2004
(Exhibit 10.46.3 to Registrant's Registration Statement on Form S-4,
No. 333-44661)
*10.46.4 --Collateral Pledge and Security Agreement dated as of December 9,
1997 between the Company and First Security Bank, National
Association, as Trustee, in connection with the 11(1)/(2)% Senior
Secured Notes due 2004 (Exhibit 10.46.4 to Registrant's Registration
Statement on Form S-4, No. 333-44661)
*10.47.1 --Exchange Agreement dated as of June 10, 1996 between TWA and Elliott
Associates, L.P. as amended (Exhibit 10.1 to 9/20/96 Form 8-K)
*10.47.2 --Exchange Agreement dated as of June 10, 1996 between TWA and
Westgate International, L.P., as amended (Exhibit 10.2 to 9/20/96
Form 8-K)
*10.48.1 --Form of Letter Agreement between TWA and executive officers
(continuing employment) (Exhibit 10.1 to 3/97 Form 10-Q)
*10.48.2 --Form of Letter Agreement between TWA and executive officers (new
hire) (Exhibit 10.2 to 3/97 Form 10-Q)
*10.49 --Change in Control Agreement for executive officers (Exhibit 10.49 to
12/31/97 Form 10-K)
*10.50 --Termination Agreement with Richard P. Magurno dated March 2, 1998
(Exhibit 10.50 to 12/31/97 Form 10-K)
*11 --Statement of Computation of Per Share Earnings (included in 12/31/97
Form 10-K)
**12 --Statement of Computation of Ratio of Earnings to Fixed Charges
*13.1 --1997 Annual Report to Stockholders
**23.1 --Consent of KPMG Peat Marwick LLP
**23.2 --Consent of Davis Polk & Wardwell, counsel of the Registrant
(included in Exhibit 5)
**24 --Powers of Attorney
**25 --Statement of Eligibility of First Security Bank, National
Association
*27 --Financial Data Schedule (included in 12/31/97 Form 10-K)
99.1 --Form of Letter of Transmittal
99.2 --Form of Notice of Guaranteed Delivery
99.3 --Form of Instruction to Registered Holder and/or Book-Entry Transfer
Facility Participant from Owner of Old Notes
99.4 --Form of Letter to Clients of Depository Trust Company Participants
99.5 --Form of Letter to Registered Holders and Depository Trust Company
Participants
- ----------
* Incorporated by reference
** Previously filed
(b) Schedules
All supplementary schedules relating to the Registration
Statement are omitted because they are not required or because the required
information, where material, is contained in the Financial Statements.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement:
provided, however, that paragraphs (a)(1)(i) and (a)(2)(ii) above do not apply
if the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Company pursuant to section 13 or section 15(d) of the
Exchange Act that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the Trustee to
act under subsection (a) of Section 310 of the Trust Indenture Act ("Act") in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Act.
(e) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 2 to the Registration Statement
on Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of St. Louis, State of Missouri, June 30, 1998.
TRANS WORLD AIRLINES, INC.
June 30, 1998
By /s/ Michael J. Palumbo
-------------------------
Michael J. Palumbo,
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement on Form S-4 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Gerald L. Gitner Director, Chairman of the Board and June 30, 1998
------------------------------- Chief Executive Officer (Principal
Gerard L. Gitner Executive Officer)
/s/ Michael J. Palumbo Senior Vice President and Chief June 30, 1998
------------------------------- Financial Officer (Principal Financial
Michael J. Palumbo Officer and Principal Accounting
Officer)
* Director June 30, 1998
-------------------------------
John W. Bachmann
* Director June 30, 1998
-------------------------------
William F. Compton
Director
-------------------------------
Sherry L. Cooper
* Director June 30, 1998
-------------------------------
William M. Hoffman
* Director June 30, 1998
-------------------------------
Edgar M. House
* Director June 30, 1998
-------------------------------
Thomas H. Jacobsen
* Director June 30, 1998
-------------------------------
Myron Kaplan
* Director June 30, 1998
-------------------------------
David M. Kennedy
* Director June 30, 1998
-------------------------------
Merrill A. McPeak
* Director June 30, 1998
-------------------------------
Thomas F. Meagher
Director
-------------------------------
Brent S. Miller
* Director June 30, 1998
-------------------------------
William O'Driscoll
* Director June 30, 1998
-------------------------------
G. Joseph Reddington
* Director June 30, 1998
-------------------------------
Blanche M. Touhill
*By: /s/ Kathleen A. Soled June 30, 1998
---------------------------
Kathleen A. Soled,
as Attorney-in-fact
</TABLE>
EXHIBIT INDEX
<TABLE>
Exhibit
Number Description Page
- ------ ----------- ----
<S> <C> <C>
*2.1 --Joint Plan of Reorganization, dated May 12, 1995 (Appendix B to the
Registrant'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 12/31/95 Form 10-K)
*3(i) --Third Amended and Restated Certificate of Incorporation of the
Registrant (Exhibit 3(i) to the Registrant's Registration Statement
on Form S-4, Registration Number 333-26645)
*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 Trans World 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 Trans World 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 --Trans World Airlines, Inc. 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 --Registration Rights Agreement, dated November 3, 1993, between TWA
and the Initial Significant Holders (Exhibit 4.9 to 9/93 10-Q)
*4.8 --Indenture between TWA and Harris Trust and Savings Bank, dated
November 3, 1993 relating to TWA's 8% Senior Secured Notes Due 2000
(Exhibit 4.11 to 9/93 10-Q)
*4.9 --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)
*4.10 --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)
*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, No. 333-04977)
*4.15 --Indenture dated as of March 31, 1997 between TWA and First Security
Bank, National Association relating to TWA's 12% Senior Secured
Notes due 2002 (Exhibit 4.15 to Registrant's Registration Statement
on Form S-4, No. 333-26645)
*4.16 --Form of 12% Senior Secured Note due 2002 (contained in Indenture
filed as Exhibit 4.15 to 12/31/97 Form 10-K)
*4.17 --Registration Rights Agreement dated as of March 31, 1997 between the
Company and the Initial Purchaser relating to the 12% Senior Secured
Notes due 2002 and the warrants to purchase 126.26 shares of TWA
Common Stock (Exhibit 4.17 to Registrant's Registration Statement on
Form S-4, No. 333-26645)
*4.18 --Warrant Agreement dated as of March 31, 1997 between the Company and
American Stock Transfer & Trust Company, as Warrant Agent, relating
to warrants to purchase 126.26 shares of TWA Common Stock (Exhibit
4.18 to Registrant's Registration Statement on Form S-4, No.
