<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998
REGISTRATION NO. 333-44661
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TRANS WORLD AIRLINES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4512 43-1145889
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
ONE CITY CENTRE, 515 N. SIXTH STREET
ST. LOUIS, MISSOURI 63101
(314) 589-3000
(ADDRESS AND TELEPHONE NUMBER 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 AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
JOSEPH P. HADLEY, ESQ.
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
PROSPECTUS
$140,000,000
OFFER TO EXCHANGE
11 1/2% SENIOR SECURED NOTES DUE 2004,
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND
ALL OUTSTANDING 11 1/2% SENIOR SECURED NOTES DUE 2004
OF
TRANS WORLD AIRLINES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 9,
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 1/2% Senior Secured Notes due 2004 (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 1/2% Senior Secured Notes
due 2004 (the '"Old Notes," and together with the Exchange Notes, the
"Notes"), of which $140 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
March 9, 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 1/2% per annum,
payable semi-annually on June 15 and December 15 of each year, commencing on
June 15, 1998. The Exchange Notes will mature on December 15, 2004. The
Exchange Notes will be redeemable, in whole or in part, at the option of TWA,
at any time on or after December 15, 2001 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 December 15, 2000, TWA may, at its
option, use the Net Cash Proceeds from one or more Public Equity Offerings to
redeem up to $49.0 million aggregate principal amount of the Notes at a price
equal to 111 1/2% of the principal amount thereof, plus accrued and unpaid
interest and Special Interest, if any, to the redemption date; provided, that
at least $91.0 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. 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 secured obligations of the Company
and will rank pari passu in right of payment with all other senior obligations
of the Company. As of December 31, 1997, the Company had approximately
$1,061.3 million of total outstanding indebtedness (including $140 million for
the Old Notes), all of which will rank pari passu in right of payment of
principal and interest with the Exchange Notes. None of the Company's
outstanding indebtedness is senior to the Notes. The Exchange Notes will be
secured by a lien on (i) certain aircraft spare parts, (ii) TWA's beneficial
interest in 30 Federal Aviation Administration-designated take-off and landing
slots at Washington National Airport and (iii) the Pledged Collateral.
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF OLD NOTES ON OR ABOUT FEBRUARY 6, 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."
continued on following page
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE PAGE 17,
"RISK FACTORS," FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
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 Exchange Notes have been approved for
listing 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
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<PAGE>
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.
----------------
The Company believes that a substantial improvement in its operating results
is necessary for TWA to maintain adequate liquidity to meet its obligations
through 1998. The Company's auditors included in their report dated March 24,
1997 on TWA's consolidated financial statement for the year ended December 31,
1996, an explanatory paragraph to the effect that substantial doubt exists
regarding the Company's ability to continue as a going concern due to the
Company's recurring losses from operations and limited sources of additional
liquidity. See Consolidated Financial Statements.
3
<PAGE>
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 10006-1881, 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 in the preceding paragraph. 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 for the year ended December 31, 1996, as amended on June 30, 1997
pursuant to Form 10-K/A; (ii) the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997; (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 29, 1997.
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.
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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.
5
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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 first nine months of 1997), whose primary business is
transporting passengers, cargo and mail. During the first nine months of 1997,
the Company carried more than 17.6 million passengers and flew approximately
19.2 billion RPMs. As of September 30, 1997, TWA provided regularly scheduled
jet service to 86 cities in the United States, Mexico, Europe, the Middle East,
Canada and the Caribbean. As of September 30, 1997, the Company operated a
fleet of 186 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 365 scheduled daily
departures as of September 30, 1997 and approximately a 72% share of airline
passenger enplanements in St. Louis for the first nine months of 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 28 domestic and international cities with approximately 42
daily departures. JFK is both the Company's and the industry's largest
international gateway from North America. As of September 30, 1997, 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. As described below,
during 1997, the Company has taken steps to refocus and improve the operating
and financial performance of its JFK operations.
RECENT FINANCIAL AND OPERATING RESULTS
For the third quarter of 1997, TWA reported operating income of $63.8 million
and pre-tax income of $47.2 million. These results compare to operating income
of $26.0 million and pre-tax income of $10.0 million in the third quarter of
1996. In addition, the Company's yield (passenger revenue per RPM) for the
third quarter of 1997 increased 3.2% to 11.24c versus comparable prior year
period and passenger revenue per available seat mile ("RASM") increased 5.8% to
8.08c versus comparable prior year period. The Company's unit costs remained
essentially unchanged at 8.29c, despite a 13.7% decrease in capacity for the
quarter versus the third quarter of 1996, as measured by total available seat
miles ("ASMs").
TWA also 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 ranked first among the
10 largest U.S. scheduled commercial airlines in domestic on-time performance
in both the second and third quarters of 1997. This compares to tenth (last)
and eighth place finishes, respectively, for the same periods of 1996. TWA has
also recorded a significant improvement in its percentage of scheduled flights
completed. In the second and third quarters of 1997, TWA completed an average
of approximately 99% of scheduled flights, which management believes is among
the highest in the industry. In contrast, TWA completed 97.4% of scheduled
flights in the second and third quarters of 1996 and 96.2% for 1996 overall.
6
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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 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.
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
at December 31, 1996. As a result, TWA's last L-1011 was retired in September
1997 and its last 747 is scheduled to leave active service in February 1998.
Under its fleet renewal plan, the Company has been replacing 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 a result of this fleet restructuring, it is
estimated that the Company's mix of narrow-body and wide-body aircraft shifted
to approximately 91%/9% as of December 31, 1997 versus approximately 80%/20% as
of year-end 1996, and that TWA's average number of seats per aircraft declined
to 141 from 161 over the same period. Management estimates that as of December
31, 1997, the average age of its fleet had decreased to slightly under 17 years
from 19 years at year-end 1996.
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 4.1%
in 1998, versus 26.2% in 1996 and 20.2% in 1997. 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
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<PAGE>
(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 31.2% in the
first nine months of 1997 versus the same period in 1996 and represented 20.0%
of total scheduled capacity for the first nine months of 1997 versus 26.1% for
the same period in 1996.
Productivity Enhancements. The Company has sought to improve its financial
performance through productivity enhancements. During 1997, TWA has 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 as of December 31, 1996 to 121 as of September 30, 1997, and to 119 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 in the first quarter of
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 Miles 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 the SCORE Program (or Safe, Clean, On-time and
Reliable), TWA has sought to institutionalize throughout all levels of its
organization the importance of running an airline with operational reliability.
This program provides certain operating and procedural guidelines for enhancing
performance and improving overall product quality. In addition, in 1996 the
Company introduced Flight Plan 97, which pays eligible employees a $65 bonus
for each month that TWA finishes 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 ranks 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.
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
8
<PAGE>
the Company since November 1993, as President and Chief Operating Officer of
the Company. Mr. Compton had been appointed Executive Vice President,
Operations on March 13, 1997, subject to Board approval which was given on
March 27, 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. On January 28, 1998, Richard P. Magurno resigned as Senior Vice
President and General Counsel, and the Board of Directors elected Kathleen A.
Soled, formerly Vice President, Legal and Corporate Secretary, to succeed Mr.
Magurno. 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. 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. 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."
1997 PREFERRED STOCK OFFERING
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 $83.2 million. The 1997 Preferred Stock has a
liquidation preference of $50.00 per share, plus accrued and unpaid dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Concurrently with this Exchange Offer, the Company plans to file a shelf
registration statement to register resales of the 1997 Preferred Stock. The
Company will use its reasonable best efforts to cause such shelf registration
statement to become effective within 150 days from the date of original
issuance of the 1997 Preferred Stock and to keep such shelf registration
statement effective until the earlier of (i) the sale of all securities covered
by such shelf registration statement, and (ii) the expiration of two years
after the date of original issuance of the 1997 Preferred Stock or, if the
period applicable under Rule 144(k) under the Securities Act, or any successor
provision for such securities is shortened, such shorter period.
RECEIVABLES SECURITIZATION OFFERING
On December 30, 1997, the Company consummated a Rule 144A/Regulation S
private placement offering (the "Receivables Securitization Offering") of $100
million aggregate principal amount of 9.80% Airline Receivable Asset Backed
Notes due 2001 (the "Receivables Securitization Notes"). Proceeds from the
offering were used to repay the Company's remaining debt to Karabu Corp. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
----------------
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.
9
<PAGE>
THE OLD NOTE OFFERING
Old Notes................. On December 9, 1997, the Company issued and sold
$140,000,000 aggregate principal amount of its Old
Notes to Lazard Freres & Co. LLC and PaineWebber
Incorporated, as initial purchasers (the "Initial
Purchasers"). The Initial Purchasers 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 $140,000,000 aggregate principal amount of 11
1/2% Senior Secured Notes due 2004 (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
December 9, 1997 among the Company and the Initial
Purchasers, 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 March 9, 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.
10
<PAGE>
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 The exchange pursuant to the Exchange Offer will
Consequences.............. not result in any income, gain or loss to the
Holders of the Notes or the Company for federal
income tax purposes. See "Exchange Offer--United
States Federal Income Tax Consequences of the
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
11
<PAGE>
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 "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 $140,000,000 aggregate principal amount of
Exchange Notes of the Company.
Maturity Date............. December 15, 2004
Interest Payment Dates.... June 15 and December 15, beginning June 15, 1998.
The Exchange Notes will bear interest from December
9, 1997. 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 December 9,
1997 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 June 15, 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 (as
defined) or (ii) certain Asset Dispositions (as
defined). See "Description of Notes--Repurchase of
Notes in Connection with Incurrence of Acquired
Indebtedness" and "--Limitation on Sales of Assets
and Subsidiary Stock."
Optional Redemption....... The Notes will be redeemable prior to December 15,
2001 only in the event that on or before December
15, 2000 the Company uses the Net Cash Proceeds (as
defined) of one or more Public Equity Offerings (as
defined) to redeem up to $49.0 million aggregate
principal amount of the Notes. On or after December
15, 2001, the Notes will be redeemable on at least
30 days' prior notice to the Company, in whole
12
<PAGE>
or in part, at any time, at the redemption price
set forth herein, in each case together with
accrued and unpaid interest and Special Interest
(as defined), if any, to the date fixed for
redemption. 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.
Ranking................... The Notes will represent senior secured obligations
of the Company and will rank pari passu in right of
payment with all other senior secured obligations
of the Company. As of December 31, 1997, the
Company had approximately $1,061.3 million of total
outstanding indebtedness (including $140 million
for the Old Notes), all of which will rank pari
passu in right of payment of principal and interest
with the Exchange Notes. None of the Company's
outstanding indebtedness is senior to the Notes.
Collateral Security....... The Notes will be secured by a lien on (i) a pool
of aircraft spare parts as constituted at August
31, 1997 with an appraised fair market value of
approximately $234 million as of December 3, 1997,
(ii) TWA's beneficial interest in 30 Federal
Aviation Administration ("FAA") designated take-off
and landing slots at Washington National Airport, a
high-density, capacity-controlled airport, with an
appraised fair market value of approximately $36
million as of November 17, 1997 and (iii) Pledged
Collateral (as defined). These appraised values are
based on certain assumptions and limitations and
are only an estimate of value. See "Description of
Notes--Collateral Security."
Certain Covenants......... The Indenture and certain related security
documents contains provisions relating to the
preservation of and release of Collateral Security
(as defined), including a prohibition against the
Company allowing certain additional liens against
such Collateral Security. 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."
13
<PAGE>
Exchange Offer; In the event that applicable law or interpretations
Registration Rights....... 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 an Initial Purchaser (as defined herein)
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 "Exchange Offer."
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 Purchasers 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 offshare 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 Purchasers are making a market
in the Old Notes and have indicated to the Company
that they currently intend to make a market in the
Exchange Notes, as permitted by applicable laws and
regulations, they are 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 Purchasers. 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 Exchange Notes have
been approved for listing 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.
14
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial and operating data presented below relates
to the three year period ended December 31, 1996, the nine month periods ended
September 30, 1996 and 1997 and the three month periods ended September 30,
1996 and 1997. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company's 1996 consolidated financial statements (including the notes thereto,
the "1996 Consolidated Financial Statements") and the Company's condensed
consolidated financial statements for the nine months ended September 30, 1996
and 1997 and the three months ended September 30, 1996 and 1997 (including the
notes thereto, the "1997 Interim Consolidated Financial Statements"), together
referred to herein as the "Consolidated Financial Statements." The consolidated
financial data for the periods in the three year period ended December 31, 1996
were derived from the audited consolidated financial statements of the Company.
For a discussion of factors affecting the comparability of this data, see
"Selected Consolidated Financial Data." See "Risk Factors--Risk Factors Related
to the Company--Liquidity; Substantial Indebtedness; Capital Expenditure
Requirements" for a description of the auditor's report issued in connection
with the 1996 Consolidated Financial Statements.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY REORGANIZED COMPANY
------------------- --------------------------------------------------------
EIGHT FOUR THREE MONTHS
YEAR MONTHS MONTHS YEAR NINE MONTHS ENDED ENDED
ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30,
DECEMBER AUGUST DECEMBER DECEMBER ------------------ ----------------
31, 1994 31, 1995 31, 1995 31, 1996 1996 1997 1996 1997
--------- --------- -------- -------- -------- -------- -------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating revenues..... $ 3,407.7 $ 2,218.4 $1,098.5 $3,554.4 $2,751.1 $2,515.1 $1,002.9 $908.4
Operating income
(loss)(1)............. (279.5) 14.6 10.4 (198.5) 33.9 (29.8) 26.0 63.8
Income (loss) before
income taxes and
extraordinary
items(2).............. (432.9) (338.3) (32.3) (274.6) (18.3) (68.3) 10.0 47.2
Income (loss) before
extraordinary
items(2).............. (433.8) (338.2) (33.6) (275.0) (18.8) 68.8 (6.9) 13.3
Extraordinary items(3). (2.0) 140.9 3.5 (9.8) (7.4) (10.9) (7.4) (7.0)
Net income (loss)...... (435.8) (197.3) (30.1) (284.8) (26.2) (79.7) (14.3) 6.3
Earnings (loss) per
share................. -- -- (1.05) (7.27) (1.36) (1.75) (0.40) 0.04
Weighted average shares
outstanding........... -- -- 33.3 44.2 43.2 52.0 45.1 56.1
Ratio of earnings to
fixed charges(4)...... -- -- -- -- -- -- -- 1.21
OTHER DATA:
Operating lease
rentals............... 261.4 182.5 96.4 303.0 222.1 268.8 77.3 94.4
Interest expense....... 195.4 123.2 45.9 126.8 95.5 85.5 30.9 27.4
Capital expenditures... 44.9 16.6 43.0 121.5 109.9 58.2 34.9 24.8
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
(IN MILLIONS)
<S> <C>
BALANCE SHEET DATA:
Total assets............................................... $2,676.6
Current maturities of long-term debt and capital leases.... 104.6
Long-term debt and long-term obligations under capital
leases.................................................... 783.4
Shareholders' equity(5).................................... 219.8
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------ ---------------
1994 1995 1996 1996 1997 1996 1997
------- ------- ------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
AIRLINE ONLY OPERATING
DATA(6):
Revenue passenger miles
(millions)............ 24,906 24,902 27,111 20,906 19,169 8,028 7,113
Available seat miles
(millions)............ 39,191 37,905 40,594 30,708 27,590 11,450 9,894
Passenger load factor.. 63.5% 65.7% 66.8% 68.1% 69.5% 70.1% 71.9%
Passenger yield
(cents)............... 11.31c 11.39c 11.35c 11.44c 11.54c 10.89c 11.24c
Passenger revenue per
available seat mile
(cents)............... 7.19c 7.48c 7.58c 7.79c 8.01c 7.64c 8.08c
Operating cost per
available seat mile
(cents)............... 8.45c 8.12c 8.76c 8.58c 8.99c 8.27c 8.29c
</TABLE>
- --------
(1) Includes special charges of $138.8 million in 1994, $1.7 million in the
eight months ended August 31, 1995 and $85.9 million in 1996. For a
discussion of these and other non-recurring items, see Note 16 to the 1996
Consolidated Financial Statements.
(2) The eight months ended August 31, 1995 include charges of $242.2 million
related to reorganization items.
(3) The extraordinary item in 1994 represents the charge for a prepayment
premium related to the sale and leaseback of four McDonnell Douglas MD-80
aircraft. The extraordinary item in the eight months ended August 31, 1995
represents the gain on the discharge of
15
<PAGE>
indebtedness pursuant to the consummation of the '95 Reorganization, while
the extraordinary item in the four months ended December 31, 1995 was the
result of the settlement of a debt of a subsidiary. The extraordinary items
in 1996 and 1997 result from the early extinguishment of certain debt.
(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 year ended December 31, 1994, $435.0; for the eight
months ended August 31, 1995, $338.3; for the four months ended December
31, 1995, $32.3; for the year ended December 31, 1996, $280.0; for the
nine months ended September 30, 1996 and 1997, $21.8 and $72.5,
respectively; and for the three months ended September 30, 1996, $8.5.
(5) No dividends were paid on the Company's outstanding common stock, $0.01
par value per share (the "Common Stock") during the periods presented
above.
(6) For a definition of the items presented, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
16
<PAGE>
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
Liquidity; Substantial Indebtedness; Capital Expenditure Requirements
The Company believes that continued improvement in its operating results is
necessary for TWA to maintain adequate liquidity. The Company's auditors
included in their report dated March 24, 1997 on TWA's Consolidated Financial
Statements for the year ended December 31, 1996 an explanatory paragraph to
the effect that substantial doubt exists regarding the Company's ability to
continue as a going concern due to the Company's recurring losses from
operations and limited sources of additional liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and the Consolidated Financial Statements.
The Company is highly leveraged and has and will continue to have
significant debt service obligations. As of September 30, 1997, the Company's
ratio of long-term debt and capital leases (including current maturities) to
shareholders' equity was 4.0 to 1. After giving effect to the Old Note
Offering, the 1997 Preferred Stock Offering and the Receivables Securitization
Offering and the application of the net proceeds therefrom, the aggregate
principal amount of the Company's total outstanding indebtedness is
approximately $1,061.3 million, all of which constitutes senior obligations.
The ratio of such long-term debt and capital leases (including current
maturities) to shareholders' equity, including net proceeds from the 1997
Preferred Stock Offering, is 3.32 to 1. TWA's estimated minimum payment
obligations under noncancellable operating leases in effect at September 30,
1997 were approximately $330 million for 1998 and approximately $2,339 million
for periods thereafter. 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 $72.5 million and $21.8 million for
the nine months ended September 30, 1997 and 1996, respectively, $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, $364.7 million for the ten
months ended October 31, 1993, and $317.4 million for the year ended December
31, 1992. See "Selected Consolidated Financial Data," "Capitalization,"
"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 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).
On September 30, 1997, the Company's total cash and cash equivalents balance
was approximately $104.6 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 a decrease of approximately $77.0
million from the Company's corresponding cash balance at December 31, 1996.
This reduction in the Company's cash balance resulted primarily from the
repayment of
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long-term debt and capital lease obligations and from TWA's net losses in the
first half of 1997. 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 the first nine months of 1997. Substantially all
of TWA's strategic assets, including its owned aircraft, have been pledged to
secure various issues of outstanding indebtedness of the Company. In
connection with the Old Note Offering, the Company repaid the 12% Reset Notes,
thereby releasing certain collateral which, based on current fair market
value, the Company believes has a value of approximately $278 million. Of such
released collateral, the aircraft spare parts, valued at approximately $234
million, has been used together with certain of the Company's take-off and
landing slots, valued at approximately $36 million, to secure the Notes. 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."
Prior Operating Losses and Future Uncertainties Relating to Results of
Operations
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 (as defined)), 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. For the first nine months of 1997, the Company reported a net loss of
$79.7 million, which represented a $53.5 million increase over the $26.2
million net loss for the first nine months of 1996, and a $29.8 million
operating loss, which represented a $63.7 million adverse change from the
$33.9 million operating profit reported for the first nine months of 1996. For
a
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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."
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 between the Company
and Karabu Corporation ("Karabu"), a Delaware corporation controlled by Carl
Icahn, in connection with the '95 Reorganization, on the terms currently
sought to be 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. In June 1996, the Company announced
the separation of Messrs. Robert A. Peiser and Mark J. Coleman, Executive Vice
President and Chief Financial Officer and Senior Vice President, Marketing,
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respectively, from the Company. Messrs. Peiser and Coleman differed with the
determination of the Board of Directors, as expressed by its unanimous vote,
to continue the management approach of the Company's President and Chief
Executive Officer at that time relating to the Company's rebuilding process.
On August 21, 1996, Edward Soule was elected to the position of Executive Vice
President and Chief Financial Officer. On September 3, 1996, Roden A. Brandt
was elected to the position of Senior Vice President, Planning. On October 24,
1996, the Company announced that Jeffery H. Erickson, President and Chief
Executive Officer, had informed the Board of his intention to leave the
Company in January 1997. On December 14, 1996, the Board appointed Gerald L.
Gitner, a member of the Board, to serve as Vice Chairman and Acting Chief
Executive Officer; David M. Kennedy, a member of the Board, to serve as Acting
Executive Vice President and Chief Operating Officer; and William F. Compton,
also a member of the Board, to serve as Acting Executive Vice President,
Operations. On December 20, 1996, Michael J. Palumbo was appointed as Senior
Vice President and Chief Financial Officer, succeeding Mr. Soule, who had
resigned from the positions of Executive Vice President and Chief Financial
Officer on December 19, 1996. On February 12, 1997, the Board of Directors
elected Mr. Gitner to serve as Chairman and Chief Executive Officer. On
February 14, 1997, Don Monteath, who had served as the Company's Senior Vice
President, Operations, left the Company. On March 27, 1997, the Board elected
Mr. Compton to serve as Executive Vice President, Operations. On May 29, 1997,
Donald M. Casey was elected to serve as the Company's Executive Vice
President, Marketing. It was also announced on May 29, 1997 that Mr. Kennedy
would leave his interim position as Acting Executive Vice President and Chief
Operating Officer. Mr. Kennedy, whose services have been retained on a
consulting basis, will also remain as a director and as chairman of the
Finance Committee of the Board of Directors. On October 29, 1997 James F.
Martin was elected to the office of Senior Vice President, Human Resources,
replacing Charles J. Thibaudeau who retired effective October 1, 1997. In
addition, on December 3, 1997, the Board elected Mr. Compton to serve as the
Company's President and Chief Operating Officer. On December 31, 1997, Mr.
Brandt resigned as Senior Vice President, Planning, but he will remain as a
consultant to the Company. On January 28, 1998, Richard P. Magurno resigned as
Senior Vice President and General Counsel, and the Board of Directors elected
Kathleen A. Soled, formerly Vice President, Legal and Corporate Secretary, to
succeed Mr. Magurno. The Company does not believe that such changes have
unduly affected its ongoing operations or implementation of the Company's
business strategy.
'94 Labor Agreements
As of September 30, 1997, the Company had approximately 22,540 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. The mediator has not yet met with the
parties and has not rendered a conclusion that negotiations are deadlocked.
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
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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."
Age of Fleet; Noise
At September 30, 1997, the average age of TWA's operating aircraft fleet was
17.6 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 the first ten months of 1997, TWA acquired 23 new or later-model used
aircraft. The Company expects to continue the process of acquiring a number of
new and later-model used aircraft and, including aircraft delivered in the
fourth quarter of 1997, TWA's composite fleet age was reduced to slightly
under 17.0 years at December 31, 1997. As of September 30, 1997, TWA's fleet
included 64 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 1995 and 1996, TWA spent
approximately $2.6 million and $3.4 million, respectively, to comply with
aging aircraft maintenance requirements and spent approximately $3.1 million
on such requirements during the first nine months of 1997. 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.
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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 would be approximately $58 million based
upon such target prices and the number of shares of Common Stock and Employee
Preferred Stock outstanding at December 31, 1996. The charge for any year,
however, could be substantially higher if the then market price of the Common
Stock exceeds certain target prices, 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
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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 in recent years as a result of mergers
and 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. 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.
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Aircraft Fuel
Since fuel costs constitute a significant portion of the Company's operating
costs (approximately 15.6% in 1996 and approximately 14.5% for the first nine
months of 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
57.0c per gallon to approximately 70.0c per gallon. During the first nine
months of 1997, the Company's average per gallon cost of fuel decreased
approximately 2.1%, from approximately 67.9c per gallon to approximately 66.5c
per gallon. 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 the first nine months of 1997) impacts operating
expense by approximately $620,000 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
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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 recently passed tax legislation
reimposing and significantly modifying the Ticket Tax. 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, including rights with respect
to the Collateral (as defined). It is also possible that holders of Notes
would not ultimately receive repayment, in whole or in part, of the Notes. See
"Description of Notes --Certain Bankruptcy Limitations."