333-26645)
*4.19 --Form of Indenture relating to TWA's 9 1/4% Convertible Subordinated
Debentures due 2007 (Exhibit 4.19 to Registrant's Registration
Statement on Form S-3, No. 33-44689)
*4.20 --Registration Rights Agreement dated as of December 2, 1997 between
the Company and the Initial Purchasers (Exhibit 4.20 to Registrant's
Registration Statement on Form S-3, No. 33-44689)
*4.21 --Indenture dated as of December 9, 1997 by and between TWA and First
Security Bank, National Association, as Trustee, relating to TWA's
11 1/2% Senior Secured Notes due 2004 (Exhibit 4.21 to Registrant's
Registration Statement on Form S-3, No. 33-44661)
*4.22 --Form of 11 1/2% Senior Secured Note due 2004 (contained in Indenture
filed as Exhibit 4.21 to 12/31/97 Form 10-K)
*4.23 --Registration Rights Agreement dated as of December 9, 1997 among the
Company and Lazard Freres & Co. LLC and PaineWebber Incorporated, as
initial purchasers, relating to TWA's 11 1/2% Senior Secured Notes
due 2004 (Exhibit 4.23 to Registrant's Registration Statement on
Form S-3, No. 33-44661)
*4.24 --Sale and Service Agreement dated as of December 30, 1997 between TWA
and Constellation Finance LLC, as purchaser, relating to TWA's
receivables (Exhibit 4.24 to Registrant's Registration Statement on
Form S-3, No. 33-44661)
** 4.25 --Registration Rights Agreement dated as of March 3, 1998 between the
Company and the Initial Purchaser
** 4.26 --Indenture dated as of March 3, 1998 by and between TWA and First
Security Bank, National Association, as Trustee, relating to TWA's
11 3/8% Senior Notes due 2006
** 4.27 --Aircraft Sale and Note Purchase Agreement dated as of April 9, 1998
among TWA, First Security Bank, National Association, as Owner
Trustee and Seven Sixty Seven Leasing, Inc.
** 4.28 --Indenture dated as of April 21, 1998 by and between TWA and First
Security Bank, National Association, as Trustee, relating to TWA's
11 3/8% Senior Secured Notes due 2003
** 4.29 --Form of 11 3/8% Senior Secured Notes due 2003 (contained as Exhibit
1 to Rule 144A/Regulation S Appendix to Indenture in Exhibit 4.28)
** 4.30 --Form of Mandatory Conversion Equity Note due 1999 (contained as
Exhibit A to Indenture in Exhibit 4.28)
** 5 --Opinion of Davis Polk & Wardwell, Counsel of the Registrant,
regarding the validity of the securities being registered
*10.1.1 --Asset Purchase Agreement, dated as of November 4, 1993, between TWA
and St. Louis (Exhibit 10.2 to 9/93 10-Q)
*10.1.2 --Equipment Operating Lease Agreement, dated November 4, 1993, between
TWA and St. Louis (Exhibit 10.2 to 9/93 10-Q)
*10.1.3 --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)
*10.1.4 --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)
*10.2.1 --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)
*10.2.2 --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)
*10.3 --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)
*10.4.1 --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)
*10.4.2 --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)
*10.4.3 --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)
*10.4.4 --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)
*10.5.1 --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)
*10.5.2 --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)
*10.5.3 --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)
*10.5.4 --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)
*10.6.1 --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)
*10.6.2 --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)
*10.6.3 --Lease Agreement 108, dated October 5, 1993, between Pacific AirCorp
747, Inc. and TWA with respect to aircraft N93108 (Exhibit 10.7 to
9/93 10-Q)
*10.7 --'92 Labor Agreements (Exhibits 2.1, 2.2 and 2.3 to 9/92 8-K)
*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 (Exhibit 10.9.1 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*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
(Exhibit 10.20.1 to Registrant's Registration Statement on Form S-4,
No. 33-84944)
*10.11.2 --Lease Agreement 927, dated as of December 15, 1993, between Pacific
AirCorp DC9, Inc. and TWA with respect to aircraft N927L (Exhibit
10.20.2 to Registrant's Registration Statement on Form S-4, No.
33-84944)
*10.11.3 --Lease Agreement 928, dated as of December 15, 1993, between Pacific
AirCorp DC9, Inc. and TWA with respect to aircraft N928L (Exhibit
10.20.3 to Registrant's Registration Statement on Form S-4, No.
33-84944)
*10.12.1 --Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.),
Inc. dated March 31, 1994, with respect to aircraft N950U (Exhibit
10.21.1 to Registrant's Registration Statement on Form S-4, No.
33-84944)
*10.12.2 --Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.),
Inc., dated March 31, 1994, with respect to aircraft N953U (Exhibit
10.21.2 to Registrant's Registration Statement on Form S-4, No.
33-84944)
*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
(Exhibit 10.21.3 to Registrant's Registration Statement on Form S-4
No. 33-84944)
*10.12.4 --Aircraft Purchase Agreement between TWA and McDonnell Douglas
Finance Corporation, dated March 31, 1994, with respect to aircraft
N951U (Exhibit 10.21.4 to Registrant's Registration Statement on
Form S-4, No. 33-84944)
*10.12.5 --Aircraft Purchase Agreement between TWA and McDonnell Douglas
Finance Corporation, dated March 31, 1994, with respect to aircraft
N952U (Exhibit 10.21.5 to Registrant's Registration Statement on
Form S-4, No. 33-84944)
*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 (Exhibit 10.21.6 to Registrant's Registration Statement on
Form S-4, No. 33-84944)
*10.13.1 --Aircraft Purchase Agreement, dated March 31, 1994, between McDonnell
Douglas Finance Corporation and TWA with respect to aircraft N306TW
(formerly N534AW) (Exhibit 10.22.1 to Registrant's Registration
Statement on Form S-4, No. 33-84944)
*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) (Exhibit 10.22.2
to Registrant's Registration Statement on Form S-4, No. 33-84944)
*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) (Exhibit 10.22.3 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*10.14 --Commuter Air Service Agreement dated July 22, 1992, between TWA and
Trans World Express, Inc. (Exhibit 10.23 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.15 --Commuter Air Service Agreement dated October 27, 1993, between TWA
and Alpha Air (Exhibit 10.24 to Registrant's Registration Statement
on Form S-4, No. 33-84944)
*10.16 --Air Service Agreement dated October 1, 1994, between TWA and Trans
States Airlines, Inc. (Exhibit 10.25 to Registrant's Registration
Statement on Form S-4, No. 33-84944)
*10.17 --Consulting Agreement between TWA and Fieldstone, Private Capital
Group, L.P. dated July 11, 1994 (Exhibit 10.26 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.18 --Consulting Agreement dated July 15, 1994, between TWA and Simat,
Helliesen & Eichner, Inc. (Exhibit 10.27 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.19.1 --Agreement for Purchase and Sale dated as of August 29, 1994, between
TWA and Browsh & Associates, Inc. (Exhibit 10.28.1 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.19.2 --Agreement for Purchase and Sale dated as of August 29, 1994, between
TWA and Travel Marketing Holding Corporation (Exhibit 10.28.2 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*10.20.1 --Addendum to Stock Purchase Agreement (identified in 10.29.2) dated
October 31, 1994 (Exhibit 10.29.3 to 9/94 10-Q)
*10.20.2 --Addendum to Stock Purchase Agreement (identified in 10.29.2) dated
November 2, 1994 (Exhibit 10.29.4 to 9/94 10-Q)
*10.21.1 --Form of Agreement dated as of August 31, 1994, between TWA and the
Air Line Pilots Association, International (Exhibit 10.31.1 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*10.21.2 --Form of Agreement dated as of September 1, 1994, between TWA and the
International Association of Machinists and Aerospace Workers
(Exhibit 10.31.2 to Registrant's Registration Statement on Form S-4,
No. 33-84944)
*10.21.3 --Form of Agreement dated as of September 1, 1994, between TWA and the
Independent Federation of Flight Attendants (Exhibit 10.31.3 to
Registrant's Registration Statement on Form S-4, No. 33-84944)
*10.21.4 --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)
*10.22.1 --Trust Agreement dated as of August 24, 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
(Exhibit 10.32.1 to Registrant's Registration Statement on Form S-4,
No. 33-84944)
*10.22.2 --Stock Pledge and Intercreditor Agreement dated as of August 24, 1994
among TWA, TWA Stock Holding Company, Inc. and United States Trust
Company of New York (Exhibit 10.32.2 to Registrant's Registration
Statement on Form S-4, No. 33-84944)
*10.23.1 --Key Employee Stock Incentive Plan (Exhibit 10.33.1 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.23.2 --Form of Option Agreements for options issued pursuant to the 1994
Key Employee Stock Incentive Plan (Exhibit 10.33.2 to Registrant's
Registration Statement on Form S-4, No. 33-84944)
*10.24 --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)
*10.24.1 --Karabu Ticket Program Agreement between TWA and Karabu Corp. dated
as of June 14, 1995 (Exhibit 10.37.1 to 12/95 10-K)
*10.25 --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)
*10.26 --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)
*10.27 --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)
*10.28 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and Elliott Associates L.P., a Delaware limited partnership
(Exhibit 10.41 to 9/95 10-Q)
*10.29 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and Westgate International L.P., a Cayman Islands limited
partnership (Exhibit 10.42 to 9/95 10-Q)
*10.30 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and United Equities (Commodities) Company, a New York general
partnership (Exhibit 10.43 to 9/95 10-Q)
*10.31 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and Grace Brothers, Ltd., an Illinois limited partnership
(Exhibit 10.44 to 9/95 10-Q)
*10.32 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and First Capital Alliance, L.P., an Illinois limited
partnership (Exhibit 10.45 to 9/95 10-Q)
*10.33 --Equity Rights Put Agreement dated as of September 15, 1995 between
TWA and Romulus Holdings Corp. a Delaware Corporation (Exhibit 10.46
to 9/95 10-Q)
*10.34 --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 12/31/95 Form 10-K/A)