Ranking of the Notes
The Notes represent senior secured obligations of the Company and rank pari
passu in right of payment with other senior obligations of the Company. None
of the Company's outstanding indebtedness is senior to the Notes. As of
September 30, 1997, after giving effect to the issuance of the Notes and the
application of the proceeds therefrom, the aggregate principal amount of the
Company's total outstanding indebtedness would have been approximately
$1,032.7 million, all of which constitutes senior obligations. While unsecured
indebtedness ranks pari passu with the Notes in right of payment, the holders
of the Notes may, to the exclusion of unsecured creditors, seek recourse
against the Collateral as security for the Notes unless and until the Notes
are satisfied in full. See "Description of Notes--Collateral Security" and "--
Certain Bankruptcy Limitations." The Notes are not presently guaranteed by any
subsidiary of the Company and as a result effectively rank junior to all
creditors (including trade creditors) of, and holders of preferred stock
issued by, subsidiaries of the Company. As of September 30, 1997, the
subsidiaries of the Company did not have any outstanding indebtedness or
preferred stock. Although the Notes contain restrictions on the incurrence of
indebtedness by subsidiaries, the amount of indebtedness which is permitted to
be incurred could be substantial. The Notes 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
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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.
Slots as Collateral
The FAA has designated certain congested U.S. airports as "High Density
Traffic Airports." At those airports, the FAA determines the maximum hourly
number of Instrument Flight Rule take-offs and landings which may be reserved
for use by air carriers and other airport operators. The authority granted by
the FAA to conduct one take-off or landing in a specified time period at one
of such airports is referred to as a "slot." A portion of the Collateral
securing the Company's obligations under the Notes is the Company's beneficial
interest in 30 of the Company's slots at Washington National Airport. These
slots are subject to complete control by the FAA and may be withdrawn from the
Company without compensation at any time to fulfill the FAA's operational
needs, including, but not limited to, providing slots for international or
essential air service operations or eliminating slots. The availability of
slots to serve as collateral and the ability of the Trustee on behalf of the
holders of the Notes to foreclose upon or realize any value from the sale or
transfer of such slots may be impaired. Further, FAA regulations provide that
except in certain circumstances, the FAA shall recall any slots not utilized
by an airline 80% of the time over a two consecutive month period. The FAA has
proposed that this utilization requirement be increased to up to 90% under
certain circumstances and with respect to certain slots. See "Description of
Notes--Collateral Security" and "Business--Regulatory Matters--Slot
Restrictions."
Appraisal of Collateral; Sufficiency of Collateral
The appraisal of the aircraft spare parts and slots constituting part of the
Collateral was prepared by Simat, Helliesen & Eichner, Inc. As of the date of
such appraisal, the fair market value, as therein defined, of these portions
of the Collateral was approximately $270 million. The appraisal is subject to
certain assumptions and limitations and is only an estimate of value. The
appraisal should not be relied on as a measure of realizable value of such
Collateral, which may be more or less than the value indicated in the
appraisal. The value of such Collateral in the event of liquidation will
likely be less than fair market value and could be considerably below such
value depending on market and economic conditions, the rapidity with which
such Collateral is sought to be sold, the availability of buyers, the
existence of liens and/or claims with respect to such Collateral and similar
factors. A substantial portion of the aircraft spare parts component of the
Collateral consists of spare parts for Lockheed L-1011 and Boeing 747
aircraft. The Company retired its last L-1011 aircraft in September 1997 and
its last 747 aircraft is scheduled to leave active service in February 1998,
which factors have been taken into consideration in determining the fair
market value of the spare parts relating to such aircraft in the appraisal. In
addition, given that the Collateral Documents (as defined) contain provisions
permitting the use, release, substitution and sale of Collateral, the
composition and amount of Collateral will continually change. Accordingly,
there can be no assurances that the proceeds of any sale of Collateral
pursuant to the Indenture and Collateral Documents following a default would
be sufficient to satisfy all payments due on the Notes. If such proceeds were
not sufficient to repay all such amounts due on the Notes, then holders (to
the extent not repaid
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from the proceeds of the sale of Collateral) would have only an unsecured
claim against the Company's remaining assets. In addition, the ability of
holders to realize upon the Collateral may be subject to certain federal
bankruptcy law limitations and, due to the nature of the Collateral
(particularly the Slots), significant restrictions imposed by governmental
authorities including the DOT and FAA. The Collateral Documents will require
the Company to maintain a minimum ratio of collateral value to outstanding
principal balance of Notes, but this ratio requirement will only be triggered
if certain minimum threshold values of spare parts Collateral are not met. See
"Description of Notes--Collateral Security."
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 December 1997 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 Purchasers are making a market in the
Old Notes and have indicated to the Company that they currently intend to make
a market in the Exchange Notes, as permitted by applicable laws and
regulations, they are 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
Purchasers. 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. 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 Exchange Notes have been approved for listing on the
American Stock Exchange. The Company has agreed 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
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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 "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."
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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 December 9, 1997, the Company issued $140 million aggregate principal
amount of Old Notes to the Initial Purchasers. In connection with the issuance
and sale of the Old Notes, the Company entered into the Registration Rights
Agreement with the Initial Purchasers, 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 December 9, 1997, 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
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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 Exchange 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, $140 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
March 9, 1998 (30 days following the commencement of the Exchange Offer),
unless the Company, in its sole discretion, extends the
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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 December 9, 1997 at the rate of
11 1/2% per annum, payable semi-annually in arrears, in cash, on June 15 and
December 15 of each year, commencing June 15, 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
December 9, 1997 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 June 15, 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
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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
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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.
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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.
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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
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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. Based on interpretations by the staff of the Commission,
as set forth in no-action letters 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), issued to third parties, 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, however, 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
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.
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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.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not result in any United States federal income tax consequences to
Holders. When a Holder exchanges an Old Note for an Exchange Note pursuant to
the Exchange Offer, the Holder will have the same adjusted basis and holding
period in the Exchange Note as in the Old Note immediately before the
exchange.
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THE COMPANY
TWA is the eighth largest U.S. air carrier (based on RPMs for the first nine
months of 1997), whose primary business is transporting passengers, cargo and
mail. During the first nine months of 1997, the Company carried more than 17.6
million passengers and flew approximately 19.2 billion RPMs. As of September
30, 1997, TWA provided regularly scheduled jet service to 86 cities in the
United States, Mexico, Europe, the Middle East, Canada and the Caribbean. As
of September 30, 1997, the Company operated a fleet of 186 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 37 states, the District of Columbia, Puerto
Rico, Mexico, Canada and the Caribbean. The JFK and St. Louis hub systems are
designed to allow TWA to support both its North American and transatlantic
connecting flights. During the first nine months of 1997, TWA's North American
revenues accounted for approximately 84% of its total revenues versus
approximately 79% during the same period of 1996.
St. Louis
TWA is the predominant carrier at St. Louis, with approximately 365
scheduled daily departures as of September 30, 1997 serving 75 cities. For the
first nine months of 1997, TWA had approximately a 72% share of airline
passenger enplanements in St. Louis, while the next largest competitor
enplaned approximately 15%. Since 1995, TWA has added service from its St.
Louis hub to Reno, Nevada, Knoxville, Tennessee, Shreveport, Louisiana,
Steamboat Springs, Colorado, Toronto, Canada and the Mexican resort cities of
Cancun, Puerto Vallarta and Ixtapa/Zihuatenejo. On December 18, 1997, TWA
added service to Palm Springs, California.
JFK
TWA serves 28 domestic and international cities from its JFK hub, with
approximately 42 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 173 daily flights into St. Louis and 57 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 the first nine months of 1997, TWA's
international revenues accounted for approximately 16% of total revenues
versus approximately 21% during the same period in 1996.
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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. 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 first quarter of 1998. The Company anticipates
that, pursuant to the code-share agreements, both Royal Jordanian Airline and
Air Europa will move their operations to the Company's JFK terminal. 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 late 1996 strategic initiatives was to
reestablish TWA's operational reliability and 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 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
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intended to simplify the Company's fleet structure, thereby reducing the
number of aircraft types to decrease overall crew training and aircraft
maintenance costs (although resulting in increased short-term transition crew
training costs). Additional efficiencies should be realized through increased
standardization of aircraft parts, supplies and cabin equipment that must be
inventoried throughout TWA's system. Despite the higher capital costs
associated with owning or leasing new and later model aircraft, the Company
believes that corresponding reductions in operating costs should result in a
lower overall cost per seat mile. Management believes this initiative offers
the potential for greater proportionate benefit to TWA than perhaps any other
major U.S. airline.
In 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. As of September 30, 1997, all of the L-1011s
and 8 of the 747s had been retired, with the last 747 scheduled to leave
active service in February 1998. These older, less efficient and less reliable
aircraft are being 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 October 24, 1997, 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 with deliveries in 1998. In 1996, the
Company entered into an agreement with the manufacturer to acquire 15 new MD-
83s. As of December 3, 1997, 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 has also entered into an agreement
for the lease of nine late-model used MD-82s with deliveries scheduled in 1997
and 1998. The Company also intends to retire eight of its older 727s, which
are expected to be replaced with MD-80s. As a result of this fleet
restructuring, the Company's mix of narrow-body and wide-body aircraft shifted
to approximately 91%/9% 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. Management estimates that as of December 31, 1997,
the average age of its fleet had decreased to slightly under 17 years from 19
years at year-end 1996. TWA is also in discussions with certain other lessors
to lease other aircraft as part of TWA's fleet modernization program.
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 DC9-30, DC9-40 and DC9-50 aircraft as well as other alternatives to
assure compliance with Stage 3 noise requirements. 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 72% of total
enplanements in the
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first nine months of 1997. 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 365 as of
September 30, 1997. In addition, beginning in 1995, the Company has been
consolidating domestic routes in order to strengthen its position further, and
has increased service to the north and south with service to Knoxville,
Tennessee, Shreveport, Louisiana, Toronto, Canada and the Mexican resort
cities of Cancun, Ixtapa/Zihuatenejo and Puerto Vallarta.
Internationally, the Company's operations are concentrated at JFK. The
Company's strategy is to reduce and streamline international operations to
focus on business markets that it believes can support non-stop service and to
maximize utilization of the JFK facility. As a result, since 1994, the Company
has eliminated service to several European cities including Berlin, Zurich and
Vienna and reduced its service to and from Paris. In addition, during 1996 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.
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 31.2% in the first nine months of
1997 versus the same period in 1996 and represented 20.0% of total scheduled
capacity for the first nine months of 1997 versus 26.1% for the same period in
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 4.1%
in 1998, versus 26.2% in 1996 and 20.2% 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
41
<PAGE>
advertising and promotional support. Trans World One is available in 767
aircraft and will also be available commencing in early 1998 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. When complete in
early 1998, the domestic service will be launched as Trans World First. The
Company is also beginning to implement a specially designed service for short-
haul business markets, which will be branded and launched in the first quarter
of 1998. 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 plans to launch a revamped and rebranded frequent flier program in the
first quarter of 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 dollar amount paid for their tickets, in
addition to other existing bonuses. Further, TWA joined the American Express
Membership Miles 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. Although the Company can not quantify
the current or potential future impact of this decision, the Company believes
the uncapped commission structure is a positive factor in maintaining and
improving its long-term relationships with such travel agents and encourages
the booking of higher fare tickets. See "Business--Travel Agencies--Travel
Agent Commissions."
Labor Relationship
Management believes TWA has a generally cooperative relationship with its
employees, including employees represented by trade unions. At various times,
the Company's employees have demonstrated significant loyalty and commitment
to TWA's future by, among other things, agreeing to various wage and work rule
concessions to improve productivity in connection with the '93 and '95
Reorganizations. As a result of these 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 of the contracts.
While management believes that the negotiation process for the
42
<PAGE>
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 the SCORE Program (or Safe, Clean, On-time
and Reliable), 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. This program provides certain
operating and procedural guidelines for enhancing performance and improving
overall product quality. In addition, in 1996 the Company introduced Flight
Plan 97, which pays eligible employees a $65 bonus for each month that TWA
finishes 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 ranks 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.
Investment in Technology
Management believes significant opportunities exist for the Company to
increase revenues and reduce costs by investing in available technology that
provides the Company and its employees with the information necessary to
operate its business more effectively and to improve customer service. The
Company has recently taken a significant step forward in this area by
installing a new computerized yield management system. The need to build a
historical database for such yield management system has delayed full
realization of benefits expected from such system; however, as this database
grows during the remainder of 1997 and into 1998, this system is expected to
allow the Company to improve significantly its ability to estimate demand
flight-by-flight for each class of fares and manage the allocation of seats
accordingly. Given TWA's prior lack of a computerized yield management system,
the Company's management believes that as this database grows this new system
will offer significant opportunities for revenue improvement. In 1996, the
Company implemented a "QIK-Res" system at its reservation center in Norfolk,
Virginia. QIK-Res is a front-end reservations software program designed to
improve customer service. Management believes the system has demonstrated its
effectiveness at Norfolk and intends to pursue the possibility of extending
the system to its reservation centers in St. Louis, Los Angeles and Chicago.
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
8.12c in 1995 to 8.76c in 1996 and from 8.58c for the first nine months of
1996 to 8.99c for the first nine months of 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
43
<PAGE>
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. As a result of such efficiencies,
the Company's unit costs remained essentially unchanged at 8.29c for the third
quarter of 1997 versus the third quarter of 1996. TWA's average number of
employees per aircraft has decreased from 131 as of December 31, 1996 to 121
as of September 30, 1997, and to 119 as of December 31, 1997, which is
generally consistent with industry standards.
The Company has increased to 12 the number of "banks" of flights operating
into its St. Louis hub to increase further the utilization of its aircraft.
TWA has installed a new ticketless system and 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 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 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.
44
<PAGE>
In the second quarter of 1995, the Company solicited and received sufficient
acceptances to effect the proposed "prepackaged" plan of bankruptcy.
Therefore, on June 30, 1995, the Company filed a prepackaged Chapter 11 plan
of reorganization, which with certain modifications was confirmed by the
United States Bankruptcy Court in St. Louis (the "Bankruptcy Court") on August
4, 1995. On August 23, 1995, approximately eight weeks after filing the
prepackaged Chapter 11 plan, the '95 Reorganization became effective and the
Company emerged from the protection of this second Chapter 11 proceeding. In
connection with the '95 Reorganization, the Company (i) exchanged certain of
its then outstanding debt securities for a combination of newly issued 12%
Preferred Stock, Common Stock, warrants and rights to purchase Common Stock,
and debt securities, (ii) converted its then outstanding preferred stock to
shares of Common Stock, warrants and rights to purchase Common Stock, (iii)
obtained certain short-term lease payment and conditional sale indebtedness
deferrals amounting to approximately $91 million and other modifications to
certain aircraft leases, and (iv) obtained an extension of the term of the
approximately $190 million principal amount of the Icahn Loans. The Company
also (i) effected a reverse stock split of its then outstanding common stock
and exchanged such shares for Common Stock, (ii) raised approximately $52
million through an equity rights offering; (iii) distributed certain warrants
to its then current equity holders, and (iv) implemented certain amendments to
the Certificate of Incorporation relating to the recapitalization and various
corporate governance matters. 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."
45
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and the capitalization
of the Company as of September 30, 1997 and as adjusted to give effect to the
issuance of the Old Notes and the application of the proceeds therefrom, the
issuance on December 2, 1997 of the 1997 Preferred Stock and the application
of the net proceeds therefrom and the issuance on December 30, 1997 of the
Receivables Securitization Notes and the application of the net proceeds
therefrom. This information should be read in conjunction with the
Consolidated Financial Statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents(1)............................... $ 104.6 $ 251.6
======== ========
Long-term debt and capital lease obligations (net of
unamortized discounts and including current
maturities)(2):
9.80% Airline Receivable Asset Backed Notes, Series 1997-
1........................................................ $ -- $ 100.0
11 1/2% Senior Secured Notes due 2004..................... $ -- 138.4
12% Senior Secured Notes due 2002......................... 43.0 43.0
12% Senior Secured Reset Notes due 1998................... 67.8 --
8% IAM Backpay Notes...................................... 13.0 13.0
PBGC Notes................................................ 164.9 164.9
Icahn Loans............................................... 71.4 --
Various secured notes, 4.0% to 12.4%, due 1997-2001....... 50.3 50.3
Installment Purchase Agreements, 10.00% to 10.53%, due
2002-2003................................................ 93.5 93.5
Boeing Co. 757 Purchase Agreements, 11.85% to 12.38%, due
2015..................................................... 111.7 111.7
IRS Deferral Note......................................... 7.1 7.1
Predelivery Financing Agreement........................... 6.2 6.2
Worldspan Note............................................ 31.2 31.2
Capital lease obligations................................. 228.0 228.0
-------- --------
Total long-term debt and capital lease obligations.... 888.1 987.3
-------- --------
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, as adjusted............................... -- --
9 1/4% Preferred Stock, no shares authorized; no shares
issued and outstanding;
1,725,000 authorized, issued and outstanding, as
adjusted............................................... -- --
Employee Preferred Stock; 6,959,860 shares authorized;
6,943,239 shares issued and outstanding, as adjusted
(3)...................................................... 0.1 0.1
Common Stock, $0.01 par value; 150,000,000 shares
authorized;
50,665,706 shares issued and outstanding, as adjusted
(4)...................................................... 0.5 0.5
Additional paid-in capital................................ 613.8 696.0
Accumulated deficit....................................... (394.6) (399.3)
-------- --------
Total shareholders' equity............................ 219.8 297.3
-------- --------
Total capitalization.................................. $1,107.9 $1,257.0
======== ========
</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. "As
adjusted" reflects receipt of the net proceeds from the sale of the Old
Notes of approximately $133.5 million and the application of approximately
$23.1 million and $76.6 million to purchase Pledged Securities and to
prepay at par, plus accrued and unpaid interest, its 12% Reset Notes,
respectively; the receipt of the net proceeds from the sale of the 1997
Preferred Stock of $82.2 million; the receipt of the net proceeds from the
sale of the Receivables Securitization Notes of $97.0 million and the
application of approximately $74.0 million of such proceeds to repay the
Icahn Loans, including accrued and unpaid interest, and approximately $8.0
million of certain cash collateral released following repayment of the
Icahn Loans.
(2) Current maturities of long-term debt and capital lease obligations at
September 30, 1997 were $66.2 million and $38.4 million, respectively.
(3) Comprised of 4,072,508 shares of the Company's IAM Preferred Stock, par
value $0.01 per share, 974,672 shares of the Company's IFFA Preferred
Stock, par value $0.01 per share, and 1,896,059 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. See "Description of Capital Stock--
Employee Preferred Stock."
(4) Does not include (i) approximately 10.9 million shares of Common Stock
initially reserved for issuance upon conversion of the 1997 Preferred
Stock, (ii) 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, (iii) approximately 9.5
million shares of Common Stock reserved for issuance upon conversion of
the 8% Preferred Stock, (iv) 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 at prices
ranging from $4.64 to $18.37 per share and Common Stock issuable upon the
exercise of warrants, and (v) 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 and "Risk Factors--Risk Factors
Related to the Company--Corporate Governance Provisions; Special Voting
Arrangements."
46
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below relate to the year
ended December 31, 1992, the ten months ended October 31, 1993, the two months
ended December 31, 1993, the year ended December 31, 1994, the eight months
ended August 31, 1995, the four months ended December 31, 1995, the year ended
December 31, 1996, the nine months ended September 30, 1996 and 1997 and the
three months ended September 30, 1996 and 1997. 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 periods in the year ended December 31, 1992,
the ten months ended October 31, 1993, the two months ended December 31, 1993,
the year ended December 31, 1994, the eight months ended August 31, 1995, the
four months ended December 31, 1995 and the year ended December 31, 1996 were
derived from the audited consolidated financial statements of the Company.
Certain amounts have been reclassified to conform with presentations adopted
in 1997. See "Risk Factors--Risk Factors Related to the Company--Liquidity;
Substantial Indebtedness; Capital Expenditure Requirements" for a description
of the auditor's report issued in connection with the 1996 Consolidated
Financial Statements.
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.
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 the amounts are not
meaningful.
47
<PAGE>
<TABLE>
<CAPTION>
PRIOR PREDECESSOR
COMPANY PREDECESSOR COMPANY REORGANIZED COMPANY
------------------------ ------------------------------------ ---------------------------------------------
EIGHT
TEN MONTHS TWO MONTHS MONTHS FOUR MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, ------------------
1992 1993 1993 1994 1995 1995 1996 1996 1997
------------ ----------- ------------ ------------ ---------- ------------ ------------ -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Operating
revenues....... $3,618.7 $2,633.9 $520.8 $3,407.7 $2,218.4 $1,098.5 $3,554.4 $2,751.1 $2,515.1
Operating income
(loss) (1)..... (420.4) (225.7) (58.3) (279.5) (14.6) 10.4 (198.5) 33.9 (29.8)
Income (loss)
before income
taxes
and
extraordinary
items (2)...... (314.3) (362.6) (88.1) (432.9) (338.3) (32.3) (274.6) (18.3) (68.3)
Provision
(credit) for
income taxes... 3.4 1.3 (0.2) 0.9 (0.1) 1.3 0.4 0.5 0.5
Income (loss)
before
extraordinary
items.......... (317.7) (363.9) (87.9) (433.8) (338.2) (33.6) (275.0) (18.8) (68.8)
Extraordinary
items (3)...... -- 1,075.6 -- (2.0) 140.9 3.5 (9.8) (7.4) (10.9)
Net income
(loss)......... (317.7) 711.7 (87.9) (435.8) (197.3) (30.1) (284.8) (26.2) (79.7)
Preferred stock
dividend
requirements
(4)............ 2.4 15.0 11.6 4.8 36.7 32.7 11.6
Income (loss)
applicable to
common shares.. (90.3) (450.8) (208.9) (34.9) (321.5) (58.9) (91.3)
Weighted average
shares
outstanding ... 33.3 44.2 43.2 52.0
Per share
amounts (5):
Income (loss)
before
extraordinary
items and
special
dividend
requirement.... (1.15) (6.60) (.73) (1.54)
Net income
(loss)......... (1.05) (7.27) (1.36) (1.75)
Ratio of
earnings to
fixed charges
(6)............ -- -- -- -- -- -- -- -- --
OTHER DATA
Operating lease
rentals........ 203.1 173.5 36.6 261.4 182.5 96.4 303.0 222.1 268.8
Interest
expense........ 110.0 91.9 31.2 195.4 123.2 45.9 126.8 95.5 85.5
Capital
expenditures... 44.1 30.2 10.4 44.9 16.6 43.0 121.5 109.9 58.2
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1996 1997
--------- -------
<S> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Operating
revenues....... $1,002.9 $908.4
Operating income
(loss) (1)..... 26.0 63.8
Income (loss)
before income
taxes
and
extraordinary
items (2)...... 10.0 47.2
Provision
(credit) for
income taxes... 16.9 33.9
Income (loss)
before
extraordinary
items.......... (6.9) 13.3
Extraordinary
items (3)...... (7.4) (7.0)
Net income
(loss)......... (14.3) 6.3
Preferred stock
dividend
requirements
(4)............ 3.9 3.9
Income (loss)
applicable to
common shares.. (18.2) 2.4
Weighted average
shares
outstanding ... 45.1 56.1
Per share
amounts (5):
Income (loss)
before
extraordinary
items and
special
dividend
requirement.... (.24) .17
Net income
(loss)......... (.40) .04
Ratio of
earnings to
fixed charges
(6)............ -- 1.21
OTHER DATA
Operating lease
rentals........ 77.3 94.4
Interest
expense........ 30.9 27.4
Capital
expenditures... 34.9 24.8
</TABLE>
<TABLE>
<CAPTION>
PRIOR
PREDECESSOR
COMPANY PREDECESSOR COMPANY REORGANIZED COMPANY
----------- ------------------- ---------------------------------
DECEMBER 31, DECEMBER 31,
--------------------------------- ------------------ SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
----------- --------- ---------- -------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents(7)........ $ 67.9 $ 187.7 $ 138.5 $ 304.3 $ 181.6 $ 104.6
Current assets......... 602.0 728.3 603.8 737.3 625.7 593.3
Net working capital
deficiency............ (316.2) (106.7) (1,238.2) (81.9) (336.4) (425.9)
Flight equipment, net.. 827.7 660.8 508.6 455.4 472.5 558.2
Total property and
equipment, net........ 1,114.3 886.1 693.0 600.1 614.2 678.5
Intangible assets, net. -- 1,024.8 921.7 1,276.0 1,184.8 1,134.7
Total assets........... 2,158.1 2,958.9 2,512.4 2,868.2 2,681.9 2,676.6
Current maturities of
long-term debt and
capital leases (8).... 327.3 108.3 1,149.7 110.4 134.9 104.6
Liabilities subject to
Chapter 11
reorganization
proceedings (9)....... 2,026.9 -- -- -- -- --
Long-term debt, less
current maturities
(8)................... -- 1,053.6 -- 764.0 608.5 593.8
Long-term obligations
under capital leases,
less current
maturities............ -- 376.6 339.9 259.6 220.8 189.6
Shareholders' equity
(deficiency) (10)..... (1,149.7) 18.4 (417.5) 302.9 238.1 219.8
</TABLE>
(See notes on following page)
48
<PAGE>
- -------
(1) Includes special charges of $138.8 million in 1994, $1.7 million in the
eight months ended August 31, 1995 and $85.9 million in 1996. For a
discussion of these and other non-recurring items, see Note 16 to the
1996 Consolidated Financial Statements.
(2) The 1992 results include non-recurring gains of $254.6 million from the
disposition of assets. The ten months ended October 31, 1993 includes a
charge of $342.4 million related to the settlement of pension obligations
and income of $268.1 million related to reorganization items. The eight
months ended August 31, 1995 includes charges of $242.2 million related
to reorganization items.