*10.35 --Employee Stock Incentive Program dated as of August 23, 1995 by TWA
(Exhibit 10.49 to 12/31/95 Form 10-K)
*10.36 --Trans World Airlines, Inc. 1995 Outside Directors' Stock Ownership
and Stock Option Plan (Exhibit 10.51 to Registrant's Registration
Statement on Form S-3, No. 333-04977)
*10.37 --Letter Agreement dated July 30, 1996 between Trans World Airlines,
Inc. and Robert A. Peiser (Exhibit 10.52 to Registrant's
Registration Statement on Form S-3, No. 333-04977)
*10.38 --Letter Agreement dated July 26, 1996 between Trans World Airlines,
Inc. and Mark J. Coleman (Exhibit 10.53 to Registrant's Registration
Statement on Form S-3, No. 333-04977)
*10.39 --Agreement dated as of September 3, 1996 between the Company and
Roden A. Brandt (Exhibit 10.6 to 9/96 Form 10-Q)
*10.40 --Letter Agreement dated January 6, 1997 between the Company and
Edward Soule (Exhibit 10.33 to 12/31/96 Form 10-K)
*10.41 --Agreement dated as of October 1, 1996 between the Company and
Michael J. Palumbo (Exhibit 10.34 to 12/31/96 Form 10-K)
*10.42 --Agreement dated as of November 11, 1996 between the Company and
Jeffrey H. Erickson (Exhibit 10.35 to 12/31/96 Form 10-K)
*10.43 --Consulting Agreement between the Company and David M. Kennedy dated
as of June 6, 1997 (Exhibit 10.1 to 6/97 Form 10-Q)
*10.44 --Separation Agreement dated July 25, 1997 between the Company and
Charles J. Thibaudeau (Exhibit 10.2 to 6/97 form 10-Q)
*10.45 --Agreement between the Company and Gerald L. Gitner dated as of
February 12, 1997 (Exhibit 10.1 to 9/97 Form 10-Q)
*10.46.1 --Pledge and Security Agreement dated as of December 9, 1997 from the
Company to First Security Bank, National Association, as Collateral
Agent, in connection with the 11(1)/(2)% Senior Secured Notes due
2004 (Exhibit 10.46.1 to Registrant's Registration Statement on Form
S-4, No. 333-44661)
*10.46.2 --Acquired Slot Trust Agreement Declaration of Trust dated as of
December 9, 1997 between the Company and First Security Bank,
National Association, as Slot Trustee, in connection with the
11(1)/(2)% Senior Secured Notes due 2004 (Exhibit 10.46.2 to
Registrant's Registration Statement on Form S-4, No. 333-44661)
*10.46.3 --Master Sub-License Agreement dated as of December 9, 1997 between
the Company and First Security Bank, National Association, in
connection with the 11(1)/(2)% Senior Secured Notes due 2004
(Exhibit 10.46.3 to Registrant's Registration Statement on Form S-4,
No. 333-44661)
*10.46.4 --Collateral Pledge and Security Agreement dated as of December 9,
1997 between the Company and First Security Bank, National
Association, as Trustee, in connection with the 11(1)/(2)% Senior
Secured Notes due 2004 (Exhibit 10.46.4 to Registrant's Registration
Statement on Form S-4, No. 333-44661)
*10.47.1 --Exchange Agreement dated as of June 10, 1996 between TWA and Elliott
Associates, L.P. as amended (Exhibit 10.1 to 9/20/96 Form 8-K)
*10.47.2 --Exchange Agreement dated as of June 10, 1996 between TWA and
Westgate International, L.P., as amended (Exhibit 10.2 to 9/20/96
Form 8-K)
*10.48.1 --Form of Letter Agreement between TWA and executive officers
(continuing employment) (Exhibit 10.1 to 3/97 Form 10-Q)
*10.48.2 --Form of Letter Agreement between TWA and executive officers (new
hire) (Exhibit 10.2 to 3/97 Form 10-Q)
*10.49 -- Change in Control Agreement for executive officers (Exhibit 10.49 to
12/31/97 Form 10-K)
*10.50 --Termination Agreement with Richard P. Magurno dated March 2, 1998
(Exhibit 10.50 to 12/31/97 Form 10-K)
*11 --Statement of Computation of Per Share Earnings (included in 12/31/97
Form 10-K)
**12 --Statement of Computation of Ratio of Earnings to Fixed Charges
*13.1 --1997 Annual Report to Stockholders
**23.1 --Consent of KPMG Peat Marwick LLP
**23.2 --Consent of Davis Polk & Wardwell, counsel of the Registrant
(included in Exhibit 5)
**24 --Powers of Attorney
**25 --Statement of Eligibility of First Security Bank, National
Association
*27 --Financial Data Schedule (included in 12/31/97 Form 10-K)
99.1 --Form of Letter of Transmittal
99.2 --Form of Notice of Guaranteed Delivery
99.3 --Form of Instruction to Registered Holder and/or Book-Entry Transfer
Facility Participant from Owner of Old Notes
99.4 --Form of Letter to Clients of Depository Trust Company Participants
99.5 --Form of Letter to Registered Holders and Depository Trust Company
Participants
- ----------
* Incorporated by reference
** Previously filed
</TABLE>
Exhibit 99.1
LETTER OF TRANSMITTAL
Offer to Exchange
11 3/8% Senior Notes due 2006,
which have been registered under
the Securities Act of 1933, as amended,
for Any and All Outstanding
11 3/8% Senior Notes due 2006
of
Trans World Airlines, Inc.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
JULY 31, 1998 (THE "EXPIRATION DATE")
UNLESS EXTENDED BY TRANS WORLD AIRLINES, INC.
EXCHANGE AGENT:
FIRST SECURITY BANK, NATIONAL ASSOCIATION
By Hand or Overnight
Delivery:
First Security Bank,
National Association
Corporate Trust Services
79 South Main Street
Salt Lake City, Utah 84111
Facsimile Transmissions:
(Eligible Institutions Only)
(801) 246-5053
To Confirm by Telephone
or for Information Call:
(801) 246-5630
By Registered or Certified Mail:
First Security Bank,
National Association
Corporate Trust Services
79 South Main Street
Salt Lake City, Utah 84111
Delivery of this Letter of Transmittal to an address other than as set
forth above or transmission of this letter of transmittal via a facsimile
transmission to a number other than as set forth above will not constitute a
valid delivery.
The undersigned acknowledges receipt of the Prospectus dated July 1,
1998 (the "Prospectus") of Trans World Airlines, Inc. (the "Company") which,
together with this Letter of Transmittal (the "Letter of Transmittal"),
describes the Company's offer (the "Exchange Offer") to exchange $1,000 in
principal amount of 11 3/8% Senior Notes due 2006 (the "Exchange Notes") for
each $1,000 in principal amount of outstanding 11 3/8% Senior Notes due 2006
(the "Old Notes"). The terms of the Exchange Notes are identical in all
material respects (including principal amount, interest rate and maturity) to
the terms of the Old Notes for which they may be exchanged pursuant to the
Exchange Offer, except that the offering of the Exchange Notes will have been
registered under the Securities Act of 1933, as amended and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof and
certain provisions relating to an increase in the stated rate of interest
shall be eliminated.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE
FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF
THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE
AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separate signed schedule affixed hereto.
- -------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED HEREWITH
- -------------------------------------------------------------------------------
Name(s) and Address(es)
of Registered Holder(s) Certificate(s) Tendered
(Please fill in) (Attach Signed List if Necessary)
- -------------------------------------------------------------------------------
Aggregate
Principal
Amount Principal
Certificate Represented Amount
Number(s)* by Old Notes* Tendered**
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
Total
- -------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by Old Notes. See Instruction 2.
- -------------------------------------------------------------------------------
This Letter of Transmittal is to be used either if certificates for Old
Notes are to be forwarded herewith or if delivery of Old Notes is to be made
by book-entry transfer to an account maintained by the Exchange Agent at The
Depository Trust Company ("DTC"), pursuant to the procedures set forth in "The
Exchange Offer--Book-Entry Transfer" in the Prospectus. Delivery of documents
to a book-entry transfer facility does not constitute delivery to the Exchange
Agent.
Unless the context requires otherwise, the term "Holder" for purposes of
this Letter of Transmittal means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder or any person whose
Old Notes are held of record by DTC or its nominee who desire to deliver such
Old Notes by book-entry transfer at DTC.
Holders whose Old Notes are not immediately available or who cannot
deliver their Old Notes and all other documents required hereby to the
Exchange Agent on or prior to the Expiration Date may tender their Old Notes
according to the guaranteed delivery procedure set forth in the Prospectus
under the caption "The Exchange Offer--Guaranteed Delivery Procedures".
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DEPOSITORY
TRUST COMPANY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution___________________________________________________
________________________________________________________________________________
The Depository Trust Company
Account Number__________________________________________________________________
Transaction Code Number_________________________________________________________
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)____________________________________________________
________________________________________________________________________________
Name of Eligible Institution that Guaranteed Delivery
________________________________________________________________________________
If Delivered by Book-Entry Transfer:
Account Number__________________________________________________________________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:___________________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of Old Notes. Subject to, and effective upon, the acceptance for exchange of
the Old Notes tendered herewith, the undersigned hereby exchanges, assigns and
transfers to, or upon the order of, the Company all right, title and interest
in and to such Old Notes. The undersigned hereby irrevocably constitutes and
appoints the Exchange Agent as the true and lawful agent and attorney-in-fact
of the undersigned (with full knowledge that said Exchange Agent acts as the
agent of the undersigned in connection with the Exchange Offer) to cause the
Old Notes to be assigned, transferred and exchanged. The undersigned
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Old Notes, and that, when the same
are accepted for exchange, the Company will acquire good and unencumbered
title to the tendered Old Notes, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The undersigned
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes or transfer ownership of such Old Notes on the account books maintained
by The Depository Trust Company.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer". The undersigned recognizes
as a result of these conditions (which may be waived, in whole or in part, by
the Company), as more particularly set forth in the Prospectus, the Company
may not be required to exchange any of the Old Notes tendered hereby and, in
such event, the Old Notes not exchanged will be returned to the undersigned at
the address shown below the signature of the undersigned.
By tendering, each holder of Old Notes represents to the Company that (i)
the Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such Exchange Notes, whether
or not such person is such holder, (ii) neither the holder of Old Notes nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes, (iii) if the holder is
not a broker-dealer or is a broker-dealer but will not receive Exchange Notes
for its own account in exchange for Old Notes, neither the holder nor any such
other person is engaged in or intends to participate in a distribution of the
Exchange Notes and (iv) neither the holder nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act of 1933, as amended (the "Act") or if such holder is an "affiliate", that
such holder will comply with the registration and prospectus delivery
requirements of the Act to the extent applicable. If the tendering holder is a
broker-dealer (whether or not it is also an "affiliate") that will receive
Exchange Notes for its own account in exchange for Old Notes, it represents that
the Old Notes to be exchanged for the Exchange Notes were acquired by it as a
result of market-making activities or other trading activities, and acknowledges
that it will deliver a prospectus meeting the requirements of the Act in
connection with any resale of such Exchange Notes. By acknowledging that it will
deliver and by delivering a prospectus meeting the requirements of the Act in
connection with any resale of such Exchange Notes, the undersigned is not deemed
to admit that it is an "underwriter" within the meaning of the Act.
All authority herein conferred or agreed to be conferred shall survive
the death, bankruptcy or incapacity of the undersigned and every obligation of
the undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned. Tendered Old Notes
may be withdrawn at any time prior to the Expiration Date.
Certificates for all Exchange Notes delivered in exchange for tendered
Old Notes any Old Notes delivered herewith but not exchanged, in each case
registered in the name of the undersigned, shall be delivered to the
undersigned at the address shown below the signature of the undersigned.