(3) The extraordinary item in 1993 represents the gain on discharge of
indebtedness pursuant to the consummation of the '93 Reorganization. The
extraordinary item in 1994 represents the charge for a prepayment premium
related to the sale and leaseback of four McDonnell Douglas MD-80
aircraft. 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, while the extraordinary item in
the four months ended December 31, 1995 was the result of the settlement
of a debt of a subsidiary. The extraordinary items in 1996 and 1997
result from the early extinguishment of certain debt.
(4) On March 22, 1996, the Company called for redemption of all of its
outstanding 12% Preferred Stock. The excess of the early redemption price
over the carrying value of the 12% Preferred Stock is reflected as a
$20.0 million "special dividend requirement" in 1996.
(5) No effect has been given to stock options, warrants or potential
issuances of additional Employee Preferred Stock as the impact would have
been anti-dilutive.
(6) 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 year ended December 31, 1992, $317.4; for
the ten months ended October 31, 1993, $364.7; for the two months ended
December 31, 1993, $88.4; for the year ended December 31, 1994, $435.0;
for the eight months ended August 31, 1995, $338.3; for the four months
ended December 31, 1995, $32.3; for the year ended December 31, 1996,
$280.0; and for the nine months ended September 30, 1996 and 1997, $21.8
and $72.5, respectively; and for the three months ended September 30,
1996, $8.5.
(7) 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.
(8) Long-term debt in 1994 was reclassified to current maturities as a result
of certain alleged defaults and payment defaults. See Note 7 to the 1995
Consolidated Financial Statements.
(9) For periods after January 31, 1992 and before the effective date of the
'93 Reorganization, certain prepetition liabilities, which were subject
to compromise pursuant to the '93 Reorganization, were classified as
liabilities subject to Chapter 11 reorganization proceedings, and the
accrual of interest was discontinued on prepetition debt that was
unsecured or estimated to be undersecured.
(10) No dividends were paid on the Company's outstanding Common Stock during
the periods presented above.
49
<PAGE>
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 schedule integrity, operational reliability 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
and 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. 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
50
<PAGE>
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 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 would be approximately $58.0
million based upon such target prices and the number of shares of Common Stock
and Employee Preferred Stock outstanding at December 31, 1996. The charge for
any year, however, could be substantially higher if the market price of the
Common Stock exceeds certain target prices. 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.
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, 1996 such additional compensation would
aggregate approximately $6.0 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 at December 31, 1996.
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.
Although the Company can not, at this time, determine the amount that the
Company will be obligated to pay under the agreement for the period July
through December 1997, management believes that its obligation for 1997 will
not exceed $12.0 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
51
<PAGE>
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. See "Risk Factors."
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 sought to be 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 recently passed tax legislation reimposing and
significantly modifying the Ticket Tax. 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
52
<PAGE>
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.
The Company's auditors included in their report dated March 24, 1997 on the
Consolidated Financial Statements an explanatory paragraph to the effect that
substantial doubt exists regarding the Company's ability to continue as a
going concern due to the Company's recurring losses from operations and
limited sources of additional liquidity. See "Risk Factors--Risk Factors
Related to the Company--Liquidity; Substantial Indebtedness; Capital
Expenditure Requirements" and the Consolidated Financial Statements.
RECENT FINANCIAL AND OPERATING RESULTS
For the third quarter of 1997, TWA reported operating income of $63.8
million and pre-tax income of $47.2 million. These results compare to
operating income of $26.0 million and pre-tax income of $10.0 million in the
third quarter of 1996. In addition, the Company's yield (passenger revenue per
RPM) for the third quarter of 1997 increased 3.2% to 11.24c versus the
comparable prior year period and passenger RASM increased 5.8% to 8.08c versus
the comparable prior year period. The Company's unit costs remained
essentially unchanged at 8.29c, despite a 13.7% decrease in capacity for the
quarter versus the third quarter of 1996, as measured by ASMs.
53
<PAGE>
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>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------- --------------
1994 1995 1996 1996 1997 1996 1997
------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTH AMERICA
Passenger revenues
(millions)............ $ 2,221 $ 2,292 $ 2,515 $ 1,936 $ 1,884 $ 671 $ 655
Revenue passenger miles
(millions)(2)......... 17,543 17,902 19,513 14,884 14,930 5,388 5,357
Available seat miles
(millions)(3)......... 27,963 28,194 30,201 22,688 22,072 7,959 7,707
Passenger load fac-
tor(4)................ 62.7% 63.5% 64.6% 65.6% 67.6% 67.7% 69.5%
Passenger yield
(cents)(5)............ 12.66c 12.80c 12.89c 13.01c 12.62c 12.46c 12.23c
Passenger revenue per
available seat mile
(cents)(6)............ 7.94c 8.13c 8.33c 8.53c 8.54c 8.43c 8.50c
INTERNATIONAL
Passenger revenues
(millions)............ $ 597 $ 544 $ 563 $ 455 $ 327 $ 203 $ 144
Revenue passenger miles
(millions)(2)......... 7,363 7,000 7,598 6,022 4,239 2,640 1,756
Available seat miles
(millions)(3)......... 11,228 9,719 10,393 8,020 5,518 3,491 2,187
Passenger load fac-
tor(4)................ 65.6% 72.1% 73.1% 75.1% 76.8% 75.6% 80.3%
Passenger yield
(cents)(5)............ 8.10c 7.78c 7.41c 7.56c 7.71c 7.70c 8.20c
Passenger revenue per
available seat mile
(cents)(6)............ 5.31c 5.60c 5.42c 5.67c 5.93c 5.82c 6.59c
TOTAL SYSTEM
Passenger revenues
(millions)............ $ 2,818 $ 2,836 $ 3,078 $ 2,391 $ 2,211 $ 874 $ 799
Revenue passenger miles
(millions)(2)......... 24,906 24,902 27,111 20,906 19,169 8,028 7,113
Available seat miles
(millions)(3)......... 39,191 37,905 40,594 30,708 27,590 11,450 9,894
Passenger load fac-
tor(4)................ 63.5% 65.7% 66.8% 68.1% 69.5% 70.1% 71.9%
Passenger yield
(cents)(5)............ 11.31c 11.39c 11.35c 11.44c 11.54c 10.89c 11.24c
Passenger revenue per
available seat mile
(cents)(6)............ 7.19c 7.48c 7.58c 7.79c 8.01c 7.64c 8.08c
Operating cost per
available seat mile
(cents)(7)............ 8.45c 8.12c 8.76c 8.58c 8.99c 8.27c 8.29c
Average daily utiliza-
tion per aircraft
(hours)(8)............ 9.30 9.45 9.63 9.82 9.34 9.90 9.64
Aircraft in fleet being
operated at end of pe-
riod.................. 185 188 192 191 186 191 186
</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 dividend by available seat miles.
(7) Operating expenses, excluding special charges, earned stock compensation
and other nonrecurring charges, divided by available seat miles.
(8) The average block hours flown per day in revenue service per aircraft.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Total operating revenues of $908.4 million during the third quarter of 1997
were $94.5 million (9.4%) less than the comparable 1996 period. This reduction
occurred primarily because of decreases in scheduled passenger revenues ($75.1
million) and cargo revenue ($6.4 million) which were primarily due to
decreases in domestic and international capacity and because of a decrease in
contract work ($10.0 million), which declined primarily due to the elimination
of a government maintenance contract.
Capacity and traffic decreased in the third quarter of 1997 from the
comparable period of 1996. System wide capacity, measured by scheduled ASMs,
decreased by 13.7% during the third quarter of 1997 (representing decreases in
domestic and international ASMs of 3.2% and 37.4%, respectively). 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. Passenger traffic volume, as measured by
total
54
<PAGE>
RPMs in scheduled service, during the third quarter of 1997 decreased 11.4%
compared to the same period of 1996. Passenger load factor for the three
months ended September 30, 1997 was 71.9% compared to 70.1% in the same period
of 1996. TWA's yield per passenger mile increased from 10.89 cents in 1996 to
11.24 cents for the three months ended September 30, 1997.
Operating expenses of $844.6 million in the third quarter of 1997 reflected
a decrease of $132.2 million (13.5%) from the operating expenses of $976.8
million for the three months ended September 30, 1996, representing a net
change in the following expense groups:
. Salary, wages and benefits of $304.3 million for the third quarter of
1997 were $13.2 million (4.2%) less than the same period in 1996,
primarily due to a decrease of 1,979 in the average number of employees.
The Company had an average of 23,038 full-time equivalent employees in
the third quarter of 1997 as compared to 25,017 in the third quarter of
1996. Flight attendants, mechanics, and passenger service agents were the
primary groups affected by the decrease.
. Earned stock compensation charges of $1.1 million for the third quarter
of 1997 versus a credit of $735 thousand for the third quarter of 1996
represents primarily the non-cash compensation charge recorded to reflect
the expense associated with the distribution of shares of stock on behalf
of employees as part of the '95 Reorganization. Additional non-cash
compensation charges may be recorded in the future, a substantial portion
of which will depend on the market price of the Common Stock. For a
further discussion of future charges related to non-cash compensation,
see "Risk Factors--Risk Factors Related to the Company--Certain Potential
Future Earnings Charges" and Notes 11 and 12 to the Consolidated
Financial Statement.
. Aircraft fuel and oil expense of $122.2 million for the third quarter of
1997 was $40.2 million (24.8%) less than the expense of $162.4 million
for the three months ended September 30, 1996. Approximately $14.4
million of the decrease was due to a reduction in the average cost of
fuel from 69.67 cents per gallon in the third quarter of 1996 to 62.31
cents per gallon in the third quarter of 1997 and the remaining $25.8
million decrease was due to the reduction in gallons consumed (196.2
million gallons in the third quarter of 1997 versus 233.1 million gallons
in the third quarter of 1996) resulting from the replacement of B-747 and
L-1011 aircraft with B-757 and B-767 aircraft and a reduction in
international flying.
. Passenger sales commission expense of $66.0 million for the third quarter
of 1997 was $10.0 million (13.2%) less than the comparable period in 1996
primarily due to the 8.6% decrease in scheduled passenger revenues and
reduced sales development commissions.
. Aircraft maintenance materials and repairs expense of $27.5 million for
the third quarter of 1997 represented a decrease of $26.0 million (48.6%)
from the $53.5 million for the same period of 1996. The decrease was
primarily the result of the introduction of new B-757 and MD-80/83
aircraft into the fleet as replacements for B-747, L-1011 and B-727
aircraft and a reduction in contract maintenance work performed.
. Depreciation and amortization expense decreased $2.9 million in the third
quarter of 1997 compared to the same period of 1996. Depreciation
generated by the L-1011 and B-747 fleets was approximately $4.7 million
less in the third quarter of 1997 than the same period of 1996 primarily
because of special charges recorded in the fourth quarter of 1996 related
to international route authorities and aircraft to be disposed of and the
sale/leaseback of one B-747 in 1997. The remaining increase is primarily
attributed to the addition of B-757 aircraft to TWA's fleet.
. Operating lease rentals of $94.4 million for the third quarter of 1997
were $17.1 million (22.1%) more than the rentals of $77.3 million for the
third quarter of 1996. The increase was primarily due to an increase in
the average number of leased aircraft from 144 in the third quarter of
1996 to 158 in the comparable period of 1997, and higher lease rates
attributable primarily to the addition of new B-757 and MD-80/83 aircraft
to the fleet.
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. Passenger food and beverage expense of $21.6 million during the third
quarter of 1997 represented a decrease of $9.6 million (30.8%) from $31.2
million during the third quarter of 1996. The decrease was primarily due
to the 33.7% reduction in the number of passengers boarded for
international flights resulting from the 37.4% reduction in international
scheduled ASMs and savings derived from changes and improved efficiencies
in food and beverage service.
All other operating expenses of $170.9 million during the third quarter of
1997 decreased by $49.3 million (22.4%) from $220.2 million for the three
months ended September 30, 1996. The decrease was primarily due to a decrease
in outside services purchased ($12.3 million). Additionally, international
navigational facility user charges and advertising expenses decreased year
over year for the third quarter by $4.9 million and $7.0 million,
respectively, due, in large part, to the 37.4% reduction in international
scheduled ASMs. Decreases were also noted in landing fees ($1.8 million),
personnel related expenses ($2.2 million), uncollectible accounts ($1.9
million), taxes other than payroll and income ($1.8 million), and numerous
other miscellaneous expenses.
Other charges (credits) were a net charge of $16.6 million for the third
quarter of 1997 as compared to $16.0 million for the same period in 1996.
Interest expense decreased $3.5 million in the third quarter of 1997 over the
third quarter of 1996 as a result of the reduction of debt in the third
quarter of 1997. Interest income decreased by $2.5 million in the third
quarter of 1997 primarily as a result of lower levels of invested funds. Net
gains from the disposition of assets were $2.8 million in the third quarter of
1997 as compared to a net loss of $87 thousand in the same period of 1996. The
net gain in the third quarter of 1997 included a gain of $1.8 million related
to the sale of a B-727 aircraft. Other charges and credits net decreased from
a net credit of $9.5 million for the third quarter of 1996 to a net credit of
$5.1 million for the third quarter of 1997, primarily caused by a $2.8 million
decline in the Company's share of Worldspan's earnings and a $1.3 million
adjustment to reflect the weakening of the U.S. dollar against currencies of
foreign countries in which TWA operates.
A tax provision of $33.9 million was recorded in the third quarter of 1997
compared to a tax provision of $16.9 million recorded in the third quarter of
1996. The tax provision recorded in the third quarter reflects the reversal of
previously recorded tax benefits, as management currently expects a taxable
loss at year-end and the realization of the benefits of any such tax loss in
future periods is presently subject to substantial uncertainty.
As a result of the above, the Company's operating income of $63.8 million
for the three months ended September 30, 1997 increased $37.8 million from
operating income of $26.0 million for the third quarter of 1996. The Company
had a net income of $6.3 million for the third quarter of 1997 compared to a
net loss of $14.3 million for the third quarter of 1996. The third quarter
1997 net income included a $7.0 million non-cash extraordinary loss related to
the early extinguishment of debt versus a $7.4 million non-cash extraordinary
loss in the third quarter of 1996.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Total operating revenues of $2,515.1 million for the nine months ended
September 30, 1997 were $236.0 million (8.6%) less than the comparable 1996
period. This reduction occurred primarily because of a $180.0 million (7.5%)
decrease in scheduled passenger revenue, a $33.7 million (55.2%) decrease in
contract revenue and a $16.6 million (14.9%) decrease in cargo revenues.
Capacity and traffic decreased in the nine months ended September 30, 1997
from the comparable period of 1996. System wide capacity, measured by
scheduled ASMs, decreased 10.2% during the first nine months of 1997
(representing decreases in domestic and international ASMs of 2.7% and 31.2%,
respectively). 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. Passenger
traffic volume, as measured by total RPMs in scheduled service, during the
first nine months of 1997 decreased 8.3% compared to the same period of 1996.
Passenger load factor for the nine months ended September 30, 1997 was
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69.5% compared to 68.1% in the same period of 1996. TWA's yield per passenger
mile increased from 11.44 cents in 1996 to 11.54 cents in the first nine
months of 1997.
Operating expenses of $2,544.9 million in the first nine months of 1997
reflected a decrease of $172.4 million (6.3%) from the operating expenses of
$2,717.3 million for the nine months ended September 30, 1996, representing a
net change in the following expense groups:
. Salary, wages and benefits of $922.2 million for the first nine months of
1997 were $1.1 million less than the same period of 1996, primarily due
to a decrease in the average number of full-time equivalent employees
from 24,212 during the first nine months of 1996 to 23,785 during the
comparable 1997 period.
. Earned stock compensation charges of $4.2 million for the first nine
months of 1997 and $4.3 million for the first nine months of 1996
represent primarily the non-cash compensation charges 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 $369.5 million for the first nine months
of 1997 decreased $63.3 million (14.6%) from expenses of $432.8 million
for the nine months ended September 30, 1996. Approximately $55.7 million
of the decrease was due to a 12.8% reduction in consumption (555.7
million gallons in the first nine months of 1997 versus 637.5 million
gallons in the first nine months of 1996), and the remaining $7.6 million
decrease was related to the 2.1% decrease in the average cost of fuel per
gallon from 67.90 cents in the first nine months of 1996 compared to
66.49 cents in the first nine months of 1997.
. Passenger sales commission expense of $189.0 million for the first nine
months of 1997 was $24.6 million (11.5%) less than the comparable period
in 1996 primarily due to a 7.5% decrease in passenger revenues and
reduced sales development commissions.
. Aircraft maintenance materials and repairs expense of $109.6 million for
the first nine months of 1997 represented a decrease of $48.9 million
(30.9%) from $158.5 million for the same period of 1996. The decrease was
primarily the result of the introduction of new B-757 and MD-80/83
aircraft into the fleet as replacements for B-747, L-1011 and B-727
aircraft, a reduction in contract maintenance work and a 4.3% decrease in
flying hours.
. Depreciation and amortization expense decreased $6.2 million in the first
nine months of 1997 compared to the same period of 1996. Special charges
recorded in the fourth quarter of 1996, related to international route
authorities and aircraft to be disposed of, reduced depreciation and
amortization in the first nine months by approximately $10.8 million but
was offset, in part, by the depreciation expense on the new aircraft that
the Company has acquired.
. Operating lease rentals of $268.8 million for the first nine months of
1997 were $46.7 million (21.0%) more than the rentals of $222.1 million
for the first nine months of 1996. The increase was primarily due to an
increase in the average number of leased aircraft from 140 during the
first nine months of 1996 to 154 during the first nine months of 1997 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 $61.4 million during the first
nine months of 1997 represented a decrease of $22.7 million (27.0%) from
$84.1 million for the first nine months of 1996. The decrease was
primarily due to a 30.0% reduction in the number of passengers boarded
for international flights resulting from a 31.2% reduction in
international scheduled ASMs and savings derived from changes and
improved efficiencies in food and beverage service.
All other operating expenses of $508.1 million during the first nine months
of 1997 decreased by $52.2 million (9.3%) from $560.3 million for the first
nine months of 1996. Primarily as the result of management's decision to
reduce international service, international departures decreased by 16.5%
during the first nine months of 1997 as compared to the same period of 1996,
which affected system-wide departures by 2.6% during the same period. This
reduction had a direct impact on several operational expenses such as
navigation charges ($8.6
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million), landing fees ($4.4 million), advertising and publicity ($13.3
million), reservation booking fees ($6.5 million) and traffic handling costs
($4.9 million). Other areas of reduced expenses included accruals for waste
management fees ($8.6 million) and provision for uncollectible accounts ($5.1
million).
Other charges (credits) were a net charge of $38.5 million for the first
nine months of 1997 as compared to $52.1 million for the same period in 1996.
Interest expense decreased $10.0 million in the first nine months of 1997 from
the first nine months of 1996 as a result of the reduction of debt in 1996 and
1997. Interest income decreased $8.3 million in the first nine months of 1997
primarily as a result of lower levels of invested funds. Net gains from the
disposition of assets were $15.2 million in the first nine months of 1997 as
compared to net losses of $62 thousand in the same period of 1996. The net
gains in the first nine months of 1997 included gains of $7.3 million related
to the sale of three gates at Newark International Airport, $1.5 million
related to the sale of spare flight equipment, and $3.2 million related to the
sale of four aircraft engines and $2.8 million related to the sale of five
surplus aircraft. Other charges and credits-net for the first nine months of
1997 were a net credit of $22.9 million compared to a net credit of $26.2
million in the first nine months of 1996. The $3.3 million decrease is
primarily the result of decreases in vendor discounts ($1.4 million) and the
favorable settlement of a lawsuit in 1996 ($2.5 million).
As a result of the above, the Company's operating loss of $29.8 million for
the nine months ended September 30, 1997 decreased $63.7 million from
operating income of $33.9 million for the first nine months of 1996. The
Company had a net loss of $79.7 million for the first nine months of 1997
compared to a net loss of $26.2 million for the first nine months of 1996.
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
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 maintenance 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 TWE 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 productively 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 $582.2 million for 1996 was $126.6
million (27.6%) over the total expense of $458.6 million for 1995. This
increase is primarily due to an increase in the price of fuel
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(22.3%), an increase in gallons consumed (4.3%) and the expiration in
October 1995 of the airlines' exemption from paying a federal fuel tax of
4.3 cents per gallon, which increased 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 expense 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-
down of the JFK-Athens route ($26.7 million), international employee severance
liabilities ($5.5 million) related to the termination of service to Athens and
Frankfurt, and a write-down of the L-1011 and 747 fleets ($32.2 million) and
the related inventories ($21.5 million), reflecting planned retirement of such
aircraft. These costs are based upon management's current estimates. Actual
costs could materially differ from these current estimates. See Note 16 to the
Consolidated Financial Statements for a further discussion of these special
charges. Special charges of $1.7 million were recorded in the third quarter of
1995 related to the shutdown of TWE.
All other operating expenses of $767.2 million in 1996 represented an
increase of $79.6 million (11.6%) from $687.6 million for the year ended
December 31, 1995. An increase in flight cancellations during 1996 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 Reorganization and additional
reductions of debt during 1996. Interest income increased by $3.5 million in
1996 primarily as a result of higher levels of invested funds. Other charges
and credits-net improved $35.8 million in 1996 compared to 1995, primarily due
to a $19.8 million improvement in the Company's share of earnings of Worldspan
and a $2.5 million credit to reflect a litigation settlement. Additionally,
other charges and credits-net for 1995 included a $14.0 million charge for
restructuring expenses.
As a result of the above, the operating loss of $198.5 million for 1996 was
$223.6 million unfavorable to the combined operating income of $10.5 million
and $14.6 million for the four month and the eight month periods of 1995,
respectively. The net loss of $284.8 million for 1996 was $57.4 million
greater than the combined loss of $227.4 for 1995. The 1996 net loss included
$9.8 million in extraordinary losses related to the
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early extinguishment of debt, while the 1995 net loss included $144.4 million
in extraordinary gains related to the discharge of indebtedness pursuant to
the '95 Reorganization and the cancellation of debt between TWE and an
aircraft lessor.
RESULTS OF OPERATIONS FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995 AND EIGHT
MONTHS ENDED AUGUST 31, 1995 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31,
1994
Total operating revenues of $1,098.5 million and $2,218.4 million for the
four months ended December 31, 1995 and the eight months ended August 31,
1995, respectively, were, on a combined basis, $90.9 million (2.7%) less than
1994, primarily because of an $80.5 million decrease in other revenues. This
decrease is primarily due to the sale of subsidiary companies in 1994 ($51.9
million), a decrease of $13.0 million in TWA Nippon, Inc. ("Nippon") revenues,
and a $12.3 million decrease in TWA Getaway Vacations revenue.
During 1995, passenger revenue remained virtually unchanged from 1994,
despite the adverse publicity generated by the '95 Reorganization, and in the
four months since emerging from bankruptcy, passenger revenue increased by
$48.3 million, a 5.5% improvement over the same period of 1994. System
capacity as measured by ASMs was trimmed by 3.2% on a system-wide basis in
1995 versus 1994. International capacity decreased 13.7% due to the
termination of flights to several international destinations, while domestic
capacity increased slightly (1.1%). During 1995, system traffic volume, as
measured by total RPMs, improved slightly (0.1%), the result of a decrease in
international traffic by 5.1% and an increase in domestic traffic by 2.3%.
TWA's yield per passenger mile for 1995 increased to 11.39 cents from 11.31
cents in 1994 (reflecting a domestic increase to 12.80 cents from 12.66 cents
and an international decrease to 7.78 cents from 8.10 cents).
Operating expenses of $1,088.0 million and $2,203.7 million for the four
months ended December 31, 1995 and the eight months ended August 31, 1995,
respectively, were, on a combined basis, $395.5 million (10.7%) less than the
operating expenses of $3,687.2 million for 1994, representing a net change in
the following expense groups:
. Salary, wages and benefits for the four months ended December 31, 1995
and the eight months ended August 31, 1995 of $373.0 million and $755.7
million, respectively, were, on a combined basis, $164.8 million (12.7%)
less than 1994. The reduction in employment costs reflect a full year of
savings realized from the '94 Labor Agreements entered into in August
1994 as the average number of employees was reduced from approximately
25,200 in 1994 to approximately 22,900 in 1995. The four months ended
December 31, 1995 included the favorable impacts of changes in estimates
which reduced employee benefit costs by approximately $6.2 million.