TENDERING HOLDER(S) SIGN HERE
_______________________________________________
_______________________________________________
Signature(s) of Holder(s)
Dated: , 1998
(Must be signed by registered holder(s) exactly as
name(s) appear(s) on certificate(s) for Old Notes
or by any person(s) authorized to become registered
holder(s) by endorsements and documents transmitted
herewith or, if the Old Notes are held of record by
DTC or its nominee, the person in whose name such
Old Notes are registered on the books of DTC. If
signature by a trustee, executor, administrator,
guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary
or representative capacity, please set forth the
full title of such person.) See Instruction 3.
Name(s):______________________________________
______________________________________________
(Please print)
Capacity (full title):________________________
Address:______________________________________
______________________________________________
(Including Zip Code)
Area Code and Telephone No.___________________
______________________________________________
Tax Identification No.
GUARANTEE OF SIGNATURE(S)
If Required -- See Instruction 3)
Authorized Signature:
Name:
Title:
Address:
Name Firm:
Area Code and Telephone No.
Dated: July 1, 1998
INSTRUCTIONS
Forming Part of the Terms and Conditions
of the Exchange Offer
1. Delivery of this Letter of Transmittal and Certificates.
Certificates for physically delivered Old Notes or confirmation of any
book-entry transfer to the Exchange Agent's account at The Depository Trust
Company of Old Notes tendered by book-entry transfer, as well as a properly
completed and duly executed copy of this Letter of Transmittal or facsimile
thereof, and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent at any of its addresses set forth herein on
or prior to the Expiration Date.
The method of delivery of this Letter of Transmittal, the Old Notes and
any other required documents is at the election and risk of the holder and,
except as otherwise provided below, the delivery will be deemed made only when
actually received by the Exchange Agent. If such delivery is by mail, it is
suggested that registered mail with return receipt requested, properly
insured, be used.
Holders whose Old Notes are not immediately available or who cannot
deliver their Old Notes and all other required documents to the Exchange Agent
on or prior to the Expiration Date or comply with book-entry transfer
procedures on a timely basis may tender their Old Notes pursuant to the
guaranteed delivery procedure set forth in the Prospectus under "The Exchange
Offer--Guaranteed Delivery Procedures". Pursuant to such procedure: (i) such
tender must be made by or through an Eligible Institution (as defined
therein); (ii) on or prior to the Expiration Date the Exchange Agent must have
received from such Eligible Institution, a letter, telegram or facsimile
transmission setting forth the name and address of the tendering holder, the
names in which such Old Notes are registered, and, if possible, the
certificate numbers of the Old Notes to be tendered; and (iii) all tendered
Old Notes (or a confirmation of any book-entry transfer of such Old Notes into
the Exchange Agent's account at The Depository Trust Company) as well as this
Letter of Transmittal and all other documents required by this Letter of
Transmittal must be received by the Exchange Agent within five American Stock
Exchange trading days after the date of execution of such letter, telegram or
facsimile transmission, all as provided in the Prospectus under the caption
"The Exchange Offer--Guaranteed Delivery Procedures".
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal
(or facsimile thereof), shall waive any right to receive notice of the
acceptance of the Old Notes for exchange.
2. Partial Tenders; Withdrawals. Tenders of Old Notes will be
accepted in all denominations of $1,000 and integral multiples in excess
thereof. If less than the entire principal amount of Old Notes evidenced by a
submitted certificate is tendered, the tendering holder must fill in the
principal amount tendered in the box entitled "Principal Amount Tendered". A
newly issued certificate for the principal amount of Old Notes submitted but
not tendered will be sent to such holder as soon as practicable after the
Expiration Date. All Old Notes delivered to the Exchange Agent will be deemed
to have been tendered unless otherwise indicated.
Tenders of Old Notes pursuant to the Exchange Offer are irrevocable,
except that Old Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. To be effective, a written,
telegraphic or facsimile transmission notice of withdrawal must be timely
received by the Exchange Agent. Any such notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered Old Notes to be
withdrawn, the principal amount of Old Notes delivered for exchange, a
statement that such holder is withdrawing its election to have such Old Notes
exchanged, and the name of the registered holder of such Old Notes, and must
be signed by the holder in the same manner as the original signature on the
Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to the Company that the person
withdrawing the tender has succeeded to the beneficial ownership of the Old
Notes being withdrawn. The Exchange Agent will return the properly withdrawn
Old Notes promptly following receipt of notice of withdrawal. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at The
Depository Trust Company to be credited with the withdrawn Old Notes or
otherwise comply with The Depository Trust Company's procedures.
3. Signature on this Letter of Transmittal; Written Instruments and
Endorsements; Guarantee of Signatures. If this Letter of Transmittal is
signed by the registered holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of
certificates without alteration, enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the registered holder or
holders of Old Notes listed and tendered hereby, no endorsements of
certificates or separate written instruments of transfer or exchange are
required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of the Old Notes listed, such Notes must be
endorsed or accompanied by separate written instruments of transfer or
exchange in form satisfactory to the Company and duly executed by the
registered holder, in either case signed exactly as the name or names of the
registered holder or holders appear(s) on the Old Notes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written
instruments of transfer or exchange required by this Instruction 3 must be
guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of such Old Notes and the certificates for Exchange Notes to be issued
in exchange therefor are to be issued (or any untendered amount of Old Notes
are to be reissued) to the registered holder; or (ii) for the account of any
Eligible Institution.
4. Transfer Taxes. The Company shall pay all transfer taxes, if any,
applicable to the transfer and exchange of Old Notes to it or its order
pursuant to the Exchange Offer. If, however, Exchange Notes are to be
delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered hereby, or if a
transfer tax is imposed for any reason other than the transfer of Old Notes to
the Company or its order pursuant to the Exchange Offer, the amount of any
such transfer taxes (whether imposed on the registered holder or any other
person) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exception therefrom is not submitted herewith the
amount of such transfer taxes will be billed directly to such tendering
holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
5. Waiver of Conditions. The Company reserves the absolute right to
waive, in whole or in part, any of the conditions to the Exchange Offer set
forth in the Prospectus.