Additionally, 1994 employment costs included a non-recurring contractual
benefit accrual of approximately $36.3 million.
. During 1995, the Company distributed shares of stock to employees as part
of its financial restructuring which, together with certain other non-
cash compensation charges, resulted in an aggregate charge of $58.0
million to operating expense.
. Aircraft fuel and oil expense of $161.8 million for the four months ended
December 31, 1995 and $296.8 million for the eight months ended August
31, 1995, reflected a combined decrease of $18.9 million from 1994. The
combined effect of decreased fuel usage (5.6%), offset by a slight
increase in the unit price (1.8%), resulted in a decrease of 4.0% in fuel
costs for 1995. The average unit price of fuel was 57.0 cents per gallon
in 1995 compared to 56.0 cents in 1994. Effective October 1, 1995, an
exemption expired related to a federal fuel tax of 4.3 cents per gallon
on commercial jet fuel purchased for use in domestic operations. This
additional tax increased fuel costs by $7 million in the fourth quarter
of 1995. See "Business--Aircraft Fuel."
. Passenger sales commission expense of $80.0 million in the four months
ended December 31, 1995 and $186.0 million in the eight months ended
August 31, 1995, respectively, together represent a decrease of $22.0
million (7.6%) from 1994. The decrease is primarily due to incentive
commissions and a reduction in the commission rate on international
tickets. The four months ended December 31, 1995
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included the favorable impacts of changes in estimated commissions which
reduced commission expense by approximately $6.7 million.
. Aircraft maintenance and repairs expense of $52.0 million and $95.7
million for the four-month and the eight-month periods of 1995,
respectively, together represent a slight increase of $2.3 million (1.6%)
over 1994.
. Depreciation and amortization decreased $21.6 million (11.8%) to the
combined $55.2 million for the four months ended December 31, 1995 and
the $106.5 million for the eight months ended August 31, 1995 from $183.3
million in 1994. The decrease is generally due to the normal decline in
depreciation as property reaches the end of its estimated economic life,
partially offset by an increase in the amortization of intangible assets
arising from fresh start reporting on the '95 Effective Date and the sale
(and simultaneous leaseback) of five 727 and two 747 aircraft in March
1995.
. Operating lease rentals were $96.4 million for the last four months of
1995 and $182.5 million for the first eight months of 1995, a combined
increase of $17.6 million (6.7%) over 1994. The increase was principally
due to the sale and simultaneous leaseback of five 727s and two 747s in
March 1995 and the addition of three new MD-83 aircraft in late 1995. The
increase was also due to the reclassification of the JFK International
Terminal lease from capital to operating ($3.8 million).
. Passenger food and beverage expenses were $34.7 million and $68.1 million
for the four months ended December 31, 1995 and the eight months ended
August 31, 1995, respectively, a combined decrease of $18.0 million
(14.9%) in 1995 compared to 1994. The decrease is primarily due to
decreased international traffic and cost savings as a result of the
closing of the JFK and Los Angeles dining units in the fourth quarter of
1994.
. Special charges of $1.7 million were recorded in the third quarter of
1995 related to the shut-down of TWE.
All other operating expenses, excluding special charges, aggregated $232.7
million for the four months ended December 31, 1995 and $454.9 million for the
eight months ended August 31, 1995, a combined decrease of $90.9 million
(11.7%) compared to 1994. The decrease is primarily the result of the
operating subsidiaries sold in 1994 ($34.6 million) and decreases in the
operating costs of TWE ($14.2 million) and other subsidiaries ($27.3 million).
Other charges (credits) were a net charge of $42.7 million for the last four
months of 1995 and a net charge of $352.9 million for the first eight months
of 1995 compared to a net charge of $153.4 million in 1994. This increase of
$242.3 million was primarily due to a $242.2 million non-recurring charge
related to the Company's restructuring. Additionally, interest expense
declined by $26.2 million and investment income increased by $5.8 million and
other charges increased by $4.3 million, reflecting the Company's
proportionate share of increased losses experienced during 1995 over 1994 by
Worldspan, a partnership among affiliates of the Company, Delta Air Lines,
Northwest Airlines and ABACUS Distributions Systems Pte. Ltd., which owns and
operates the WORLDSPAN computer reservation system. Worldspan's increased loss
during 1995 as compared to 1994 was primarily due to restructuring charges
recognized by Worldspan in the fourth quarter of 1995. See also Note 15 to the
Consolidated Financial Statements.
As a result of the above, the operating profit of $10.4 million for the four
months ended December 31, 1995 and $14.6 million for the eight months ended
August 31, 1995 reflected, on a combined basis, a $304.5 million improvement
from the operating loss of $279.5 million in 1994. The net loss of $30.1
million for the last four months of 1995 and $197.3 million for the first
eight months of 1995 was, on a combined basis, $208.4 million less than the
net loss of $435.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following is a discussion of the impact of significant factors affecting
TWA's liquidity position and capital resources. These comments should be read
in conjunction with, and are qualified in their entirety by, the Consolidated
Financial Statements and Notes thereto.
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Liquidity
The Company's consolidated cash and cash equivalents balance at September
30, 1997 was $104.6 million, a $77.0 million decrease from the December 31,
1996 balance of $181.6 million. This reduction in the Company's cash balances
resulted primarily from the repayment of long-term debt and capital lease
obligations and from TWA's net losses caused in part by, among other factors,
difficulties experienced in the last two quarters of 1996 and the first
quarter of 1997 in operating performance. Although the Company's operational
performance substantially improved during the second and third quarters of
1997, the residual effects of these difficulties 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, discussed below,
designed to improve the Company's financial performance and the Company's
financial performance for the third quarter of 1997 was better than its
performance in the third quarter 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.
In December 1997, the Company raised net proceeds of $82.2 million from the
sale of the 1997 Preferred Stock, net proceeds of $133.5 million from the sale
of the Old Notes, a portion of the proceeds of which was used to refinance 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 (as defined below).
The net decrease in cash and cash equivalents during the first nine months
of 1997 was due, in part, to the fact that cash used in operating activities
in the first nine months of 1997 was $21.0 million as compared to the first
nine months of 1996 when $47.9 million was provided by operating activities.
Pursuant to the eight-year Karabu Ticket Program Agreement between the Company
and Karabu (the "Ticket Agreement"), net discounted sales from tickets sold
under the agreement are excluded from cash provided by operating activities as
the related amounts were applied as a $53.7 million reduction to the
outstanding balance of financing provided to TWA by Karabu (the "Icahn Loans")
and a $38.8 million reduction to the outstanding balance of certain promissory
notes issued to the PBGC in connection with the '93 Reorganization (the "PBGC
Notes"). Cash used by investing activities was $17.6 million in the first nine
months of 1997 versus $108.9 million in the first nine months of 1996. A large
part of this change was related to a reduction in new aircraft predelivery
deposits of approximately $35 million during the first nine months of 1997 and
an increase of $16.3 million in proceeds from asset sales. Gross proceeds from
assets sold during the first nine months of 1997 included $10.0 million for
three gates at Newark International Airport and $11.8 million for spare flight
equipment, aircraft and engines. Financing activities used $38.5 million of
cash in 1997, while such activities provided cash of $5.1 million in the first
nine months of 1996, primarily related to net proceeds of $104.4 million
(after the redemption of the Mandatorily Redeemable 12% Preferred Stock) from
the sale of 3,869,000 shares of 8% Preferred Stock in March 1996. Net proceeds
from the issuance of the Units were $47.2 million in March 1997.
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, pursuant to the Karabu Ticket Agreement net discounted sales
from tickets sold under the agreement are excluded from cash provided by
operating activities as the related amounts 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
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<PAGE>
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 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.
The Company's ability to improve its financial position and meet its
financial obligations will depend upon a variety of factors, including:
continued improvement in 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. In late 1996, the Company began implementing a series of new
strategic initiatives designed to improve the Company's financial and
operating results. See "The Company--Business Strategy."
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. See "Risk Factors."
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
$700,000 in 1995 and approximately $8.1 million in 1996. Concurrently, the
Company undertook aircraft lease payment deferrals to increase liquidity and
improve the Company's financial condition. Gross deferrals of lease and
conditional sale indebtedness payments aggregated approximately $91.0 million
with a weighted average repayment period of approximately two years. The
aircraft lease payment deferrals contemplated by the '95 Reorganization
generally anticipated six month deferrals with various payback periods,
extending in some instances over the remaining life of the lease, and in other
cases over a specified period. Cash repayments of lease deferrals, including
interest, were approximately $9.5 million in the fourth quarter of 1995, $23.8
million in 1996 and are expected to approximate $9.0 million in 1997.
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 out of
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
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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 final
judicial determination that the Ticket Agreement was violated by the Company
could result in the imposition of damages.
Also on March 20, 1996, Karabu and certain other companies controlled by Mr.
Icahn filed suit against the Company alleging violations by the Company of the
Ticket Agreement and federal anti-trust laws. On March 24, 1997, the 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 alleging tortious interference with prospective economic
advantage based on alleged violations of the Ticket Agreement. This suit is
similar to the previous action filed by Karabu referred to in the first
sentence of this paragraph. 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.
For a more complete description of the various Icahn litigations, 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
September 30, 1997, approximately $118.6 million of such proceeds had been
applied to the principal balance of the Icahn Loans and $45.2 million had been
applied to the PBGC Notes.
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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 the nine months ended September 30, 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.
TWA has no unused credit lines and must satisfy all of its working capital
and capital expenditure requirements from cash provided by operating
activities, from external borrowings, issuance of additional equity or from
the sale of assets. Substantially all of TWA's strategic assets, including its
owned aircraft, 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. TWA has relatively few non-
strategic assets which it could monetize, substantially all of such assets
being subject to various liens and security interests which would restrict
and/or limit the ability of TWA to realize any significant proceeds from the
sale thereof. To the extent that the Company's access to capital is
constrained, the Company may not be able to make certain capital expenditures
or 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 November 25, 1997, 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 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 to be delivered in March and April of 1998. The
longer-range 300 series aircraft will be utilized on TWA's international
routes.
TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce plc
relating to the purchase of ten A330-300 twin-engine wide body aircraft and
related engines, spare parts and equipment for an aggregate purchase price of
approximately $1.1 billion. The agreements, as amended, require the delivery
of the aircraft in
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<PAGE>
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.
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.
TWA has elected to comply with the transition requirements of the Noise Act
by adopting the Stage 2 aircraft phase-out/retrofit option, which requires
that 50% of its base level (December 1990) Stage 2 fleet be phased-
out/retrofitted by December 31, 1996, 75% by December 31, 1998 and 100% by
December 31, 1999. To comply with the 1996 requirement, the Company has
retrofitted, by means of engine hush-kits, 30 of its DC-9 aircraft. As of
September 30, 1997, hush-kits have been installed on 71 DC-9's 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.
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,
resulting in a date recognition problem in the year 2000. The Company has
hired an outside consulting firm to study what actions will be necessary to
make its computer systems year 2000 compliant. The expense associated with
these actions cannot presently be determined, but could be material to the
Company's financial position and results of operations.
Availability of NOLs
The Company estimates that it had, for federal income tax purposes, net
operating loss carryforwards ("NOLs") amounting to approximately $691 million
at December 31, 1996. Such NOLs expire in 2008 through 2011 if not utilized
before then to offset taxable income. Section 382 of the Internal Revenue Code
of 1986, as amended (the "Code"), and regulations issued thereunder impose
limitations on the ability of corporations to use NOLs, if the corporation
experiences a more than 50% change in ownership during certain periods. In
connection with the change of ownership caused by the '95 Reorganization, the
Company elected to reduce its NOLs in accordance with Section 382 of the Code
and regulations issued thereunder. An additional change in ownership
thereafter 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 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 the
foregoing reasons, prospective purchasers of the Notes should not assume the
unrestricted availability of the Company's currently existing NOLs, if any, in
making their investment decisions. 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.
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<PAGE>
BUSINESS
TWA is the eighth largest U.S. air carrier (based on RPMs for the first nine
months of 1997), whose primary business is transporting passengers, cargo and
mail. During the first nine months of 1997, the Company carried more than 17.6
million passengers and flew approximately 19.2 billion RPMs. As of September
30, 1997, TWA provided regularly scheduled jet service to 86 cities in the
United States, Mexico, Europe, the Middle East, Canada and the Caribbean. As
of September 30, 1997, the Company operated a fleet of 186 jet powered
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 first nine months of 1997, the Company's North
American operations accounted for 84% of its total revenues, while its
transatlantic operations contributed 16% 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 37 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 28
cities with approximately 42 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 1997, the Company has selectively expanded the
amount of engine third-party contract maintenance work that it performs.
FLIGHT EQUIPMENT
As of September 30, 1997, TWA operated a fleet of 186 aircraft, of which 37
were owned by TWA and 149 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 September 30, 1997
are listed below.
<TABLE>
<CAPTION>
AVERAGE AGE SEATS IN
OF AIRCRAFT STANDARD TWA
TYPE OWNED(2) LEASED TOTAL(3) (IN YEARS) CONFIGURATION
- ---- ------- ------ ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Douglas DC-9-10.............. -- 7 7 30.7 77
Douglas DC-9-30.............. -- 36 36 27.8 100
Douglas DC-9-40.............. -- 3 3 22.9 100
Douglas DC-9-50.............. -- 12 12 20.7 107
Douglas MD-80/83............. -- 59 59 10.0 144
Boeing 727-200(1)............ 27 8 35 22.9 146
Boeing 747(1)................ 2 4 6 27.0 434
Boeing 757................... 3 11 14 0.5 180
Boeing 767................... 5 9 14 13.1 192
--- --- --- ----
Total........................ 37 149 186 17.6
=== === === ====
</TABLE>
- --------
(1) Excludes the following aircraft which are not in the active fleet: four
Boeing 727-100s, five Boeing 747-100s, two Boeing 747-200s and 13 L-1011s.
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(2) Substantially all TWA's owned flight equipment is pledged to secure its
indebtedness.
(3) For information concerning compliance of the above-referenced aircraft
with the Noise Act, see "--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 27 gates, 102 ticket counter positions, and ramp, baggage and other
supporting ground facility space. TWA occupies both Terminal 5 and Terminal 6
as a holdover tenant pursuant to expired agreements of lease with the Port
Authority of New York and New Jersey (the "Port Authority"). Such holdover
tenancies are with the consent of the Port Authority pursuant to a Term Sheet
dated August 12, 1993 (the "Term Sheet"), which extended TWA's right to occupy
Terminals 5 and 6, provided TWA paid the rent set forth in the Term Sheet,
made certain specified financed improvements to Terminals 5 and 6, and was
otherwise in compliance with the expired leases. 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 nine
of the 13 gates in Terminal 6 to other carriers and anticipates that at least
two more gates will be subleased by the end of the first quarter of 1998.
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 the first nine
months of 1997, approximately 81.9% of all tickets sold for travel on TWA were
sold by travel agents. Until October 2, 1997, TWA paid the full traditional
10% commission on
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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. Although the Company can not quantify the current or
potential future impact of this decision, the Company believes the uncapped
commission structure is a positive factor in the Company maintaining and
improving its long-term relationships with such travel agents and encourages
the booking of higher fare tickets. 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 FLIGHT BONUS PROGRAM
TWA initiated its FFB Program in May 1981. Frequent flier programs like
TWA's FFB Program have been adopted by most major air carriers and are
considered the number one marketing tool for developing brand loyalty among
travelers and accumulating demographic data pertaining to business fliers.
TWA's FFB 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 the FFB
Program including other airlines. FFB Program members may also receive mileage
credit pursuant to exchange agreements maintained by TWA with a variety of
entities, including hotels, car rental firms, credit card issuers and long
distance telephone service companies. For example, through the American
Express Membership Miles program, FFB Program members may use amounts charged
on the American Express card to earn additional frequent flier miles.
TWA accounts for its FFB Program under the incremental cost method, whereby
travel awards are valued at the incremental cost of carrying one additional
passenger. Such costs are accrued when FFB Program participants accumulate
sufficient miles to be entitled to claim award certificates. Incremental costs
include unit costs for passenger food, beverages and supplies, fuel,
reservations, communications, liability insurance and denied boarding
compensation expenses expected to be incurred on a per passenger basis. No
profit or overhead margin is included in the accrual for incremental costs. No
liability is recorded for airline, hotel or car rental award certificates that
are to be honored by other parties because there is no cost to TWA for these
awards.
At December 31, 1995, FFB participants had accumulated mileage credits for
approximately 660,752 free awards, compared with accumulated mileage credits
for approximately 751,689 awards at December 31, 1996. Because TWA expects
that some award certificates will never be redeemed, the calculations of the
accrued liability for incremental costs at December 1995 and 1996 were based
on approximately 70.0% and 71.5%, respectively, of the accumulated credits.
Mileage for FFB participants who have accumulated less than the
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minimum number of mileage credits necessary to claim an award is excluded from
the calculation of the accrual. The accrued liability at December 31, 1995 was
approximately $19.0 million compared to approximately $20.4 million at
December 31, 1996.
TWA's customers redeemed awards representing approximately 6.3%, 6.0% and
4.5% of TWA's RPMs in 1994, 1995 and 1996, respectively.
AIRCRAFT FUEL
TWA's worldwide aircraft fuel requirements are met by in excess of twenty
different suppliers. The Company has contracts with some of these suppliers,
the terms of which vary as to price, payment terms, quantities and duration.
The Company also makes incremental purchases of fuel based on price and
availability. To assure adequate supplies of jet fuel and to provide a measure
of control over price, the Company trades fuel, ships fuel and maintains fuel
storage facilities to support key locations. Petroleum product prices,
including jet fuel, are primarily driven by crude oil costs. The market's
alternate uses of crude oil to produce petroleum products other than jet fuel
(e.g., heating oil and gasoline) as well as the adequacy of refining capacity
and other supply constraints affect the price and availability of jet fuel.
Changes in the price or availability of fuel could materially affect the
financial results of the Company. See also "Risk Factors--Risk Factors Related
to the Industry--Aircraft Fuel."
During 1996, aircraft fuel prices increased significantly, however, such
prices have declined moderately during the first nine months of 1997. The
following table details TWA's fuel consumption and costs for the three years
ended December 31, 1994, 1995 and 1996, the nine months ended September 30,
1996 and 1997 and the three months ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED DECEMBER ENDED ENDED
31, SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------- --------------
1994 1995 1996 1996 1997 1996 1997
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Gallons consumed (in
millions).............. 852.2 804.2 838.9 637.5 555.7 233.1 196.2
Total cost(1) (in mil-
lions)................. $477.6 $458.6 $585.2 $432.8 $369.5 $162.4 $122.2
Average cost per gallon. 56c 57c 70c 68c 66c 70c 62c
Percentage of operating
expenses............... 13.0% 13.9% 15.6% 15.9% 14.5% 16.6% 14.5%
</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 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 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.
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
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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 September 30, 1997, the Company had approximately 22,540 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
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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
first stock grant under the ESIP was to 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% if
the closing price of the Common Stock exceeded a target price of $11.00 per
share during the period from January 1, 1997 to July 15, 1997. Because such
target price was not exceeded, the grant will instead be made on July 15 of
the next year up to and including July 15, 2002, if any that the Common Stock
exceeds such target price. In subsequent years through the end of the seven
year term of the ESIP, the additional number of shares of Employee Preferred
Stock subject to grant under this program would be equivalent to 1.5% in 1998,
1.5% in 1999, 1.0% in 2000, 1.0% in 2001 and 1.0% in 2002 of the combined
total number of shares of Common Stock and Employee Preferred Stock
outstanding as of the applicable July 15 grant date, with the target prices
increasing 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 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 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 after
July 15, 1997, to purchase over the seven year term of the ESIP additional
shares of Employee Preferred Stock in amounts up to an aggregate of 2% of the
combined total number of outstanding Common Stock and Employee Preferred Stock
at a discount of 20% from the then current market price. The employees' right
to purchase additional shares of Employee Preferred Stock is accelerated and
becomes immediately exercisable if there is a merger, sale or consolidation of
TWA (where TWA is not the surviving entity) at a price equivalent to or in
excess of $17.72 per share of Common Stock at a 20% discount from the merger,
sale or consolidation price relating to such a transaction. 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% 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 also provides that if additional shares are distributed following
the '95 Effective Date in respect of the '95 Reorganization, employees will be
entitled to receive an additional number of shares of Common Stock and
Employee Preferred Stock such that the employees will retain the same level of
ownership. Union representatives and the Company agreed that the number of
shares of Employee Preferred Stock and Common Stock to be issued pursuant to
the ESIP was 525,856. In addition, 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 ESIP and, to the extent
that additional shares are granted to the ESIP, the Company will receive a
credit towards the new grant for these previously issued shares, in that
amount in the event additional shares are granted pursuant to the ESIP.
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."
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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. The mediator
has not yet met with the parties and has not reached a conclusion that
negotiations are deadlocked. 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 Washington
National, which have been designated "High Density Airports" by the FAA, there
are restrictions on the number of aircraft that may land and take off during
peak hours. In the future, these take-off and landing time slot restrictions
and other restrictions on the use of various airports and their facilities may
result in further curtailment of services by, and increased operating costs
for, individual airlines, including TWA, particularly in light of the increase
in the number of airlines operating at such airports. On April 1, 1986, the
FAA implemented a final rule relating to allocated slots at the High Density
Airports. This rule, as since amended, contains provisions requiring the
relinquishment of slots for nonuse and permits carriers, under certain
circumstances, to sell, lease or trade their slots to other carriers. TWA does
not anticipate losing any slots as a result of these new rules; 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
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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 a 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 September 30, 1996, approximately 66% 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 DC9-30, DC9-40 and DC9-50 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."
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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 1995 and 1996, TWA spent approximately $2.6 million and $3.4 million,
respectively, to comply with aging aircraft maintenance requirements and spent
approximately $3.5 million during 1997 on such 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 no more
than $12.00 per round trip. As a result of competitive pressure, the
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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 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, the Company signed 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 out 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. TWA believes that applicable provisions of
the Ticket Agreement do not allow Karabu to market or sell System Tickets
through travel agents
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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 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. Those negotiations reached an impasse and
the Company refiled its suit on March 20, 1996 in the St. Louis County Circuit
Court (as described below).
On March 20, 1996, the Company filed a petition (the "TWA Petition")
commencing a lawsuit against Mr. Icahn, Karabu and certain other entities
affiliated with Icahn (collectively, the "Icahn Defendants"). The TWA
Petition, which was filed in the Circuit Court for St. Louis County, Missouri,
alleges that the Icahn Defendants are violating the Ticket Agreement and
otherwise tortiously interfering with the Company's business expectancy and
contractual relationships, by among other things, marketing and selling
tickets purchased under the Ticket Agreement through travel agents or directly
to the general public. The TWA Petition seeks a declaratory judgment finding
that the Icahn Defendants have violated the Ticket Agreement, and also seeks
liquidated, compensatory and punitive damages, in addition to the Company's
costs and attorney's fees. 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. The trial of
this case was completed on January 7, 1998. A final judicial determination
regarding this matter is pending.
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 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,
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unless the Company took appropriate action to mitigate the effect of such
sales, the Company could suffer significant loss of revenue that could reduce
overall passenger yields on a continuing basis during the term of the Ticket
Agreement. In addition, a final judicial determination that the Ticket
Agreement was violated by the Company could result in the imposition of
damages.
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. Currently, drafts of the Statement of Basis and the Post
Closure Permit are being reviewed by both agencies. Upon completion of that
review, the documents will be submitted for public comment. Upon final
approval of the CMS, an additional order will be issued and the required
corrective actions implemented. TWA presently estimates the cost of the
corrective action activities under the existing and anticipated orders to be
approximately $7 million, a majority of which represents costs associated with
long-term groundwater monitoring and maintenance of the remedial systems.
Although the Company believes adequate reserves have been provided for all
known environmental contingencies, it is possible that additional reserves
might be required in the future which could have a material adverse effect on
the results of operations or financial condition of the Company. However, the
Company believes that the ultimate resolution of known environmental
contingencies should not have a material adverse effect on the financial
position or results of operations based on the Company's knowledge of similar
environmental sites.