6. Mutilated, Lost, Stolen or Destroyed Notes. Any holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated below for further instructions.
7. Requests for Assistance or Additional Copies. Questions relating
to the procedure for tendering, as well as requests for additional copies of
the Prospectus and this Letter of Transmittal, may be directed to the Exchange
Agent at the address and telephone number set forth below. In addition, all
questions relating to the Exchange Offer, as well as requests for assistance
or additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Company at One City Centre, 515 N. Sixth Street, St. Louis,
Missouri 63101, Attention: Paul Rutterer.
8. Irregularities. All questions as to the validity, form,
eligibility (including time of receipt), and acceptance of Letters of
Transmittal or Old Notes will be resolved by the Company, whose determination
will be final and binding. The Company reserves the absolute right to reject
any or all Letters of Transmittal or tenders that are not in proper form or the
acceptance of which would, in the opinion of the Company's counsel, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to the particular Old Notes covered by any Letter of
Transmittal or tendered pursuant to such letter. None of the Company, the
Exchange Agent or any other person will be under any duty to give notification
of any defects or irregularities in tenders or incur any liability for failure
to give any such notification. The Company's interpretation of the terms and
conditions of the Exchange Offer shall be final and binding.
9. Definitions. Capitalized terms used in this Letter of Transmittal
and not otherwise defined have the meanings given in the Prospectus.
IMPORTANT: This Letter of Transmittal or a facsimile thereof (together
with certificates for Old Notes or confirmation of book-entry transfer and all
other required documents) or a Notice of Guaranteed Delivery must be received
by the Exchange Agent on or prior to the Expiration Date.
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
for
Offer to Exchange
11 3/8% Senior Notes due 2006,
which have been registered under
the Securities Act of 1933, as amended,
for Any and All Outstanding
11 3/8% Senior Notes due 2006
of
Trans World Airlines, Inc.
Registered holders of outstanding 11 3/8% Senior Notes due 2006 (the
"Old Notes") who wish to tender their Old Notes in exchange for a like
principal amount of 11 3/8% Senior Notes due 2006 (the "Exchange Notes"),
which have been registered under the Securities Act of 1933, as amended, and,
in each case, whose Old Notes are not immediately available or who cannot
deliver their Old Notes and Letter of Transmittal (and any other documents
required by the Letter of Transmittal) to First Security Bank, National
Association (the "Exchange Agent") prior to the Expiration Date, may use this
Notice of Guaranteed Delivery or one substantially equivalent hereto. This
Notice of Guaranteed Delivery may be delivered by hand, sent by facsimile
transmission (receipt confirmed by telephone and an original delivered by
guaranteed overnight delivery) or mailed to the Exchange Agent. See "Exchange
Offer--Guaranteed Delivery Procedures" in the Prospectus.
The Exchange Agent for the Exchange Offer is:
FIRST SECURITY BANK, NATIONAL ASSOCIATION
By Hand or Overnight
Delivery:
First Security Bank,
National Association
Corporate Trust Services
79 South Main Street
Salt Lake City, Utah 84111
Facsimile Transmissions:
(Eligible Institutions Only)
(801) 246-5053
To Confirm by Telephone
or for Information Call:
(801) 246-5630
By Registered or Certified
Mail:
First Security Bank,
National Association
Corporate Trust Services
79 South Main Street
Salt Lake City, Utah 84111
Delivery of this Notice of Guaranteed Delivery to an address other than
as set forth above or transmission of instructions via a facsimile
transmission to a number other than as set forth above will not constitute a
valid delivery.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on the Letter of Transmittal is required to be
guaranteed by an Eligible Institution, such signature guarantee must appear in
the applicable space provided on the Letter of Transmittal for Guarantee of
Signatures.
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(Note to be used for signature guarantee)
The undersigned, a firm that is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office, branch,
agency or correspondent in the United States, hereby guarantees to deliver to
the Exchange Agent at one of its addresses set forth above, the certificates
representing the Old Notes, together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, and any other documents required by the Letter of
Transmittal within five American Stock Exchange trading days after the date of
execution of this Notice of Guaranteed Delivery.
Name of Firm:_________________________ Authorized Signature_________________
Address:______________________________ _____________________________________
Title
______________________________________
(Zip Code) Name:________________________________
(Please type or print)
Area Code and
Telephone Number:_____________________ Date:________________________________
NOTE: DO NOT SEND NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. NOTES SHOULD
BE SENT WITH YOUR LETTER OF TRANSMITTAL.
Exhibit 99.3
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
of
Trans World Airlines, Inc.
11 3/8% Senior Notes due 2006
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated July
1, 1998 (the "Prospectus") of Trans World Airlines, Inc., a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meaning ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Old Notes held by you for the account of
the undersigned.
The aggregate face amount in the Old Notes held by you for the account
of the undersigned is (fill in amount):
$___________________________ of the 11 3/8% Senior Notes due 2006
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] To TENDER the following Old Notes held by you for the account of the
undersigned (insert principal amount of Old Notes to be tendered, if any):
$__________________________ of the 11 3/8% Senior Notes due 2006
[ ] NOT to TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you for
the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representation and warranties contained in
the Letter of Transmittal that are to be made with respect to the undersigned
as a beneficial owner, including but not limited to the representations, that
(i) the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the undersigned, (ii) neither
the undersigned nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such Exchange Notes,
(iii) if the undersigned is not a broker-dealer, or is a broker-dealer but will
not receive Exchange Notes for its own account in exchange for Old Notes,
neither the undersigned nor any such other person is engaged in or intends to
participate in the distribution of such Exchange Notes and (iv) neither the
undersigned nor any such person is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act") or if the undersigned is an "affiliate", that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the
undersigned is a broker-dealer (whether or not it is also an "affiliate") that
will receive Exchange Notes for its own account in exchange for Old Notes, it
represents that such Old Notes were acquired as a result of market-making
activities or other trading activities, and it acknowledges that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. By acknowledging that it
will deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes, the
undersigned is not deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
SIGN HERE
Name of beneficial owner(s):
__________________________________________________
Signature(s):_____________________________________
Name(s) (please print):___________________________
Address:__________________________________________
__________________________________________________
Telephone Number:_________________________________
Taxpayer Identification or Social Security Number:
__________________________________________________
__________________________________________________
Date:_____________________________________________
Exhibit 99.4
Offer to Exchange
11 3/8% Senior Notes due 2006,
which have been registered under
the Securities Act of 1993, as amended,
for Any and All Outstanding
11 3/8% Senior Notes due 2006
of
Trans World Airlines, Inc.