On October 22, 1991, judgment in the amount of $12,336,127 was entered
against TWA in an action in the United States District Court for the Southern
District of New York by Travellers International A.G. and its parent company,
Windsor, Inc. (collectively, "Travellers"). The action commenced in 1987, as
subsequently amended, sought damages from TWA in excess of $60 million as a
result of TWA's alleged breach of its contract with Travellers for the
planning and operation of Getaway Vacations. In order to obtain a stay of
judgment pending appeal, TWA posted a cash undertaking of $13,693,101. In
connection with the '93 Reorganization, TWA sought to have the matter
ultimately determined by the Bankruptcy Court. Following prolonged litigation
with respect to jurisdiction, the United States Supreme Court determined that
the matter should be addressed by the bankruptcy court, and in February 1994,
the bankruptcy court determined the matter in a manner favorable to TWA. Upon
appeal, the District Court affirmed in part and reversed in part the
bankruptcy court's decision. Both parties have appealed the matter to the
United States Court of Appeals for the Third Circuit. The Company believes
that in the event that the District Court's decision is affirmed, the ultimate
result will not be materially different than the decision of the bankruptcy
court.
78
<PAGE>
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 Air Lines
("Delta") in the United States District Court for the Northern District of
Georgia, alleging breach of contract and violations of certain antitrust laws
with respect to the Company's lease of certain takeoff and landing slots at
LaGuardia International Airport in New York. On November 17, 1995, the court
denied ValuJet's motion to temporarily enjoin the lease transaction and the
Company and Delta consummated the lease of the slots. On July 12, 1996, the
Federal Court in Atlanta granted summary judgment in TWA's favor in the
ValuJet litigation on all claims and counts raised in the ValuJet amended
complaint. The order granting summary judgment to TWA was not a final order
and was not directly appealable due to an outstanding claim against Delta.
While ValuJet's counsel has stated that an appeal will be filed at a later
date, the Company intends to defend itself vigorously in any future action.
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.
79
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John W. Bachmann...... 59 Director
William F. Compton.... 50 President and Chief Operating Officer
Eugene P. Conese...... 68 Director
Gerald L. Gitner...... 52 Chairman and Chief Executive Officer
William M. Hoffman.... 50 Director
Edgar M. House........ 65 Director
Thomas H. Jacobsen.... 58 Director
Myron Kaplan.......... 52 Director
David M. Kennedy...... 59 Director
Merrill A. McPeak..... 62 Director
Thomas F. Meagher..... 67 Director
William O'Driscoll.... 68 Director
G. Joseph Reddington.. 56 Director
Blanche M. Touhill.... 66 Director
Stephen M. Tumblin.... 36 Director
Donald M. Casey....... 62 Executive Vice President, Marketing
Kathleen A. Soled..... 40 Senior Vice President and General Counsel
James F. Martin....... 47 Senior Vice President, Human Resources
Michael J. Palumbo.... 51 Senior Vice President and Chief Financial Officer
</TABLE>
John W. Bachmann has been a director of TWA since April 1, 1996. Mr.
Bachmann has been managing principal of Edward Jones since January 1980. Mr.
Bachmann serves as Chairman of the St. Louis Regional Commerce and Growth
Association/Civic Progress panel studying airport expansion and modernization
in St. Louis. Mr. Bachmann served as a member of the U.S. Steering Committee
for the Group of 30 and chaired its securities settlement implementation
taskforce in 1989. He also served as Chairman of the Securities Industry
Association from 1987 to 1989. Mr. Bachmann has served as a member of the
Board of Governors of the Chicago Stock Exchange and as a member of the
Regional Firms Advisory Board of the New York Stock Exchange. He is the
Chairman of the St. Louis Symphony Society and a Trustee of Washington
University and Wabash College. He is a member of the Board of Visitors of the
Peter F. Drucker Center. Mr. Bachmann's term of office as a director expires
with the Annual Meeting of Stockholders in 1998.
William F. Compton was appointed President and Chief Operating Officer of
TWA on December 3, 1997. Mr. Compton had been named Executive Vice President,
Operations on March 13, 1997, subject to Board approval which was given on
March 27, 1997. He had been acting in such position since December 14, 1996.
He was the ALPA-designated director of TWA from November 3, 1993 until March
1997, at which time he resigned and was appointed a management-designated
director. A pilot for TWA since September 13, 1968, Mr. Compton was an
Executive Board Member and Master Chairman of the TWA Master Executive Council
("MEC") of ALPA from September 1991 to September 11, 1995, Coordinator for the
Company's Productivity Task Force until September 6, 1995 and a member of the
TWA Labor Advisory Committee from August 1992 until September 1995. He was
Chairman of the TWA MEC Negotiating Committee from March 1988 to September
1991, a member of the ALPA National Collective Bargaining Committee from June
1988 to June 1990, and a member of the TWA MEC Negotiating Committee from June
1986 to March 1988. Mr. Compton's term of office as a director expires with
the Annual Meeting of Stockholders in 1998. Mr. Compton serves as an officer
of the Company at the pleasure of the Board of Directors.
80
<PAGE>
Eugene P. Conese has been a director of TWA since November 3, 1993. Mr.
Conese has been Chairman of the Board and Chief Executive Officer of The
Greenwich Company Limited ("GCL") since September 1997. He was Chairman and
Chief Executive Officer of Greenwich Air Services, Inc. ("GAS") from October
1987 until September 1997, and Chairman of the Board and President of World
Air Lease, Inc. since July 1989. He was the founder of GCL and served as
Chairman of the Board and Chief Executive Officer from August 1980 until
December 30, 1995, when GCL was merged with and into GAS. He also served as
Chief Executive Officer and director of Irvin Industries, Inc. ("II") from
October 1975 to October 1979, and President and member of the Board of
Directors of II from September 1970 to September 1975. He is a Trustee of Iona
College. Mr. Conese's term of office as a director expires with the Annual
Meeting of Stockholders in 1998.
Gerald L. Gitner has been Chairman and Chief Executive Officer of TWA since
February 12, 1997 and a director of TWA since November 3, 1993. He has been
Chairman of Avalon Group, Ltd. since April 1992, and Co-Chairman of Global
Aircraft Leasing Ltd. since 1990. Mr. Gitner was Vice Chairman of Tribeca
Corporation from February 1990 to December 1991, Chairman of Tribeca
Corporation from December 1991 to March 1992, and President and Chief
Executive Officer, ATASCO USA Inc. from September 1986 to December 1989. Mr.
Gitner was President of Texas Air Corp. from 1985 to 1986, Chairman and Chief
Executive Officer of Pan Am World Services from 1983 to 1985 and Vice Chairman
of Pan Am World Airways Inc. from 1983 to 1985. He was a founder of People
Express Airlines, Inc. and served as its President from 1980 to 1982. Mr.
Gitner is a director of ICTS International, N.V. and was a trustee of Boston
University from 1984 to 1996. Mr. Gitner's term of office as a director
expires with the Annual Meeting of Stockholders in 1998. Mr. Gitner serves as
an officer of the Company at the pleasure of the Board of Directors.
William M. Hoffman has been a director of TWA since January 23, 1996. He has
been a flight attendant for TWA since March 1970. Mr. Hoffman became Vice
President of IFFA during 1990 and served through October 1995. He served as a
member of the IFFA Executive Board from October 1980 through September 1995
and became Secretary and Treasurer of IFFA in 1983 and served through 1990.
Mr. Hoffman's term of office as a director expires with the Annual Meeting of
Stockholders in 1998.
Edgar M. House has been a director of TWA since January 28, 1998. Mr. House
became General Vice President of IAM in 1989 and served until he retired on
July 1, 1997. Mr. House's term of office as a director expires with the Annual
Meeting of Stockholders in 1999.
Thomas H. Jacobsen has been a director of TWA since March 21, 1995. He has
been President, Chief Executive Officer and Chairman of the Board of
Mercantile Bancorporation Inc. since 1989. Mercantile Bank National
Association, formerly known as Mercantile Bank of St. Louis National
Association, and a subsidiary of Mercantile Bancorporation Inc., has provided
in the past and from time to time hereafter may provide depository and/or
other banking products to the Company and the Company's affiliates. Mr.
Jacobsen has been a director of the Student Loan Marketing Association since
November 1987 and a director of Union Electric Company since April 1990. Mr.
Jacobsen was Vice Chairman and director of Barnett Banks, Inc. from 1984 to
1989. Mr. Jacobsen's term of office as a director expires with the Annual
Meeting of Stockholders in 1999.
Myron Kaplan has been a director of TWA since November 3, 1993. He has been
a partner in the law firm of Kleinberg, Kaplan, Wolff & Cohen, P.C. since
1972. Mr. Kaplan's term of office as a director expires with the Annual
Meeting of Stockholders in 1998.
David M. Kennedy has been a director of TWA since October 23, 1996. Mr.
Kennedy served as the Company's Acting Executive Vice President and Chief
Operating Officer from December 14, 1996 to May 29, 1997 on an interim basis,
and his services have been retained by the Company on a consulting basis. Mr.
Kennedy was Chief Executive Officer of Aer Lingus from 1974 to 1988, and has
held a variety of positions in the airline industry, including as director of
CSA, Czechoslovak Airlines, from 1993 to 1994, member of the International
Advisory Committee of Air France from 1991 to 1994, and as Aviation Consultant
to the European Bank for Reconstruction and Development and the World Bank.
Mr. Kennedy was a director of the Bank of
81
<PAGE>
Ireland from 1984 to 1995, where he served as Deputy Governor from 1989-1991.
Mr. Kennedy is currently chairman of the Bank of Ireland Pension Fund, and
serves as a director of CRH plc, Jurys Hotel Group Plc. and as Chairman of
Drury Communications Limited. Mr. Kennedy is a part-time lecturer at the
Graduate School of Business of the University College Dublin. Mr. Kennedy is a
citizen of Ireland. Mr. Kennedy's term of office as a director expires with
the Annual Meeting of Stockholders in 1999.
General Merrill A. McPeak (USAF, Ret.) has been a director of TWA since May
29, 1997. He is President of McPeak and Associates, an aerospace consulting
firm, and a director of ECC International Corp., Praegitzer Industries,
Tektronix, Inc., and Thrustmaster, Inc. General McPeak was Chief of Staff,
United States Air Force, 1990 to 1994, Commander-in-Chief, Pacific Air Forces,
1988-1990 and Commander, 12th Air Force, 1987 to 1988. He serves on the
national boards of the Air Force Association, the National Aeronautic
Association and the International Aerobatic Club. General McPeak's term of
office as a director expires with the Annual Meeting of Stockholders in 1998.
Thomas F. Meagher has been a director of TWA since November 3, 1993 and was
Chairman of the Board from November 14, 1995 to February 12, 1997 and
currently serves as Lead Outside Director of the Board. Mr. Meagher has served
as Chairman of the Board and Chief Executive Officer of Howell Tractor &
Equipment Co. since 1980, and serves as a director of UNR Industries and
Everen Securities. Mr. Meagher was Chairman of Continental Air Transport from
1983 until July 1, 1995 and was Chief Executive Officer of Continental Air
Transport from 1983 to 1993. He is a retired director of Lakeside Bank of
Chicago and is a former Chairman of the Airport Ground Transportation
Association. He is a Trustee of St. Mary's University and DePaul University.
Mr. Meagher's term of office as a director expires with the Annual Meeting of
Stockholders in 1999.
William O'Driscoll has been a director of TWA since November 3, 1993. Mr.
O'Driscoll has been President and Directing General Chairman of IAM District
Lodge 142 since August 1990. Mr. O'Driscoll's term of office as a director
expires with the Annual Meeting of Stockholders in 1998.
G. Joseph Reddington has been a director of TWA since November 3, 1993. He
has been President and Chief Executive Officer and director of Breuner Home
Furnishings Corp. since February 1997. Mr. Reddington has been a director of
Loblaw Companies Ltd. since August 1994. Mr. Reddington was a director of
Sears Canada, Inc. from January 1985 to February 1994. Mr. Reddington was
Chairman and Chief Executive Officer of the Signature Group from April 1994 to
February 1997. President and Chief Executive Officer of Sears Canada from 1989
to December 1993, and Chief Administrative Officer of Sears Merchandising
Group from December 1988 to December 1989. Mr. Reddington's term of office as
a director expires with the Annual Meeting of Stockholders in 1999.
Blanche M. Touhill, has been a director of TWA since May 29, 1997. Since
1991, she has been Chancellor of the University of Missouri-St. Louis, where
she is Professor of History and Education. She was Interim Chancellor from
1990 to 1991 and Vice Chancellor for Academic Affairs from 1987-1991. Ms.
Touhill is a director of Boatmen's National Bank, Delta Dental, Christian
Health Services, the Missouri Botanical Garden, the Urban League of
Metropolitan St. Louis and the American Conference for Irish Studies. Ms.
Touhill's term of office as a director expires with the Annual Meeting of
Stockholders in 1998.
Stephen M. Tumblin has been a director of TWA since March 27, 1997. Mr.
Tumblin is an associate with the law firm of LeBoeuf, Lamb, Greene & MacRae
L.L.P. and has been with that firm since 1987. Mr. Tumblin's term of office as
a director expires with the Annual Meeting of Stockholders in 1998.
Donald M. Casey has been Executive Vice President, Marketing since May 29,
1997. Mr. Casey was formerly a principal with Deskey Luxon Carra, a design
consulting firm. In 1993, he formed Seabrook Consultants and was President,
leaving the firm in 1995. From 1983 to 1993 Mr. Casey worked with Young and
Rubicam in a number of executive positions. He previously worked for TWA from
1968 until 1981, including serving as Senior Vice President, Marketing from
1976 to 1981. Mr. Casey serves as an officer of the Company at the pleasure of
the Board of Directors.
82
<PAGE>
Richard P. Magurno has been Senior Vice President and General Counsel of TWA
since May 2, 1994. Mr. Magurno was a partner at Lord Day & Lord, Barrett Smith
law firm, New York, New York from 1989 until May 1994. From 1970 to 1988, Mr.
Magurno served in various legal capacities at Eastern Air Lines, Inc.,
including Senior Vice President--Legal Affairs. Mr. Magurno serves as an
officer of the Company at the pleasure of the Board of Directors.
James F. Martin was elected Senior Vice President, Human Resources on
October 29, 1997. Mr. Martin formerly was Vice President, Operations and
Technology of Coors Brewing Company from 1996-1997, Vice President, Human
Resources of Harcourt Brace & Company from 1992 to 1995 and Vice President,
Human Resources of Macmillan/McGraw-Hill School Publishing Company from 1989
to 1992. Mr. Martin serves as an officer of the Company at the pleasure of the
Board of Directors.
Michael J. Palumbo has been Senior Vice President and Chief Financial
Officer of TWA since December 20, 1996. Mr. Palumbo was formerly the Company's
Vice President and Treasurer and has been employed by TWA since 1994. Before
joining the Company, Mr. Palumbo was a partner in HPF Associates from 1988 to
1994 and Senior Vice President and Transportation Group Head for E.F. Hutton
from 1984 to 1988. Mr. Palumbo had previously served as Senior Vice President,
Finance and Treasurer of Western Airlines from 1983 to 1984 and Assistant
Treasurer of Pan American World Airways from 1977 to 1983. Mr. Palumbo serves
as an officer of the Company at the pleasure of the Board of Directors.
On September 22, 1997, the Company's Board of Directors authorized the
adoption of severance agreements (each, a "Severance Agreement") with 10
officers of the Company. Each Severance Agreement provides that, if at any
time following a Change in Control of the Company (for purposes of this
paragraph only, as defined therein), the employment of the applicable officer
is terminated by the Company without Cause (as defined) or is terminated by
the executive for Good Reason (as defined), the officer will be entitled to
receive a severance payment equal to two times the officer's annual base
salary and bonus, continuation of certain benefits such as life, disability
and health insurance for a period of two years, a two year additional service
credit under applicable Company retirement plans and lifetime travel pass
privileges. Each Severance Agreement has an initial term of two years and is
subject to automatic renewal on each one year anniversary of the date of the
original Severance Agreement for a period of two years from such date unless
the Company elects not to so extend the term. For purposes of the Severance
Agreements, "Change in Control" is defined to include, with certain
exceptions, any acquisition by any person of beneficial ownership of 20% or
more of the Company's voting securities, approval by the Company's
shareholders of certain mergers, consolidations or reorganizations or of a
sale of all or substantially all of the Company's assets and any change in the
Board which results, within any period of 18 months, in persons who, on the
date of the Severance Agreements, were members of the Board (the "Incumbent
Directors") (together with any new directors whose election or nomination for
election was approved by a vote of at least a majority of the then Incumbent
Directors or in the case of an individual elected by holders of a series of
Employee Preferred Stock, if such individual is elected pursuant to the terms
of the applicable Employee Preferred Stock) cease to constitute at least a
majority of the Board. The Severance Agreements do not alter the preexisting
rights, if any, of the officers upon a termination of employment by reason of
death, disability or retirement, by the Company for Cause or by the officer
other than for Good Reason.
83
<PAGE>
PRINCIPAL HOLDERS OF CAPITAL STOCK
The following table sets forth, as of December 31, 1997, certain information
concerning ownership of each class of voting securities of the Company by: (i)
each person who is known by the Company to own beneficially more than 5% of
the voting securities of the Company, (ii) each current director individually,
(iii) the chief executive officer and the five other senior executive officers
and (iv) all current directors and executive officers of the Company as a
group. The determinations of "beneficial ownership" of voting securities are
based upon Rule 13d-3 under the Exchange Act. Such rule provides that the
securities will be deemed "beneficially owned" where a person has, either
solely or in conjunction with others, the power to vote or to direct the
voting of securities and/or the power to dispose, or to direct the disposition
of, the securities or where a person has the right to acquire any such power
within 60 days after the date such "beneficial ownership" is determined.
Except as described below, each of the persons and groups listed below has
sole voting and investment power with respect to the securities shown.
PRINCIPAL HOLDERS OF COMMON STOCK(1)
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OR IDENTITY OF BENEFICIAL VOTING
GROUP OWNERSHIP(2) SECURITIES(2)
- --------------------------------------------------- ----------- ------------
<S> <C> <C>
John W. Bachmann(3)(4).............................. 3,909 *
William F. Compton(5)............................... 849 *
Eugene P. Conese(3)(6)(7)(8)(9)..................... 12,185 *
Gerald L Gitner(3)(6)(10)........................... 657,776 1.1%
William M. Hoffman(11).............................. 319 *
Thomas H. Jacobsen(3)(6)(7)(9)...................... 10,185 *
Myron Kaplan(3)(4)(6)(9)(12)........................ 10,731 *
David M. Kennedy(3)................................. 1,000 *
Merrill A. McPeak(3)................................ 1,514 *
Thomas F. Meagher(3)(9)(13)(14)..................... 12,164 *
William O'Driscoll(15).............................. 192,975 *
G. Joseph Reddington(3)(4)(6)(9)(13)................ 11,231 *
Blanche M. Touhill(3)............................... 1,000 *
Stephen M. Tumblin(3)............................... 1,000 *
Donald M. Casey(16)................................. 2,500 *
Richard P. Magurno (16)(17)(18)..................... 1,247,117 2.2%
Michael J. Palumbo(16)(17)(19)...................... 1,009,512 1.7%
James F. Martin(16)................................. 0
Total Shares owned by Current Directors and Current
Executive Officers, as a group (18 individu-
als)(20)........................................... 3,175,967 5.5%
</TABLE>
- --------
* Less than 1%
(1) On March 19, 1997, Prince Al-Waleed Bin Talal Bin Abdulaziz Al-Saud of
Saudi Arabia informed the Company that he had purchased 2,088,000 shares
of Common Stock, representing approximately 5% of the outstanding stock.
(2)Includes securities issuable pursuant to options exercisable within 60
days.
(3) Pursuant to the Company's 1995 Outside Directors' Stock Ownership and
Stock Option Plan (the "Outside Directors Plan"), each outside director
may elect to defer some or all of his or her annual retainer by
participating in a Deferred Retainer Program (as defined in the Outside
Directors Plan). Participating directors are entitled to receive annual
credits to their deferred retainer accounts equaling the percentage of
84
<PAGE>
his or her retainer to be received in shares of Common Stock times the
annual retainer amount payable to such outside director divided by (i) with
respect to 1996, $4.1875, the subscription price of the Company's September
1995 equity rights offering (the "Subscription Price") and (ii) with
respect to 1997, $6.875, the fair market value of the Common Stock on
January 2, 1997. Upon the earlier to occur of December 31, 2000 and the
last date of a participating director's service on the Board, such director
is entitled to a payment equal to (i) the total number of shares of Common
Stock in the director's deferred retainer account, (ii) cash equaling the
number of shares of Common Stock contained in the deferred retainer account
times the Fair Market Value (as defined in the Outside Directors Plan) of
the Common Stock on the date the retainer becomes payable or (iii) a
combination of (i) and (ii).
(4) Messrs. Bachmann, Kaplan and Reddington each elected to defer 50% of 1997
retainer amounts payable to them in a deferred retainer account.
Constitutes or includes 1,455 shares of Common Stock issuable to such
outside director pursuant to the Outside Directors Plan in the event of
his termination from service on the Board within 60 days assuming such
director elects to receive the entire balance of his deferred retainer
account in shares of Common Stock.
(5) Excludes approximately 932 shares of Employee Preferred Stock
attributable to Mr. Compton's beneficial interest in the TWA Air Line
Pilots Supplemental Stock Plan. Excludes shares owned by his wife
pursuant to her beneficial interest in the IAM Trans World Airlines
Employees' Stock Ownership Plan for Flight Attendants (the "Flight
Attendant Trust") and other shares as to which she is the record holder.
Mr. Compton disclaims beneficial ownership of all shares held by his
wife. Mr. Compton is the record holder of 849 shares of Common Stock.
(6) Messrs. Conese, Gitner, Jacobsen, Kaplan, and Reddington each elected to
defer all 1996 retainer amounts payable to them in a deferred retainer
account. Constitutes or includes 4,776 shares of Common Stock issuable to
such outside director pursuant to the Outside Directors Plan in the event
of his termination from service on the Board within 60 days, assuming
such director elects to receive the entire balance of his deferred
retainer account in shares of Common Stock.
(7) Messrs. Conese and Jacobsen each elected to defer all 1997 retainer
amounts payable to them in a deferred retainer account. Constitutes or
includes 2,909 shares of Common Stock issuable to such outside director
pursuant to the Outside Directors Plan in the event of his termination
from service on the Board within 60 days, assuming such director elects
to receive the entire balance of his deferred retainer account in shares
of Common Stock.
(8) Includes warrants to purchase 49 shares of Common Stock at a price of
$14.40 per share.
(9) Includes 1,500 options granted pursuant to the Outside Directors Plan for
Messrs. Conese, Jacobsen, Kaplan, Meagher and Reddington.
(10) Includes 500,000 shares of Common Stock issuable upon the exercise of
vested options and 150,000 shares which will vest within 60 days hereof,
granted to Mr. Gitner pursuant to the KESIP.
(11) Includes approximately 16 shares of Common Stock held for Mr. Hoffman's
benefit as a TWA employee in the Flight Attendant Trust and warrants to
purchase 8 shares of Common Stock at a price of $14.40 per share. Mr.
Hoffman is also the beneficial owner of an undetermined amount of Common
Stock which has not yet been issued or allocated, which is to be
distributed to Mr. Hoffman as a TWA employee as a result of IFFA
litigation against TWA settled in the course of the '93 Reorganization.
Mr. Hoffman is the record holder of 295 shares of Common Stock.
(12) These shares are held by Mr. Kaplan for the benefit of the firm of
Kleinberg, Kaplan, Wolff & Cohen, P.C., of which Mr. Kaplan is a member.
(13) Pursuant to the Outside Directors Plan, such outside director was granted
the right to purchase up to 3,000 shares of Common Stock at the
Subscription Price. Includes 3,000 shares of Common Stock issuable upon
exercise of this right.
(14) Mr. Meagher elected to defer all 1996 retainer amounts payable to him in
a deferred retainer account. Constitutes 7,164 shares of Common Stock
issuable to Mr. Meagher pursuant to the Outside Directors Plan in the
event of his termination from service on the Board within 60 days,
assuming Mr. Meagher elects to receive the entire balance of his deferred
retainer account in shares of Common Stock.
85
<PAGE>
(15) 155,227 shares are held by Mr. O'Driscoll as a member of the IAM Plan
Trust Committee of the IAM Trans World Airlines Employees' Stock
Ownership Plan (the "IAM Trust"), along with Mr. Gary Poos. 37,748 shares
are held by Mr. O'Driscoll as a member of the Trustee Committee of the
Flight Attendant Trust, along with Sherry Cooper and Rocky Miller. Mr.
O'Driscoll disclaims beneficial ownership of the shares held by the IAM
Trust and the Flight Attendant Trust.
(16) Does not include unvested options to purchase shares of Common Stock
pursuant to the KESIP.
(17) Approximately 1,958 and 1,119 shares attributable to the respective
beneficial interests of Messrs. Magurno, and Palumbo are held by the
employee stock ownership trust established for the benefit of TWA's non-
contract employees (the "Non-Contract Employees Trust"). Except for such
shares, Messrs. Magurno and Palumbo disclaim beneficial ownership of the
shares held by the Non-Contract Employees Trust. Messrs. Magurno and
Palumbo serve as members of the committee having the power to direct the
vote of the shares of Common Stock held in the Non-Contract Employees
Trust. Such trust holds 887,793 shares.
(18) Includes 357,366 shares of Common Stock issuable upon the exercise of
vested options granted to Mr. Magurno pursuant to the KESIP.
(19) Includes 120,600 shares of Common Stock issuable upon the exercise of
vested options granted to Mr. Palumbo pursuant to the KESIP.
(20) When combined with shares of Employee Preferred Stock beneficially held
by current directors and current executive officers, as a group,
represents a total of 9,647,902 shares of the Company's voting
securities.
86
<PAGE>
PRINCIPAL HOLDERS OF EMPLOYEE PREFERRED STOCK (AS OF OCTOBER 31, 1997)
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF SERIES OF AMOUNT OF OUTSTANDING
BENEFICIAL OWNER OR EMPLOYEE BENEFICIAL SHARES OF
IDENTITY OF GROUP PREFERRED STOCK OWNERSHIP SERIES
- ------------------- --------------- ---------- -----------
<S> <C> <C> <C>
TWA Air Line Pilots
Supplemental Stock
Plan, Joseph A.
Chronic, Howard L.
Coldwell, Jr. and Scott
Schwartz as
trustees(1)............ ALPA Preferred Stock 1,366,151 72.10%(2)
TWA Air Line Pilots 1995
Employee Stock Owner-
ship Plan, American
Stock
Transfer & Trust Compa-
ny, Trustee(3)......... ALPA Preferred Stock 528,375 27.90%(4)
IAM Trust(5)............ IAM Preferred Stock 3,948,510 100%(6)
Flight Attendant
Trust(7)............... Flight Attendant Preferred Stock 971,309 100%(8)
William O'Driscoll(9)... IAM and Flight Attendant
Preferred Stock 4,919,819 100%(10)
</TABLE>
- --------
(1) The address of the ALPA Trust is c/o Joseph A. Chronic, as co-trustee,
TWA Air Line Pilots Supplemental Stock Plan, 3221 McKelvey Road, Suite
200, Bridgeton, Missouri 63044.
(2) Constitutes 2.37% of the securities entitled to vote on all agenda
matters at meetings of stockholders other than the election of directors.
(3) The address of the TWA Air Line Pilots 1995 Employee Stock Ownership Plan
is c/o American Stock Transfer & Trust Company, as trustee ("AST"), 40
Wall Street, 46th Floor, New York, New York 10005.
(4) Constitutes 0.92% of the securities entitled to vote on all agenda items
at meetings of stockholders other than the election of directors.
(5) The address of the IAM Trust is c/o Fleet National Bank, N.A., as
trustee, One Federal Street, 31st Floor, Boston, Massachusetts 02211.
(6) When combined with the 155,227 shares of Common Stock held by the IAM
Trust, constitutes 7.11% of the securities entitled to vote on all agenda
matters at meetings of stockholders other than the election of directors.
(7) The address of the Flight Attendant Trust is c/o AST, at the address set
forth in footnote 3.
(8) When combined with the 37,748 shares of Common Stock held by the Flight
Attendant Trust, constitutes 1.75% of the securities entitled to vote on
all agenda matters at meetings of stockholders other than the election of
directors.
(9) The address of Mr. O'Driscoll is c/o Fleet National Bank, N.A., as
trustee, One Federal Street, 31st Floor, Boston, Massachusetts 02211.
(10) Includes all shares of IAM Preferred Stock held by the IAM Trust and all
shares of the Flight Attendant Preferred Stock held by the Flight
Attendant Trust. Mr. O'Driscoll disclaims beneficial ownership of the
shares of IAM Preferred Stock held by the IAM Trust and all shares of the
Flight Attendant Preferred Stock held by the Flight Attendant Trust.
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DESCRIPTION OF NOTES
The Company issued the Old Notes and will issue the Exchange Notes under the
Indenture dated as of December 9, 1997 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, the Registration Rights
Agreement and the Collateral Documents (as defined) 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, the Registration Rights
Agreement or the Collateral Documents 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 represent senior secured obligations of the Company and rank pari
passu in right of payment with other senior obligations of the Company. None
of the Company's outstanding indebtedness is senior to the Notes. As of
September 30, 1997, after giving effect to the issuance of the Old Notes and
the application of the proceeds therefrom, the aggregate principal amount of
the Company's total outstanding indebtedness would have been approximately
$1,032.7 million, all of which constitutes senior obligations. While unsecured
indebtedness ranks pari passu with the Notes in right of payment, the holders
of the Notes may, to the exclusion of unsecured creditors, seek recourse
against the Collateral as security for the Notes unless and until the Notes
are satisfied in full. See "--Collateral Security" and "--Certain Bankruptcy
Limitations."
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 $140.0 million of principal in the aggregate
and will mature on December 15, 2004. The Notes will bear interest at the
annual rate of 11 1/2% 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 June 15 and December 15 of each year,
commencing on June 15, 1998, to the person in whose name the Note is
registered at the close of business on the preceding June 1 and December 1, 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 registrable, 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
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- --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 December 15, 2001. On or after December
15, 2001, 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 redemption
prices (expressed as a percentage of principal amount) as set forth below
during the twelve month periods beginning December 15 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>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001................................... 105.750%
2002................................... 102.875%
2003 and thereafter.................... 100.000%
</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 or by
any other equitable manner determined by the Trustee in its sole discretion.
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 December 15, 2001 only in the event that on or before December 15, 2000 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 $49.0 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 1/2% 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 $91.0
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
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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
The Company has filed the Registration Statement of which this Prospectus is
a part, and will commence the Exchange Offer, pursuant to the Registration
Rights Agreement.
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
Purchasers so
90
<PAGE>
request with respect to Old Notes not eligible to be exchanged for Exchange
Notes in the Registered Exchange Offer, or if any holder of Old 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 Old
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 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 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 Old Notes or the Exchange
Notes, as the case may be. A holder selling such Old 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 Old
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 Old 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 Old Notes, neither the Registered Exchange Offer is consummated nor the
Shelf Registration Statement is declared effective; or (iv) 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 Old 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 (iv), 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 Old 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 Old 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 Old 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
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<PAGE>
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:
(1) 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;
(2) Aircraft Acquisition Debt;
(3) 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;
(4) the Old Notes and the Exchange Notes;
(5) 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 Capitalized
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;
(6) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2), (3), (4) or (5) of this covenant);
(7) 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 (3)(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;
(8) 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
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<PAGE>
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";
(9) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (1), (2), (3), (4), (5), (6), (7),
(8) of this covenant or this clause (9);
(10) 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;
(11) Hedging Obligations consisting of Interest Rate Agreements, Fuel
Protection Agreements or Currency Agreements;
(12) 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;
(13) 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;
(14) 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;
(15) 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;
(16) 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
(17) 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.
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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: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) 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 (3) 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,
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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
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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 the
Collateral Documents 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
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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 (x) any sale, lease, transfer or other disposition (or series of
related sales, leases, transfers or other dispositions) of any Collateral
Security, except as permitted under the Collateral Documents or (y) 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
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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
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"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 discharge or release 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 (i) any of its properties other than the
Collateral Security (including Capital Stock of a Restricted Subsidiary),
whether owned at the Issue Date or thereafter acquired, 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 or (ii) any Collateral Security other than, with
respect to any Collateral, Permitted Collateral Liens.
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, the Indenture and the
Collateral Documents; (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 and the Collateral Documents are enforceable against the Successor
Company in accordance with their 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
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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 Collateral and properties used or useful in
their businesses; provided, however, that, subject to the requirements of the
Collateral Documents, neither the Company nor any such Subsidiary shall be
prevented from discontinuing those operations or suspending the maintenance of
that Collateral or 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 Collateral or property is deemed to be useful to the
conduct of the business of the Company or its Subsidiaries, the Company will,
or will cause such Subsidiaries to, maintain appropriate insurance, in
accordance with industry practice, on such Collateral and properties and as
required under the provisions of the Collateral Documents.
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.
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Listing of Exchange Notes on the AMEX. The Exchange Notes have been approved
for listing on the American Stock Exchange. The Company has agreed to maintain
such listing for so long as any of the Exchange 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 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) a default in the
observance or performance of certain covenants or agreements of the Company in
the Collateral Documents that continues for the relevant period specified
therein, including, but not limited to, the requirements described under "--
Collateral Security--Maintenance Test;" (iv) the failure by the Company to
comply with its obligations under "--Certain Covenants--Merger and
Consolidation" above; (v) 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;" (vi) any representation or warranty of the Company in the
Indenture or any of the Collateral Documents 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, the Indenture or any of the Collateral Documents, in
each case that continues for the period and after the notice specified below;
(vii) 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"); (viii) 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 (ix) 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 (v), (vi) or (viii) above or, with respect to a
Restricted Subsidiary that is not a Significant Subsidiary, clause (ix) 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 (vi) or (viii), or within 30 days with respect to clause (v) or,
with respect to a Restricted Subsidiary that is not a Significant Subsidiary,
clause (ix), 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
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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 with respect to the Collateral Security or
otherwise 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) extend 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 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, the Indenture or any Collateral
Document 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.
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DEFEASANCE
The Company at any time may terminate all its obligations under the Notes,
the Indenture and the Collateral Documents ("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 (iii), (v), (vi), (vii),
(viii) or (ix) (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.
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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 (as trustee under the Indenture, as
collateral agent under the Security Agreement (defined below) and the Note
Pledge Agreement (defined below) and as slot trustee under the Slot Trust
described below).
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.
COLLATERAL SECURITY
Pursuant to a Pledge and Security Agreement between the Company and the
Collateral Agent (the "Security Agreement"), the Acquired Slot Trust Agreement
between the Company and the Collateral Agent, as slot trustee (the "Slot Trust
Agreement"), the Master Sub-License Agreement between the Company and the
Collateral Agent, as slot trustee (the "Master Sub-License Agreement") and the
Note Pledge Agreement (collectively, the "Collateral Documents"), as
applicable, the indebtedness evidenced by the Notes will be secured by a lien
on (i) the Pledged Spare Parts (as defined below), (ii) a beneficial ownership
certificate (the "Beneficial Interest Certificate") evidencing the Company's
beneficial interest in 30 FAA-designated take-off and landing slots at
Washington National Airport ("DCA") in Washington D.C. and (iii) the Pledged
Collateral, the Pledged Spare Parts, the Beneficial Interest Certificate and
the other collateral under the Pledge Agreement are sometimes referred to
herein collectively as the "Collateral" and, together with the Pledged
Collateral, the "Collateral Security."
Spare Parts
The term "Pledged Spare Parts" refers to the pool of aircraft spare parts
including expendables, "pipeline" spares and capital units at locations in the
United States designated from time to time by the Company at which the Pledged
Spare Parts are located; provided that such designated locations (i) shall
(except as described below under "--Use of Collateral; Release and Termination
of Lien") at all times include the four locations in the United States at
which are located the Company's highest dollar value of spare parts that may
be pledged under the Security Agreement, and (ii) shall at no time exclude
locations at which are located inventories of spare parts of the Company which
are materially disproportionally newer or more valuable (as shown in the
Company's system for tracking and valuing spare parts (the "Inventory Control
System")) than the Pledged Spare Parts, in light of the aircraft types on
which spare parts may be used. As of the Issue Date, the Pledged Spare Parts
will constitute substantially all of the aircraft spare parts of the Company.
Pledged Spare Parts include:
1. Expendables, which are those Pledged Spare Parts that are used (consumed)
in the routine operation of an airline and are generally items which are used
only once and then discarded such as gaskets, light bulbs, raw metal stock,
general hardware and fabric;
2. "Pipeline" spares, which is a term used by the Company to refer to non-
capital, rotable airframe and engine components; and
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3. Capital units, which are those Pledged Spare Parts that will, subject to
maintenance, repair and overhaul, normally last the life of the aircraft, such
as spare control surfaces, landing gears, avionics units and engine
accessories.
In the day-to-day operation of the airline, the composition of its Pledged
Spare Parts inventory is continually changing: new parts (including parts for
new types of aircraft placed into service) are purchased and placed into
stock; expendable parts are taken from inventory and utilized; used rotable
and repairable units are removed from aircraft and placed in a hold status
awaiting eventual repair; other rotables are sent to outside vendors for
overhaul and processing; at the conclusion of the overhaul/repair process,
inventory is either re-installed on aircraft, returned to stock for reuse; and
spare parts no longer used or usable in the airline's operations may be
scrapped or sold.
Slots
The FAA designates certain congested airports in the United States as high
density traffic airports. At such airports, the FAA determines the maximum
hourly number of instrument flight rule ("IFR") take-offs and landings which
may be reserved for use by air carriers and other aircraft operators. The
authority granted by the FAA to conduct one IFR take-off or landing in a
specified period, at one of these airports is referred to in the industry as a
"slot." While the FAA has sanctioned the right to buy and sell slots, it has
also been specific in stating that a slot does not represent a property right,
but merely an operational authority. As such, slots are subject to complete
control by the FAA and may be withdrawn without compensation at any time to
fulfill the FAA's operational needs, including, but not limited to, providing
slots for international or essential air service operations or eliminating
slots. Further, FAA regulations provide that except in certain circumstances,
the FAA shall recall any slots not utilized by an airline 80% of the time over
a two consecutive month period. The FAA has proposed that this utilization
requirement be increased to up to 90% under certain circumstances and with
respect to certain slots. A total of 30 slots which TWA currently holds at DCA
have been placed in a "Slot Trust" governed by a Slot Trust Agreement (the
"Slots"). The Company's interest in the Slot Trust is evidenced by the
Beneficial Interest Certificate which has been pledged to the Trustee under
the Security Agreement. While TWA currently has sufficient slots to conduct
its business and has in the past utilized such slots sufficiently to retain
the right to use such slots, there can be no assurance that such slots,
including one or more Slots, will not be revoked in the future by the FAA for
any reason, including, but not limited to, TWA's failure to use such slots to
the extent required now or in the future, or that such slots will be adequate
for TWA's operations in the future. In addition, the FAA could lower or
eliminate the value of a slot, including one or more Slots, by withdrawing it
from the holder as part of a reallocation of slots, by creating additional
Slots, by discounting the requirements for slots at DCA or at the affected
hour or by amending or revoking the regulations or practices with respect to
the sale, lease or transfer of slots. Such actions could adversely affect the
value of the Collateral. The Company retains a reversionary interest in the
Slots. In addition, the Slot Trust has sub-licensed the right to operate the
Slots to TWA for a period equal to the term of the Notes, subject to the terms
of the Master Sub-License Agreement. The Master Sub-License Agreement, subject
to certain restrictions, permits TWA to, among other things, further sub-
license, directly or indirectly, to other air carriers the right to use Slots.
These transactions, which have been confirmed by the FAA, permit TWA to
continue to operate the Slots.
Upon the acceleration of TWA's obligations under the terms of the Notes, the
Master Sub-License Agreement automatically will terminate, whereupon TWA could
no longer have the right to operate the Slots and, subject to certain
limitations, all of TWA's rights (other than its reversionary interest) with
respect to operating the Slots would terminate.
Upon the occurrence of an Event of Default under the Indenture and during
the continuance thereof, TWA agrees to deliver to the Collateral Agent all
consideration to be received by TWA after such Event of Default (other than
the right to use a Slot as to which a person other than TWA is the operator of
record at the FAA) in connection with any third party license of the right to
operate any of the Slots.
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Pledged Securities
The Indenture provides that upon the closing of the Offering, the Company
deposit and pledge to the Trustee for the benefit of the Trustee and the
holders of the Notes, cash, and/or purchase and so pledge the Pledged
Securities in such amount as will when combined be sufficient (upon receipt of
scheduled interest and principal payments of such securities, if any), to
provide for payment in full of the first three scheduled interest payments on
the Notes when and as due. The Company used approximately $23.1 million of the
net proceeds of the Offering to make such deposit and/or acquire the Pledged
Securities. The Pledged Collateral has been pledged by the Company to the
Trustee for the benefit of the Trustee and the holders of Notes pursuant to
the Note Pledge Agreement and is held by the Trustee in the Interest Escrow
Account. Pursuant to the Note Pledge Agreement, immediately prior to an
interest payment date on the Notes, the Company may either deposit with the
Trustee from funds otherwise available to the Company cash sufficient to pay
the interest scheduled to be paid on such date or the Company may direct the
Trustee to release from the Interest Escrow Account proceeds sufficient to pay
interest then due. In the event that the Company exercises the former option,
the Note Pledge Agreement provides that the Company may thereafter direct the
Trustee to release to the Company Pledged Collateral from the Interest Escrow
Account in like amount.
Interest earned on the Pledged Securities will be added to the Interest
Escrow Account. In the event that the Pledged Collateral held in the Interest
Escrow Account exceeds the amount sufficient to provide for payment in full of
the first three scheduled interest payments due on the Notes (or, in the event
an interest payment or payments have been made, an amount sufficient to
provide for payment in full of any interest payment remaining, up to and
including the third scheduled interest payment), the Trustee will be permitted
to release to the Company at the Company's request any such excess amount. The
Notes are secured by a first priority security interest in the Pledged
Collateral and in the Interest Escrow Account and, accordingly, the Pledged
Collateral and the Interest Escrow Account also secure repayment of the
principal amount of the Notes to the extent of such security.
Prior to the purchase of the Pledged Securities for the Interest Escrow
Account, and prior to the release to the Company of any excess amount from the
Interest Escrow Account with respect to or based on Pledged Securities, the
Company delivered to the Trustee a written certification of a nationally
recognized firm of independent public accountants selected by the Company
which states that the Pledged Securities in the Interest Escrow Account
together with the cash, if any, are sufficient upon receipt of scheduled
interest and principal payments of such securities to provide for payment in
full of the first three scheduled interest payments on the Notes when and as
due. Under the Note Pledge Agreement, assuming that the Company makes the
first three scheduled interest payments on the Notes in a timely manner, all
of the Pledged Collateral will have been released from the Interest Escrow
Account.
Use of Collateral; Release and Termination of Lien
The Indenture and the Collateral Documents provide, among other things, that
the Company may (i) use and deal with the Collateral in any manner consistent
with the Company's ordinary course of business, (ii) unless an Event of
Default has occurred and is continuing, cause certain Collateral to be leased
or subleased in accordance with the applicable Collateral Documents and (iii)
unless an Event of Default has occurred and is continuing, cause Collateral to
be released from the lien of the Security Agreement and the applicable
Collateral Documents upon providing specified substitute collateral of equal
or greater appraised value at the time of substitution, cash or U.S.
Government Obligations and/or acquired or canceled Notes.
Upon the payment in full of all amounts outstanding under the Notes and the
Indenture, the liens created by Collateral Documents will terminate.
In addition, such Collateral Documents permit the release of the relevant
Collateral from the lien created thereby if certain collateral coverage ratios
are satisfied. Generally, the Company may dispose of Pledged Spare Parts in
the ordinary course of its business so long as the value of the remaining
Pledged Spare Parts (including
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the value of all Pledged Spare Parts acquired subsequent to the issuance of
the Notes and not previously disposed of) as determined by reference to the
Inventory Control System (as defined) (adjusting the value of 747 and L-1011
Pledged Spare Parts by a 31% reduction to reflect their lower appraised values
due to the Company's phasing out of these aircraft types) is not less than 85%
of their initial value as so determined as of November 30, 1997 (the "Spare
Parts Threshold"). The Company maintains a system of tracking and valuing its
aircraft spare parts, including the Pledged Spare Parts (the "Inventory
Control System") based, in general, on historical costs, adjusted to the
extent that the actual unit price paid for newly purchased spare parts varies
20% more or less, or is $500 more or less, than such historical cost. The
Spare Parts Threshold can be reduced by providing specified substitute
collateral of equal or greater appraised value at the time of substitution,
cash and/or acquired or canceled Notes. The Pledged Spare Parts do not include
spare parts the purchase price of which has been financed and which have been
pledged to secure such purchase money financing. However, the Company will not
be permitted to pledge new spare parts to secure purchase money financing
unless the Spare Parts Threshold is satisfied. The Collateral Documents also
provide that at such time as the aggregate outstanding principal amount of the
Notes has been reduced to $100.0 million, the Company will be entitled to the
release of all of the Slots, subject to the conditions that (i) after giving
effect to such release, the ratio of the aggregate fair market value of the
Pledged Spare Parts (and permitted substitutes) (based on an appraisal not
more than 20 months old and a current Company officer's certificate) to the
aggregate outstanding principal amount of the Notes (less cash collateral),
would equal or exceed 2.0 to 1 and (ii) no Event of Default or Default of the
type described in clauses (ii), (v), (vi), (viii) or (ix) under the heading
"Description of Notes--Events of Default") shall have occurred and be
continuing. The Collateral Documents also provide that at such time as the
aggregate outstanding principal amount of the Notes has been reduced to $60.0
million, the Company will be entitled to reduce the number of designated
locations for Pledged Spare Parts to the one or two locations in the United
States at which are located the Company's highest dollar value of Pledged
Spare Parts. The reduction of designated locations referred to in the
immediately preceding sentence will occur on the first date, on or after the
satisfaction of the foregoing Note retirement threshold, when (i) after giving
effect to such release, the ratio of the aggregate fair market value of the
Pledged Spare Parts at such remaining designated location or locations (based
on an appraisal not more than 20 months old and a current Company certificate)
to the aggregate outstanding principal amount of the Notes (less cash
collateral), would equal or exceed 2.5 to 1 and (ii) no Event of Default or
Default of the type described in clauses (ii), (v), (vi), (viii) or (ix) under
the heading "Description of Notes--Events of Default") shall have occurred and
be continuing.
The Company will provide monthly reports of the Inventory Control System
value of the Pledged Spare Parts to the Collateral Agent. Such value will
include an adjustment to reflect a 31% discounted value for existing Parts
related to L-1011 and 747 aircraft, since the Company has retired its last L-
1011 aircraft as of September 1997 and intends to discontinue flying 747
aircraft in February 1998.
The Company can sell Pledged Spare Parts in the ordinary course of business
for any form of consideration at any time if the Spare Parts Threshold is met
after giving effect to such sale. The Company can sell Pledged Spare Parts for
cash in the ordinary course of business at any time if the cash is deposited
with the Collateral Agent as cash collateral or the Spare Parts Threshold is
met after giving effect to such sale. The Company can sell Pledged Spare Parts
for cash other than in the ordinary course of business (i.e. sales or series
of related sales for $10 million or more) if the cash is deposited as cash
collateral with the Collateral Agent. Such cash collateral will be released if
the ratio of the fair market value of Pledged Spare Parts and Slots to the
aggregate principal balance of outstanding Notes (less cash collateral) is
equal to at least 1.93 to 1, after giving effect to such release, as evidenced
by a current (within 30 days of release) appraisal (the "Appraised Value
Ratio"). Such appraisal may be a "desk top" appraisal, not involving a
physical inspection of the Pledged Spare Parts, if it is based on a full
appraisal conducted by the same appraiser within the 20 months preceding such
"desk top" appraisal.
Maintenance Test. If the Inventory Control System value of Pledged Spare
Parts as shown on any monthly report is less than 60% of the Inventory Control
System value as of November 30, 1997, the Company must, within 60 days,
provide an officers' certificate setting forth the calculation of the
Appraised Value Ratio as of the date of such certificate, based on an
appraisal which will be attached to such certificate. Such appraisal may be a
"desk
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top" appraisal, not involving a physical inspection of the Pledged Spare
Parts, if it is based on a full appraisal conducted by the same appraiser
within the 20 months preceding such "desk top" appraisal. The appraisal must
show the fair market values of all assets required for calculation of the
Appraised Value Ratio and setting forth the Appraised Value Ratio, in each
case as of a date no earlier than the last day of the month to which such
inventory report relates. If the Appraised Value Ratio is less than 1.2 to 1,
the Company must, within 30 days, make an Offer to Purchase Notes at 101% or
provide additional Pledged Spare Parts, Slots or cash collateral (or any
combination of the foregoing) to cause the Appraised Value Ratio to be at or
above 1.2 to 1. Cash collateral provided to cause the Appraised Value Ratio to
be at or above 1.2 to 1 may be released only if, after giving effect to such
release, the Appraised Value Ratio is at least 1.5 to 1 as evidenced by an
appraisal.
Under the terms of the Collateral Documents, the Trustee, acting upon
instructions from holders of at least 66 2/3% in aggregate principal amount of
Notes then outstanding will determine the circumstances under and the manner
in which the Collateral Security may be disposed of, including, but not
limited to, the determination of whether to release all or any portion of the
Collateral Security from the liens created by the Collateral Documents other
than in accordance with the terms thereof. The holders of at least a majority
in aggregate principal amount of the Notes then outstanding may determine
whether and under what circumstances to foreclose on the Collateral Security.
Upon any foreclosure, cash or other property realized by the Trustee will be
applied first to pay the expenses of such foreclosure and fees and other
amounts then payable to the Trustee under the Collateral Documents and the
Indenture, and thereafter for the equal and ratable benefit of the holders pro
rata to the aggregate principal amounts of Notes held by such holders. In
connection with any release of Collateral Security, the Trustee shall
determine whether they have received all documentation required by Section 314
of the TIA (to the extent applicable) to permit such release.