To Our Clients:
We are enclosing herewith a Prospectus, dated July 1, 1998, of Trans
World Airlines, Inc. (the "Company"), a Delaware corporation, and a related
Letter of Transmittal (which together constitute the "Exchange Offer")
relating to the offer by the Company to exchange its 11 3/8% Senior Notes due
2006 (the "Exchange Notes"), pursuant to an offering registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of its issued and outstanding 11 3/8% Senior Secured Notes
due 2006 (the "Old Notes") upon the terms and subject to the conditions set
forth in the Exchange Offer.
Please note that the Exchange Offer will expire at 5:00 p.m., New York
City time, on July 31, 1998, unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
We are the holder of record and/or participant in the book-entry
transfer facility of Old Notes held by us for your account. A tender of such
Old Notes can be made only by us as the record holder and/or participant in
the book-entry transfer facility and pursuant to your instructions. The Letter
of Transmittal is furnished to you for your information only and cannot be
used by you to tender Old Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of
the Old Notes held by us for your account pursuant to the terms and conditions
of the Exchange Offer. We also request that you confirm that we may on your
behalf make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the Exchange Notes acquired in the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such Exchange Notes, whether or not such person is such holder, (ii)
neither the holder of the Old Notes nor any such other person has an
arrangement or understanding with any person to participate in the
distribution of such Exchange Notes, (iii) if the holder is not a
broker-dealer or is a broker-dealer but will not receive Exchange Notes for
its own account in exchange for Old Notes, neither the holder nor any such
other person is engaged in or intends to participate in a distribution of the
Exchange Notes and (iv) neither the holder nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or if such holder is an "affiliate", that such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. If the tendering holder is a broker-dealer (whether or not
it is also an "affiliate") that will receive Exchange Notes for its own
account in exchange for Old Notes, we will represent on behalf of such
broker-dealer that the Old Notes to be exchanged for the Exchange Notes were
acquired by it as a result of market-making activities or other trading
activities, and acknowledged on behalf of such broker-dealer that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. By acknowledging that it
will deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes, the
undersigned is not deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
Very truly yours,
Exhibit 99.5
Offer to Exchange
11 3/8 Senior Notes due 2006,
which have been registered under
the Securities Act of 1933, as amended,
for Any and All Outstanding
11 3/8% Senior Notes due 2006
of
Trans World Airlines, Inc.
To Registered Holders and The Depository
Trust Company Participants:
We are enclosing herewith the material listed below relating to the
offer by Trans World Airlines, Inc., a Delaware corporation (the "Company"),
to exchange its 11 3/8% Senior Notes due 2006 (the "Exchange Notes"), pursuant
to an offering registered under the Securities Act of 1933, as amended (the
"Securities Act"), for a like principal amount of its issued and outstanding
11 3/8% Senior Notes due 2006 (the "Old Notes") upon the terms and subject to
the conditions set forth in the Company's Prospectus, dated July 1, 1998, and
the related Letter of Transmittal (which together constitute the "Exchange
Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated July 1, 1998;
2. Letter of Transmittal;
3. Notice of Guaranteed Delivery;
4. Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Owner; and
5. Letter which may be sent to your clients for whose account you hold Old
Notes in your name or in the name of your nominee, to accompany the
instruction form referred to above, for obtaining such client's
instruction with regard to the Exchange Offer.
We urge you to contact your clients promptly. Please note that the
Exchange Offer will expire at 5:00 p.m., New York City time, on July 31, 1998,
unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the Exchange Notes acquired in the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such Exchange Notes, whether or not such person is such holder, (ii)
neither the holder of the Old Notes nor any such other person has an
arrangement or understanding with any person to participate in the
distribution of such Exchange Notes, (iii) if the holder is not a
broker-dealer or is a broker-dealer but will not receive Exchange Notes for
its own account in exchange for Old Notes, neither the holder nor any such
other person is engaged in or intends to participate in a distribution of the
Exchange Notes and (iv) neither the holder nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or if such holder is an "affiliate", that such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. If the tendering holder is a broker-dealer (whether or not
it is also an "affiliate") that will receive Exchange Notes for its own
account in exchange for Old Notes, you will represent on behalf of such
broker-dealer that the Old Notes to be exchanged for the Exchange Notes were
acquired by it as a result of market-making activities or other trading
activities, and acknowledge on behalf of such broker-dealer that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. By acknowledging that it
will deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes, the
undersigned is not deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The enclosed Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Owner contains an authorization by the beneficial owners of
the Old Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer
or to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer. The
Company will pay or cause to be paid any transfer taxes payable on the
transfer of Old Notes to it, except as otherwise provided in Instruction 4 of
the enclosed Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
First Security Bank, National
Association
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU THE
AGENT OF TRANS WORLD AIRLINES, INC. OR FIRST SECURITY BANK, NATIONAL
ASSOCIATION OR AUTHORIZE YOU TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON
THEIR BEHALF IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE DOCUMENTS
ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