Appraisals
Simat, Helliesen & Eichner, Inc. ("SH&E") prepared appraisals, dated
December 3, 1997 and November 17, 1997 (the " Appraisals"), of the Pledged
Spare Parts, as constituted at August 31, 1997, and the Slots, respectively
(such Pledged Spare Parts and Slots, collectively the "Appraised Assets"),
which indicated fair market values, as therein defined, for such Collateral of
$234.6 million and $36.0 million, respectively. In determining fair market
value, SH&E, among other things, estimated the current fair market value for
the sale thereof by a willing buyer and a willing seller, neither being under
any pressure to complete the transaction. SH&E relied substantially upon
previous valuations of the Slots made by them in 1994 and 1995, and the
Pledged Spare Parts made by them in 1995, and, in part, on prior research and
analysis to the extent deemed relevant. Among other things, SH&E also reviewed
other prior sale transactions over a period of years in order to derive
comparables, made certain limited inspections and samplings where deemed
appropriate, performed telephone surveys of relevant industry sources and
consulted with TWA's management to the extent deemed necessary or appropriate.
The appraisals by SH&E are matters of opinion only, reflect the assumptions
and limitations stated therein and in any event may not reflect actual
realizable values to be obtained in connection with any exercise of remedies.
The value of the Appraised Assets in the event of liquidation will likely be
less than fair market value and could be considerably below such value
depending on market and economic conditions, the rapidity with which such
assets are sought to be sold, the availability of buyers, the existence of
liens and/or claims with respect to such Collateral and similar factors. A
substantial portion of the Pledged Spare Parts component of the Collateral
consists of spare parts for Lockheed L-1011 and Boeing 747 aircraft. The
Company retired its last L-1011 aircraft in September 1997 and its last 747
aircraft is scheduled to leave active service in February 1998, which factors
have been taken into consideration in determining the fair market value of the
spare parts relating to such aircraft in the appraisal. In addition, given
that the Collateral Documents contain provisions permitting the use, release,
substitution and sale of Collateral, the composition and amount of Collateral
will continually change. Accordingly, there can be no assurances that the
proceeds of any sale of Collateral pursuant to the Indenture and Collateral
Documents following a default would be sufficient to satisfy all payments due
on the Notes. If such proceeds were not sufficient to repay all such amounts
due on the Notes, then holders (to the extent not repaid from the proceeds of
the sale of Collateral) would have only an unsecured claim against the
Company's remaining assets. In addition, the ability of holders to realize
upon the Collateral
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may be subject to certain federal bankruptcy law limitations and, due to the
nature of the Collateral (particularly the Slots), significant restrictions
imposed by governmental authorities including the DOT and FAA.
FILING AND PERFECTION REQUIREMENTS FOR COLLATERAL SECURITY
The security interest in the Collateral Security has been duly perfected
generally in accordance with applicable federal, state and local laws. The
transfer of Slots to the Slot Trust was confirmed by the FAA and has been
noted by the FAA in its records.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Trustee to repossess and dispose of the Collateral
Security, or otherwise to exercise rights or remedies with respect to the
Collateral, upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against the Company prior to the date when, or
possibly even after, the Trustee has effected any such action. Under
bankruptcy law, secured creditors such as the Holders are prohibited from
repossessing their security from a debtor in a bankruptcy case, or from
disposing of security repossessed from such debtor, without bankruptcy court
approval. Moreover, bankruptcy law permits the debtor to continue to retain
and to use collateral even though the debtor is in default under the
applicable debt instruments, provided generally that the secured creditor is
given "adequate protection." The meaning of the term "adequate protection" may
vary according to circumstances, but it is intended in general to protect the
value (as determined by the Bankruptcy Court) of the secured creditor's
interest in the collateral and may include cash payments or the granting of
additional security, if and at such times as the court in its discretion
determines, for any diminution in the value of the collateral as a result of
the stay of repossession or disposition or any use of the collateral by the
debtor during the pendency of the bankruptcy case. In view of the lack of a
precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how
long payments under the Notes could be delayed following commencement of a
bankruptcy case, whether or when the Trustee could repossess or dispose of the
Collateral Security or whether or to what extent Holders would be compensated
for any delay in payment or loss or value of the Collateral Security through
the requirement of "adequate protection." Furthermore, in the event that the
bankruptcy court determines the value of the Collateral Security is not
sufficient to repay all amounts due on the Notes, the Holders would hold
"undersecured claims." Applicable federal bankruptcy laws do not permit the
payment and/or accrual of interest, costs and attorney's fees for
"undersecured claims" during the pendency of a debtor's bankruptcy case.
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
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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, (H) any sale, lease, transfer or other
disposition of maintenance bases, hangars and engine shops or (I) any
disposition of Collateral Security permitted by the Collateral Documents.
"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
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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.
"Collateral Agent" means the Trustee.
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"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
(1) 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,
(2) 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,
(3) 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),
(4) 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
(5) 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 (3) or (4) 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
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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:
(i) any net income of any Person (other than the Company) if such Person
is not a Restricted Subsidiary, except that (A) subject to the exclusion
contained in clause (iv) 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 (iii) below) and (B) the Company's equity in a net loss of any
such Person for such period shall be included in determining such
Consolidated Net Income;
(ii) 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;
(iii) 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 (A) subject
to the exclusion contained in clause (iv) 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 (B) 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;
(iv) 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;
(v) extraordinary, unusual and non-recurring gains or losses; and
(vi) the cumulative effect of a change in accounting principles since the
Issue Date.
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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.
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"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):
(i) the principal of and premium (if any) in respect of (A) indebtedness
of such Person 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, including, in each case, any premium
on such indebtedness to the extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person;
(iii) 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);
(iv) 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
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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);
(v) 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);
(vi) all obligations of the type referred to in clauses (i) through (v)
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;
(vii) 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.
"Independent Appraiser" means a Person (i) engaged in a business which
includes appraising aircraft and assets and rights related to the operation
and maintenance of aircraft from time to time and (ii) who (a) is in fact
independent of the parties to the transaction in question and their Affiliate;
(b) does not have any direct financial interest or any material indirect
financial interest in the Company or any of the Restricted Subsidiaries or any
of their respective Affiliates and (c) is not connected with the Company, any
of the Restricted Subsidiaries or any of such Affiliates as an officer,
director, employee, promoter, underwriter, trustee, partner or person
performing similar functions.
"Interest Escrow Account" means an account established with the Trustee
pursuant to the terms of the Note Pledge Agreement for the deposit of the
Pledged Securities purchased by the Company with a portion of the net proceeds
from the Offering.
"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;
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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 Old Notes were originally issued.
"Legal Holiday" means a Saturday, Sunday or any other day on which banks
located in New York City 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.
"Note Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the date of the Indenture, by and between the Trustee and the
Company, providing for, among other things, the governing of the disbursement
of funds from the Interest Escrow Account.
"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" 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
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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 at maturity 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 at maturity 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 at maturity to any unpurchased
portion of the Note surrendered; provided that each Note purchased and each
new Note issued shall be in a principal amount at maturity 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 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
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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 Collateral Liens" means the Liens permitted under the terms of
the Pledge Agreement.
"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 Old 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
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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.
"Pledged Collateral" means the collateral covered by the Note Pledge
Agreement.
"Pledged Securities" means the U.S. Government Obligations purchased by the
Company with a portion of the net proceeds from the sale of the Notes and
deposited in the Interest Escrow Account in accordance with the terms of the
Note Pledge Agreement.
"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
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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.
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"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
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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.
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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.
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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
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of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchasers), 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
Investors holding their Notes through DTC will follow settlement practices
applicable to United States corporate debt obligations. The Indenture requires
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.
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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 November 12, 1997, 50,883,869 shares of Common Stock were issued and
outstanding and were held by approximately 18,506 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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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
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of the total number of directors that the Corporation 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 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
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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
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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 66 2/3% 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 66 2/3%
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.
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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.
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 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.
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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 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 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 interest
payments on Notes to the extent of the Company's current or accumulated
earnings and profits or on the entire amounts of the interest 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
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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
141
<PAGE>
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.
142
<PAGE>
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, 1995
and 1996 and for each of the periods in the three year period ended December
31, 1996 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 contains an explanatory paragraph indicating that the Company's
recurring losses from operations and its limited sources of additional
liquidity raise substantial doubt about the Company's ability to continue as a
going concern. In addition, their report refers to the application of fresh
start reporting in connection with the '95 Reorganization.
143
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditors' Report.......................................... F-2
Statements of Consolidated Operations for the Year Ended December 31,
1996, the Four Months Ended December 31, 1995, the Eight Months Ended
August 31, 1995, and the Year Ended December 31, 1994................ F-3
Consolidated Balance Sheets, December 31, 1996 and 1995............... F-4
Statements of Consolidated Cash Flows for the Year Ended December 31,
1996, the Four Months Ended December 31, 1995, the Eight Months Ended
August 31, 1995, and the Year Ended December 31, 1994................ F-6
Consolidated Statements of Shareholders' Equity (Deficiency) for the
Year Ended December 31, 1996, the Four Months Ended December 31,
1995, the Eight Months Ended August 31, 1995, and the Year Ended
December 31, 1994.................................................... F-8
Notes to Consolidated Financial Statements............................ F-9
Unaudited Statements of Consolidated Operations for the Three Months
and Nine Months Ended September 30, 1997 and 1996 ................... F-44
Consolidated Balance Sheets, September 30, 1997 (unaudited) and
December 31, 1996.................................................... F-45
Unaudited Statements of Consolidated Cash Flows for the Nine Months
Ended September 30, 1997 and 1996.................................... F-47
Notes to Unaudited Consolidated Financial Statements.................. F-49
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Trans World Airlines, Inc.
We have audited the accompanying consolidated balance sheets of Trans World
Airlines, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related statements of consolidated operations, cash flows and shareholders'
equity (deficiency) for the year ended December 31, 1996, the four months
ended December 31, 1995, the eight months ended August 31, 1995 and the year
ended December 31, 1994. 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, 1996 and 1995, and
the results of their operations and their cash flows for the year ended
December 31, 1996, the four months ended December 31, 1995, the eight months
ended August 31, 1995 and the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
consolidated financial statements reflect the application of fresh start
reporting as of September 1, 1995 and, therefore, are not comparable in all
respects to the consolidated financial statements for periods prior to such
date.
The accompanying consolidated financial statements have been prepared
assuming that Trans World Airlines, Inc. and subsidiaries will continue as a
going concern. The Company's recurring losses from operations and its limited
sources of additional liquidity raise substantial doubt about the entity's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
March 24, 1997
F-2
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger.............................................................. $3,077,905 $ 943,077 $1,929,166 $2,875,851
Freight and mail....................................................... 153,076 48,384 94,784 149,932
All other.............................................................. 323,426 107,013 194,405 381,919
---------- ---------- ---------- ----------
Total................................................................ 3,554,407 1,098,474 2,218,355 3,407,702
---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits........................................... 1,254,341 373,041 755,708 1,293,570
Earned stock compensation (Note 12).................................... 9,056 2,192 55,767 --
Aircraft fuel and oil.................................................. 585,163 161,799 296,833 477,555
Passenger sales commissions............................................ 268,131 80,045 185,981 288,000
Aircraft maintenance materials and repair.............................. 208,183 51,998 95,657 145,321
Depreciation and amortization.......................................... 161,822 55,168 106,474 183,283
Operating lease rentals................................................ 302,990 96,393 182,548 261,365
Passenger food and beverages........................................... 110,092 34,676 68,137 120,804
Special charges (Note 16).............................................. 85,915 -- 1,730 138,849
All other.............................................................. 767,241 232,716 454,878 778,449
---------- ---------- ---------- ----------
Total................................................................ 3,752,934 1,088,028 2,203,713 3,687,196
---------- ---------- ---------- ----------
Operating income (loss).................................................. (198,527) 10,446 14,642 (279,494)
---------- ---------- ---------- ----------
Other charges (credits):
Interest expense (contractual interest of $141,967 for the eight months
ended August 31, 1995)................................................ 126,822 45,917 123,247 195,352
Interest and investment income......................................... (21,309) (7,484) (10,366) (12,058)
Disposition of assets, gains and losses--net (Note 15)................. 1,135 (3,330) 206 (1,072)
Reorganization items (Note 19)......................................... -- -- 242,243 --
Other charges and credits--net (Note 17)............................... (30,598) 7,611 (2,379) (28,847)
---------- ---------- ---------- ----------
Total................................................................ 76,050 42,714 352,951 153,375
---------- ---------- ---------- ----------
Loss before income taxes and extraordinary items......................... (274,577) (32,268) (338,309) (432,869)
Provision (credit) for income taxes (Note 5)............................. 450 1,370 (96) 960
---------- ---------- ---------- ----------
Loss before extraordinary items.......................................... (275,027) (33,638) (338,213) (433,829)
Extraordinary items, net of income taxes (Note 14)....................... (9,788) 3,500 140,898 (2,005)
---------- ---------- ---------- ----------
Net loss................................................................. (284,815) (30,138) (197,315) (435,834)
Preferred stock dividend requirements.................................... 36,649 4,751 11,554 15,000
---------- ---------- ---------- ----------
Loss applicable to common shares......................................... $ (321,464) $ (34,889) $ (208,869) $ (450,834)
========== ========== ========== ==========
Per share amounts:
Loss before extraordinary item and special dividend requirements....... $ (6.60) $ (1.15)
Extraordinary item and special dividend requirements................... (.67) .10
---------- ----------
Net loss............................................................... $ (7.27) $ (1.05)
- --------------------------------------------------
========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY
---------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 181,586 $ 304,340
Receivables, less allowance for doubtful accounts,
$12,939 in 1996 and $13,517 in 1995 (Note 8).......... 239,496 226,451
Spare parts, materials and supplies, less allowance for
obsolescence, $11,563 in 1996 and $2,201 in 1995 (Note
8).................................................... 111,239 143,374
Prepaid expenses and other............................. 93,424 63,136
---------- ----------
Total.............................................. 625,745 737,301
---------- ----------
Property (Notes 8, 9 and 18):
Property owned:
Flight equipment....................................... 339,150 303,248
Prepayments on flight equipment........................ 39,072 --
Land, buildings and improvements....................... 59,879 54,722
Other property and equipment........................... 60,750 39,032
---------- ----------
Total owned property............................... 498,851 397,002
Less accumulated depreciation.......................... 71,810 18,769
---------- ----------
Property owned--net................................ 427,041 378,233
---------- ----------
Property held under capital leases:
Flight equipment..................................... 172,812 172,812
Land, buildings and improvements..................... 54,761 54,761
Other property and equipment......................... 6,570 6,862
---------- ----------
Total property held under capital leases........... 234,143 234,435
Less accumulated amortization........................ 46,977 12,602
---------- ----------
Property held under capital leases--net............ 187,166 221,833
---------- ----------
Total property--net................................ 614,207 600,066
---------- ----------
Investments and other assets:
Investments in affiliated companies (Note 4)........... 108,173 98,156
Investments, receivables and other (Note 9)............ 149,028 156,693
Routes, gates and slots-net............................ 401,659 450,916
Reorganization value in excess of amounts allocable to
identifiable assets--net.............................. 783,127 825,079
---------- ----------
Total.............................................. 1,441,987 1,530,844
---------- ----------
$2,681,939 $2,868,211
========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY
----------------------
1996 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt (Note 8)........ $ 92,447 $ 67,566
Current obligations under capital leases (Note 9).... 42,501 42,835
Advance ticket sales................................. 241,516 209,936
Accounts payable, principally trade.................. 216,675 137,140
Accounts payable to affiliated companies (Note 4).... 4,894 6,104
Accrued expenses:
Employee compensation and vacations earned......... 116,846 101,637
Contributions to retirement and pension trusts
(Note 6).......................................... 14,091 17,716
Interest on debt and capital leases................ 39,420 44,710
Taxes.............................................. 19,018 16,995
Other accrued expenses............................. 174,753 174,575
---------- ----------
Total accrued expenses........................... 364,128 355,633
---------- ----------
Total............................................ 962,161 819,214
---------- ----------
Long-Term Liabilities and Deferred Credits:
Long-term debt, less current maturities (Note 8)..... 608,485 764,031
Obligations under capital leases, less current
obligations (Note 9)................................ 220,790 259,630
Postretirement benefits other than pensions (Note 6). 471,171 461,346
Noncurrent pension liabilities (Note 6).............. 30,716 21,253
Other noncurrent liabilities and deferred credits.... 150,511 178,452
---------- ----------
Total............................................ 1,481,673 1,684,712
---------- ----------
Mandatorily redeemable 12% preferred stock, (aggregate
liquidation preference of $111,179 in 1995) (Note 10). -- 61,430
---------- ----------
Commitments and Contingent Liabilities (Notes 1, 2, 3,
6, 7, 8, 9, 11, 12, 16, 18)...........................
Shareholders' equity:
8% cumulative convertible exchangeable preferred
stock, $50 liquidation preference; 3,869 shares
issued and outstanding.............................. 39 --
Employee preferred stock, $0.01 liquidation
preference; special voting rights; shares issued and
outstanding; 1996-5,681; 1995-5,277................. 57 53
Common Stock, $0.01 par value; shares issued and
outstanding; 1996-41,763; 1995-35,129............... 418 351
Additional paid-in capital........................... 552,544 332,589
Accumulated deficit.................................. (314,953) (30,138)
---------- ----------
Total............................................ 238,105 302,855
---------- ----------
$2,681,939 $2,868,211
========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................................. $(284,815) $(30,138) $(197,315) $(435,834)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Employee earned stock compensation...................................... 9,056 2,192 55,767 --
Depreciation and amortization........................................... 161,822 55,168 106,474 183,283
Amortization of discount and expenses on debt........................... 14,744 3,063 12,472 18,571
Extraordinary loss (gain) on extinguishment of debt..................... 9,788 (3,500) (140,898) --
Interest paid in common stock........................................... 11,332 11,587 -- --
Equity in undistributed earnings of affiliates not consolidated......... (10,017) 12,169 (2,339) 5,517
Revenue from Icahn ticket program....................................... (71,534) (4,356) -- --
Net gains-losses on disposition of assets............................... 1,135 (3,330) 206 (1,072)
Non-cash special charges................................................ 85,915 -- -- 119,829
Reorganization items.................................................... -- -- 242,243 --
Change in operating assets and liabilities:
Decrease (increase) in:
Receivables............................................................ 3,927 69,121 (62,094) 37,628
Inventories............................................................ (4,897) 510 5,866 1,259
Prepaid expenses and other current assets.............................. (28,288) 23,241 (8,894) 2,734
Other assets........................................................... 111 (3,088) (1,586) (10,079)
Increase (decrease) in:
Accounts payable and accrued expenses.................................. 83,840 (41,989) 108,669 48,499
Advance ticket sales................................................... 19,698 (39,350) 81,598 (33,890)
Benefits, other noncurrent liabilities and deferred credits............ (7,505) (6,387) (28,160) 65,182
--------- -------- --------- ---------
Net cash provided (used).............................................. (5,688) 44,913 172,009 1,627
--------- -------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of property.......................................... 3,234 7,069 2,221 76,240
Capital expenditures..................................................... (121,547) (42,973) (16,554) (44,897)
Net decrease (increase) in investments, receivables and other............ 10,941 842 26,064 27,962
--------- -------- --------- ---------
Net cash provided (used).............................................. (107,372) (35,062) 11,731 59,305
--------- -------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt issued...................................... 2,750 22,100 -- 6,213
Proceeds from sale and leaseback of certain aircraft..................... 13,800 -- -- --
Repayments on long-term debt and capital lease obligations............... (117,203) (39,654) (62,158) (116,331)
Net proceeds from sale of preferred stock................................ 186,163 -- -- --
Net proceeds from exercise of equity rights, warrants and options........ 1,034 51,930 -- --
Redemption of 12% Preferred Stock........................................ (81,749) -- -- --
Cash dividends paid on preferred stock................................... (14,489) -- -- --
--------- -------- --------- ---------
Net cash provided (used).............................................. (9,694) 34,376 (62,158) (110,118)
--------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents..................... (122,754) 44,227 121,582 (49,186)
Cash and cash equivalents at beginning of period......................... 304,340 260,113 138,531 187,717
--------- -------- --------- ---------
Cash and cash equivalents at end of period............................... $ 181,586 $304,340 $ 260,113 $ 138,531
- --------------------------------------------------
========= ======== ========= =========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Paid During the Period for:
Interest............................................................... $102,311 $27,318 $55,878 $110,287
======== ======= ======= ========
Income taxes........................................................... $ 159 $ 7 $ 39 $ 24
======== ======= ======= ========
Information About Noncash Operating, Investing and Financing Activities:
Promissory notes issued to finance aircraft acquisition................ $ 10,565 $ -- $ -- $ --
======== ======= ======= ========
Promissory notes issued to finance aircraft predelivery payments....... $ 19,862 $ -- $12,690 $ 7,000
======== ======= ======= ========
Property acquired and obligations recorded under new capital lease
transactions.......................................................... $ 4,266 $ -- $12,690 $ 7,000
======== ======= ======= ========
Partial interest on debt paid in kind, issued and valued at principal
amount................................................................ $ -- $ 574 $18,496 $ --
======== ======= ======= ========
Common Stock issued in lieu of cash dividends on mandatorily redeemable
12% preferred stock................................................... $ 3,255 $ -- $ -- $ --
======== ======= ======= ========
Exchange of long-term debt for common stock:
Debt cancelled including accrued interest, net of unamortized
discount............................................................ $ 41,021 $ -- $ -- $ --
Common stock issued, at fair value................................... 49,182 -- -- --
-------- ------- ------- --------
Extraordinary loss................................................... $ 8,161 $ -- $ -- $ --
- --------------------------------------------------
======== ======= ======= ========
</TABLE>
ACCOUNTING POLICY
For purposes of the Statements of Consolidated Cash Flows, TWA considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
See notes to consolidated financial statements
F-7
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995,
THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
12% 8% EMPLOYEE PAID-IN
PREFERRED PREFERRED PREFERRED COMMON CAPITAL ACCUMULATED
STOCK STOCK STOCK STOCK (DEFICIENCY) DEFICIT TOTAL
--------- --------- --------- ------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance, December 31,
1993................... $125 $-- $-- $200 $105,925 $ (87,892) $ 18,358
Net loss for 1994....... -- -- -- -- -- (435,834) (435,834)
---- ---- ---- ---- -------- --------- --------
Balance, December 31,
1994................... 125 -- -- 200 105,925 (523,726) (417,476)
Net loss for the eight
months ended August 31,
1995................... -- -- -- -- -- (197,315) (197,315)
Eliminate Predecessor
equity accounts in
connection with fresh
start reporting........ (125) -- -- (200) (105,925) 35,817 (70,433)
Record additional excess
of reorganization value
over identifiable
assets................. -- -- -- -- -- 685,224 685,224
Issuance of Common and
Employee Preferred
Stock pursuant to Plan -- -- 53 172 269,775 -- 270,000
of Reorganization...... ---- ---- ---- ---- -------- --------- --------
Balance, August 31,
1995................... -- -- 53 172 269,775 -- 270,000
---- ---- ---- ---- -------- --------- --------
REORGANIZED COMPANY:
Equity rights exercised. -- -- -- 132 51,727 -- 51,859
Interest on 12% Notes
paid in Common Stock... -- -- -- 19 11,568 -- 11,587
Options and warrants
exercised.............. -- -- -- 28 43 -- 71
Earned Stock
Compensation........... -- -- -- -- 2,046 -- 2,046
Amortization of the
excess of redemption
value over carrying
value of Mandatorily
Redeemable 12%
Preferred Stock........ -- -- -- -- (2,570) -- (2,570)
Net loss for the four
months ended -- -- -- -- -- (30,138) (30,138)
December 31, 1995...... ---- ---- ---- ---- -------- --------- --------
Balance, December 31,
1995................... -- -- 53 351 332,589 (30,138) 302,855
---- ---- ---- ---- -------- --------- --------
Warrants exercised...... -- -- -- 4 68 -- 72
Options exercised....... -- -- -- 2 1,248 -- 1,250
Earned Stock
Compensation........... -- -- -- -- 6,875 -- 6,875
Allocation of employee
preferred stock to ALPA
ESOP................... -- -- 6 -- (6) -- --
Conversion of employee
preferred stock to
Common Stock........... -- -- (2) 2 -- -- --
Net proceeds from
issuance of 8%
preferred stock........ -- 39 -- -- 186,124 -- 186,163
Dividends on 8%
preferred stock paid in
cash................... -- -- -- -- (11,349) -- (11,349)
Dividends on mandatorily
redeemable 12%
preferred stock paid in
Common Stock........... -- -- -- 3 (3) -- --
Dividends on mandatorily
redeemable 12%
preferred stock paid in
cash................... -- -- -- -- (3,140) -- (3,140)
Amortization of the
excess of redemption
value over carrying
value of mandatorily
redeemable 12%
preferred stock........ -- -- -- -- (328) -- (328)
Excess of cash paid for
early redemption of
mandatorily redeemable
12% preferred stock
over carrying value.... -- -- -- -- (19,992) -- (19,992)
Common Stock issued in
exchange for 12% notes. -- -- -- 45 49,137 -- 49,182
Interest on 12% Notes
paid in Common Stock... -- -- -- 11 11,321 -- 11,332
Net loss for 1996....... -- -- -- -- -- (284,815) (284,815)
---- ---- ---- ---- -------- --------- --------
Balance, December 31,
1996................... $-- $ 39 $ 57 $418 $552,544 $(314,953) $238,105
==== ==== ==== ==== ======== ========= ========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL CONDITION AND LIQUIDITY:
Trans World Airlines, Inc. ("TWA" or the "Company") has undergone two
reorganizations under Chapter 11 of the Bankruptcy Code since 1992, as further
described in Note 3--Chapter 11 Reorganizations. In August 1995 the Company
emerged from the most recent bankruptcy proceeding and thereafter, through the
second quarter of 1996, the Company had experienced improvements in its
operating performance as operating income had increased to $7.8 million in six
months ended June 30, 1996, as compared to an operating loss of $21.9 million
in the same period of 1995. However, beginning in the third quarter of 1996,
the Company's operating performance substantially deteriorated as the
Company's operating profit for the third quarter, typically the strongest
period of the year, declined to $26.0 million in the three months ended
September 30, 1996, as compared to a combined operating profit (excluding
special charges and earned stock compensation charges aggregating $57.9
million) of $103.7 million in the comparable period of the prior year. The
results of the fourth quarter of 1996 evidenced a further acceleration of
deterioration as the Company reported an operating loss (excluding special
charges) of $146.5 million, as compared to operating income of $1.1 million in
the same period of 1995. In the second half of 1996, the Company's revenues
increased only 2.4%, while capacity operated, measured in ASMs, increased by
6.9%, as compared to the second half of 1995. Operating costs, excluding
earned stock compensation and special charges, increased 16.0% over this same
period. The most significant increases were; salaries, wages and benefits
($82.4 million), which reflected the increased number of employees and
additional overtime costs; fuel ($69.4 million), reflecting significantly
higher units costs and increased usage; and maintenance costs. Notwithstanding
the actions taken and planned by management to improve the Company's future
operating results as described below, management expects that its first
quarter 1997 operating loss will significantly exceed that reported in the
first quarter of 1996.
In light of the deterioration in the Company's operating results, management
has over the last several months refocused and accelerated certain aspects of
its business strategy, including its fleet modernization and consolidation
plan, route structure and facility improvements and efficiencies. Management
believes that its recent operating results have been adversely affected by an
aggressive increase in capacity, which when combined with unexpected
maintenance delays and related costs, has negatively impacted schedule
reliability resulting in excessive levels of flight cancellations and
deterioration in its on-time performance. The Company believes that this has
adversely affected its unit revenues (principally yields) and costs. In
response to these issues, management has taken action to accelerate the phase
out of all B-747 and L-1011 aircraft, reduce low yield domestic JFK feed
service, curtail and/or eliminate historically unprofitable international
routes and consolidate for the near term most operations at JFK to a single
terminal. The above actions are designed to improve its operational
performance and make its product more attractive to the business segment which
offers higher yields. The Company has also curtailed the amount of contract
maintenance services provided to third parties and redeployed those resources
to TWA's aircraft. Furthermore, the Company has reviewed its route structure
and fleet plan. The Company recently announced that it would discontinue
service to Athens and Frankfurt and that it would undertake to accelerate the
replacement of its L-1011 and B-747 aircraft with newer and smaller sized
aircraft, specifically B-757, B-767 and MD-80 aircraft. Management believes
such aircraft will better match the market demands in cities served and
provide efficiencies relative to the costs of fuel, flight crews and
maintenance. The Company plans to retire its remaining fleet of L-1011 and B-
747 aircraft in 1997, although the implementation of this plan could be
delayed if suitable replacement aircraft can not be obtained within this time
frame. The Company has also determined to consolidate a substantial potion of
its operations at JFK into a single terminal which should result in reductions
in labor and other costs and improve the overall utilization of this facility.
In connection with the above described plans, management has announced a
comparable reduction in employee headcount. Management may undertake further
actions to reduce costs which may result in additional reductions of the
number of employees.
The Company's consolidated cash and cash equivalents balance at December 31,
1996 was $181.6 million (including approximately $28.3 million in cash and
cash equivalents held in its international operations and by
F-9
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
its subsidiaries which, based upon various foreign monetary regulations and
other factors, might not be immediately available to the Company), a $122.7
million decrease from the December 31, 1995 balance of $304.3 million. Due to
seasonal factors, the Company's cash balances during the first quarter of each
year are typically lower than in other periods. These seasonal factors, when
combined with the large anticipated loss in the first quarter of 1997 which
would significantly exceed the loss reported in the comparable quarter of
1996, will reduce cash balances significantly below the cash balance at
December 31, 1996. In February 1997, in order to improve its liquidity, the
Company entered into an agreement with and received approximately $26 million
from certain St. Louis business enterprises, representing the advance payment
for tickets for future travel by such enterprises. The Company is currently
pursuing other projects intended to increase its cash balances.
The Company's collective bargaining agreements with all of its union-
represented employee groups, which represent approximately 82% of the
Company's work force, become amendable after August 31, 1997. While the
Company cannot predict the precise wage rates that will be in effect at such
time (since such rates will be determined by subsequent events), the wage
rates then in effect will likely increase. However, management believes that
it is essential that the Company's labor costs remain favorable in comparison
to its largest competitors. The Company will seek to continue to improve
employee productivity as an offset to any wage increases and will continue to
explore other ways to control and/or reduce operating expenses. There can be
no assurance that the Company will be successful in obtaining such
productivity improvements or unit cost reductions. In the opinion of
management, the Company's financial resources are not as great as those of
most of its competitors and, therefore, any substantial increase in its labor
cost as a result of any new labor agreements or any cessation or disruption of
operation due to any strike or work action could be particularly damaging to
the Company.
As a result of application of fresh start reporting in August of 1995,
substantial values were assigned to routes, gates and slots ($458.4 million)
and reorganization value in excess of amounts allocable to identifiable assets
($839.1 million). The Company has evaluated its future cash flows and,
notwithstanding its substantial operating losses in recent periods, expects
that the carrying value of the intangibles at December 31, 1996 will be
recovered. However, the achievement of such improved future operating results
and cash flows are subject to considerable uncertainties. In future periods
these intangibles will be evaluated for recoverability based upon estimated
future cash flows. If expectations are not substantially achieved, charges to
future operations for impairment of those assets may be required and such
changes could be material.
The accompanying consolidated financial statements have been prepared on a
going concern basis which assumes continuity of operations and realization of
assets and liquidation of liabilities in the ordinary course of business. The
Company remains highly leveraged and substantially all of TWA's assets are and
will likely remain subject to various liens and security interest, and many of
its loan agreements contain mandatory prepayment provisions in the event that
the assets are sold. Accordingly, management expects that TWA will not be able
to rely, in any significant degree, on the proceeds from sales of assets to
fund operations and that TWA may have limited sources of additional liquidity
other than cash generated by operations. The Company's ability to improve its
financial position and meet its financial obligations will depend upon a
variety of factors including; significantly improved operating results,
favorable domestic and international airfare pricing environments, absence of
adverse general economic conditions, more effective operating cost controls
and efficiencies, and the Company's ability to attract new capital and
maintain adequate liquidity. No assurance can be given that the Company will
be successful in generating the operating results or attracting new capital
required for future viability.
As a result of the redemption of the 12% Mandatorily Redeemable Preferred
Stock, certain of TWA's leasehold interests in domestic airport gates were
released as collateral and are now unencumbered. As a result of the exchange
of common stock for 12% Senior Secured Notes as described in Note 8, liens on
the stock of
F-10
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
wholly owned subsidiary which owns TWA's interest in a hangar at Los Angeles
International Airport and a floating lien on certain of TWA's domestic airport
ground equipment were released as collateral and are also now unencumbered. In
addition, based on the current level of outstanding 12% Senior Secured Notes,
TWA expects that certain slots at New York's LaGuardia and JFK airports and
Chicago's O'Hare airport will be released as security for the 12% Senior
Secured Notes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows, and results of
operations are as follows:
(a) Description of Business: TWA is one of the major airlines in the United
States serving many of the principal domestic and transatlantic destinations.
TWA's principal domestic routes include service to and from its St. Louis and
New York-JFK hubs and between other cities in the U.S., both nonstop and
through St. Louis. TWA's domestic routes also provide connections with its
international service to and from U.S. cities and certain major cities in
Europe and the Middle East (see Note 21).
The airline industry is highly competitive and the factors affecting
competition are subject to rapid change. Many of the Company's competitors are
larger and have significantly greater financial resources. In addition,
several carriers have introduced or have announced plans to introduce low-
cost, short-haul service, which may result in increased competition to the
Company. Internationally, TWA competes in several "limited entry" markets in
which, as a result of governmental regulations and agreements with foreign
governments, TWA has traditionally competed with a limited number of carriers.
No assurance can be given that TWA will continue to have the advantage of all
of the "limited entry" markets in which it currently operates or that it will
not face substantial additional competition.
Historically, the airline industry has experienced substantial volatility in
profitability as a result of, among other factors, general economic
conditions, competitive pricing initiatives, the overall level of capacity
operated in the industry and fuel prices. TWA continues to be highly leveraged
and has and will continue to have significant debt service obligations. TWA
presently has no unused credit lines and substantially all of TWA's strategic
assets have been pledged to secure indebtedness of the Company.
(b) Fresh Start Reporting: Financial accounting during a Chapter 11
proceeding is prescribed in "Statement of Position 90-7 of the American
Institute of Certified Public Accountants", titled "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which TWA
adopted effective June 30, 1995. The emergence from the 1995 Chapter 11
proceeding (the "95 Reorganization") on August 23, 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.
F-11
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Property and Depreciation: Property and equipment owned are depreciated
to residual values over their estimated useful service lives on the straight-
line method. Property held under capital leases is amortized on the straight-
line method over its estimated useful life, limited generally by the lease
period. Estimated remaining useful service lives and residual values are
reviewed periodically for reasonableness and any necessary change is effected
at the beginning of the accounting period in which the revision is adopted. In
connection with the application of fresh start reporting, no significant
changes in the estimated useful lives of assets have been made.
Estimated useful service lives in effect for the purpose of computing the
provision for depreciation, were:
Flight equipment (aircraft and engines, including related
spares)--16 to 25 years, varying by aircraft fleet type
Buildings--20 to 50 years
Other equipment--3 to 20 years
Leasehold improvements--Estimated useful life limited by the lease
period
Maintenance and repairs, including periodic aircraft overhauls, are expensed
in the year incurred; major renewals and betterments of equipment and
facilities are capitalized and depreciated over the remaining life of the
asset.
(e) Intangible Assets: Route authorities are amortized on a straight line
basis over 30 years (1), gates over the term of the related leases and slots
over 20 years. Routes, gates and slots consist of the following amounts at
December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Routes..................................................... $248,100 $276,000
Gates...................................................... 86,649 86,649
Slots...................................................... 95,800 95,800
-------- --------
430,549 458,449
Accumulated Amortization................................... 28,890 7,533
-------- --------
$401,659 $450,916
======== ========
</TABLE>
- --------
(1) Prior to January 1, 1995, the Company utilized an estimated useful life
for route authorities of 40 years (also see Note 16--Special Charges and
Other Nonrecurring Items).
The reorganization value in excess of amounts allocable to identifiable
assets is being amortized over a twenty year period on the straight-line
method. Accumulated amortization at December 31, 1996 and 1995 was $55,937,000
and $13,984,000, respectively.
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.
F-12
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(g) Inventories: Inventories, valued at standard cost, which approximates
actual average unit cost, consist primarily of expendable spare parts used for
the maintenance and repair of flight equipment, plus aircraft fuel and other
operating supplies. A provision for obsolescence of spare parts is accrued at
annual rates which will provide an allowance such that the unused inventory,
at the retirement date of the related aircraft fleet, is reflected at the
lower of cost or estimated net realizable value.
(h) Passenger Revenue Recognition: Passenger ticket sales are recognized as
revenue when the transportation service is rendered. At the time of sale a
current liability for advance ticket sales is established and subsequently is
eliminated either through carriage of the passenger by TWA, through billing
from another carrier that renders the service, or by refund to the passenger.
Under TWA's "Frequent Flight Bonus Program" ("FFB"), frequent travelers may
accumulate certain defined unit mileage credits which entitle them to a choice
of various awards, including certain free air transportation on TWA at a
future date. When the free travel award level is achieved by a frequent
traveler, a liability is accrued and TWA's operating expense is charged for
the estimated incremental cost which will be incurred by TWA upon the future
redemption of the free travel awarded.
Pursuant to the 1995 Restructuring, TWA issued 600,000 ticket vouchers, each
having a face value of $50, which may be used for a discount of up to 50% off
the cost of a ticket for transportation on TWA. Concurrently, TWA entered into
an agreement, as amended, to purchase for cash from a third party any ticket
vouchers acquired by the stand-by purchaser. The ticket vouchers were
initially recorded as a liability at their estimated fair value, approximately
$26.2 million. The liability will be relieved in future periods as vouchers
are redeemed for cash or will be reflected as revenue when the transportation
is provided for tickets purchased with vouchers. Approximately 180,000 and
396,000 vouchers were outstanding at December 31, 1996 and 1995, respectively.
(i) Interest Capitalized: Interest cost associated with funds expended for
the acquisition of qualifying assets is capitalized. Interest capitalized was
$5,463,000 in 1996 and $2,133,000 in 1994. There was no interest capitalized
during 1995.
(j) Income Taxes: TWA accounts for income taxes based on Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". This statement requires the use of the liability method to record the
deferred income tax consequences of differences between the financial
reporting and income tax bases of assets and liabilities.
(k) Postretirement Benefits Other Than Pensions: TWA accounts for
postretirement benefits other than pensions based on SFAS No. 106 which
requires that the expected cost of providing such benefits be accrued over the
years that the employee renders service, in a manner similar to the accounting
for pension benefits.
(l) Deferred Credit-Aircraft Operating Leases: The present value of the
excess of contractual rents due under aircraft operating leases over the fair
rentals for such aircraft were recorded as deferred credits as part of the
application of fresh start reporting. The deferred credit will be increased
through the accrual of interest expense and reduced through a reduction in
operating lease rentals over the terms of the respective aircraft leases. At
December 31, 1996 and 1995, the unamortized balance of the deferred credits
were $31,408,000 and $41,727,000 respectively.
(m) Environmental Contingencies: TWA is subject to numerous environmental
laws and regulations and is subject to liabilities and compliance costs
arising from its past and current handling, processing, recycling, storing and
disposing of hazardous substances and hazardous wastes. It is TWA's policy to
accrue environmental remediation costs when it is probable that a liability
has been incurred and an amount can be reasonably estimated. As potential
environmental liabilities are identified and assessments and remediation
proceed, these
F-13
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accruals are reviewed periodically and adjusted, if necessary, as additional
information becomes available. The accruals for these liabilities can
significantly change due to factors such as the availability of additional
information on the nature or extent of the contamination, methods and costs of
required remediation and other actions by governmental agencies. Costs of
future expenditures for environmental remediation obligations are not
discounted to their present value.
(n) Mandatorily Redeemable 12% Preferred Stock: The Mandatorily Redeemable
12% Preferred Stock issued in connection with the 1995 Reorganization was
initially recorded at its estimated fair value. Until its redemption in April
1996, the carrying amount was being increased by amortization of the
difference between the redemption value and the carrying amount, using the
interest method. Such amounts were recorded as additional preferred stock
dividend requirements. A special dividend requirement of approximately $20.0
million was recorded in 1996 to reflect the excess of the early redemption
price over the carrying value of the Mandatorily Redeemable 12% Preferred
Stock.
(o) Earnings (Loss) Per Share: In computing the loss applicable to common
shares for 1996 and the four months ended December 31, 1995, the net loss has
been increased by dividend requirements on the Mandatorily Redeemable 12%
Preferred Stock (including amortization of the difference between the carrying
amount and the redemption value and the special dividend requirement related
to the early redemption in 1996) and on the 8% Cumulative Convertible
Exchangeable Preferred Stock from the date of issuance in March 1996. In
computing the related net loss per share, the loss applicable to common shares
has been divided by the aggregate average number of outstanding shares of
Common Stock (38.5 million in 1996 and 28.0 million in 1995) and Employee
Preferred Stock (5.7 million in 1996 and 5.3 million in 1995) which, with the
exception of certain special voting rights, is the functional equivalent of
Common Stock. No effect has been given to stock options, warrants or potential
issuances of additional Employee Preferred Stock as the impact would have been
anti-dilutive. Earnings per share of the predecessor company are not presented
as the amounts are not meaningful.
(p) Concentration of Credit Risk: TWA does not believe it is subject to any
significant concentration of credit risk. At December 31, 1996 most of the
Company's receivables related to tickets sold to individual passengers through
the use of major credit cards (37%) or to tickets sold by other airlines (16%)
and used by passengers on TWA. These receivables are short-term, generally
being settled shortly after sale or in the month following usage. Bad debt
losses, which have been minimal in the past, have been considered in
establishing allowances for doubtful accounts.
(q) Use of Estimates: Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(r) Stock-Based Compensation: TWA applies APB Opinion No. 25 and related
interpretations in accounting for its plans. This opinion allows for stock-
based employee compensation to be recognized based on the intrinsic value.
(s) Presentation: Certain prior period amounts have been reclassified to
conform with current year presentation.
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
F-14
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
F-15
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
collective bargaining agreements with the three labor unions representing
approximately 84% of the Company's employees, the IAM, ALPA and IFFA. The '94
Labor Agreements provided for waiver of certain contractually agreed wage
concessions, modifications to work rules and the deletion of certain
provisions of the then existing labor agreements, including eliminating so
called snapbacks, i.e., the automatic restoration of the wage reductions
granted in such agreements upon their expiration. During 1994 and 1995, the
Company also implemented a number of similar saving initiatives with respect
to domestic non-union and management employees, primarily through reducing
head count, altering benefit packages, and eliminating certain planned
restorations of wage reductions.
On June 14, 1995, as one of the transactions contemplated by the extension
of the Icahn Loans, TWA and an entity affiliated with Mr. Icahn, Karabu
Corporation ("Karabu"), entered into an agreement for the sale of tickets (the
"Ticket Agreement"). There are two categories of tickets under the Karabu
Ticket Program: (1) "Domestic Consolidator Tickets" which are subject to a cap
of $610 million, based on the full retail price of the tickets ($120 million
in the first fifteen months and $70 million per year for seven consecutive
years through the term of the Ticket Agreement) and (2) "System Tickets" and
"Matching Tickets" which are not subject to any cap throughout the term of the
Ticket Agreement. The Ticket Agreement provides for the sale of tickets to
Karabu at prices significantly lower than the full retail price.
Domestic Consolidator Tickets sold under the Ticket Agreement are limited to
certain origin/destination city markets in which TWA has less than a 5% market
share, except for the New York market, which has a 10% market share limit.
These restricted markets will be reviewed from time to time to determine any
change in TWA's market share, and other markets may be designated as
necessary.
Ticket sales under the Ticket Program, which commenced in September 1995,
were $139.7 million in 1996 and $16.0 million in 1995 at full published fares.
The aggregate net sales, after applicable discounts under the Ticket
Agreement, were $76.9 million in 1996 and $8.8 million in 1995. Of these
amounts, $71.5 million and $4.4 million is included as passenger revenues for
1996 and the four months ended December 31, 1995, respectively, as the related
transportation had been provided. Substantially all ticket sales under the
Ticket Program to date have been "System Tickets".
The purchase price for the tickets purchased by Karabu are required to
either, at Karabu's option and with certain restrictions, be retained by
Karabu and the amount so retained shall be credited as prepayments against the
outstanding balance of the Icahn Loans, or be paid over to the settlement
trust established in connection with the '93 Reorganization for TWA's account
as prepayments on the PBGC Notes. At December 31, 1996, approximately $64.9
million of such proceeds had been applied to the principal balance of the
Icahn Loans, and $6.4 million had been applied to the PBGC Notes, which
resulted in a $1.6 million extraordinary charge related to the early
extinguishment of PBGC Notes (See Note 14).
Tickets sold to Karabu pursuant to the Ticket Agreement are priced at levels
intended to approximate current competitive discount fares available in the
airline industry. The Ticket Agreement provides that no ticket may be included
with an origin or destination of St. Louis, nor may any ticket include flights
on other carriers. Tickets sold pursuant to the Ticket Agreement are required
to be at fares specified in the Agreement, net to TWA, and be exclusive of
tax. No commissions will be paid by TWA for tickets sold under the Ticket
Agreement, and in general TWA believes that under the applicable provisions of
the Ticket Agreement System Tickets may not be marketed or sold to the general
public either directly or through travel agents. Karabu, however, has been
marketing System Tickets 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. In December 1995, the
Company filed a lawsuit against Karabu, Mr. Icahn and affiliated companies
seeking damages and to enjoin further violations. Mr. Icahn countered
threatening to attempt to declare a default on the Icahn Loans on a
F-16
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
variety of claims related to his various interpretations of the security
documents related to such loans as well as with respect to alleged violations
of the Ticket Agreement by the Company. The parties then negotiated a series
of standstill agreements pursuant to which the lawsuit was temporarily
withdrawn while the parties endeavor to negotiate a settlement of their
differences and respective claims. If Karabu's interpretation as to sales of
discount tickets to the general public through travel agents was determined by
a court or otherwise to be correct and the Company did not otherwise take
appropriate action to mitigate the effect of such sales, the Company could
suffer significant loss of revenue so as to reduce overall passenger yields on
a continuing basis during the eight year term of the Ticket Agreement. In
addition, any default by the Company under the ticket agreement or directly on
the Icahn loans which resulted in an acceleration of the Icahn Loans could
result in a cross-default to the Company's other indebtedness and leases and
otherwise have a material adverse effect on the Company.
4. INVESTMENTS:
TWA, through a wholly-owned subsidiary, has a 25% partnership interest in
Worldspan, a joint venture among TWA, Delta Airlines, Inc., Northwest
Airlines, Inc. and ABACUS Distribution Systems PTE Ltd. Worldspan owns,
markets and operates a global computer airline passenger reservation system on
behalf of subscriber travel agents and contracting airlines who pay booking
fees to Worldspan for such reservation service. TWA accounts for its
investment in the partnership on the equity basis. TWA's share of the combined
net earnings (loss) of the partnership was approximately $11,919,000 for the
year ended December 31, 1996, $(11,535,000) for the four months ended December
31, 1995, $3,607,000 for the eight months ended August 31, 1995 and
$(3,616,000) for the year ended December 31, 1994, which is included in Other
Charges (Credits) in TWA's Statements of Consolidated Operations. The excess
of TWA's carrying value for its investment in Worldspan over its share of the
underlying net assets of Worldspan is being amortized over a period of 20
years. At December 31, 1996 and 1995, the unamortized balance of this excess
amounted to approximately $32.0 million and $33.9 million, respectively.
The partnership provides passenger reservations services, communication
facilities and other computer services which are purchased by TWA on a
recurring basis. The aggregate cost of the services purchased from the
partnership, which is included in all other operating expenses in TWA's
Statements of Consolidated Operations, is approximately as follows (in
thousands):
<TABLE>
<S> <C>
Year Ended December 31, 1996........................................ $54,611
Four Months Ended December 31, 1995................................. $16,566
Eight Months Ended August 31, 1995.................................. $29,604
Year Ended December 31, 1994........................................ $43,638
</TABLE>
Summary financial data for Worldspan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Current assets............................................ $172,368 $ 84,854
Non-current assets........................................ 384,653 410,901
-------- --------
Total assets............................................ $557,021 $495,755
======== ========
Current liabilities....................................... $126,774 $101,219
Non-current liabilities................................... 125,255 137,220
Partners' equity.......................................... 304,992 257,316
-------- --------
Total liabilities and equity............................ $557,021 $495,755
======== ========
</TABLE>
F-17
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Revenues.................................................. $548,419 $498,138
Costs and expenses........................................ 500,743 529,852
-------- --------
Net income (loss)....................................... $ 47,676 $(31,714)
======== ========
</TABLE>
5. INCOME TAXES:
Income tax liabilities at December 31, 1996 and 1995, included in other
noncurrent liabilities, consist of the following (in millions):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Current taxes................................................... $ -- $ --
Deferred taxes:
Federal....................................................... 10.7 10.7
Other income and franchise taxes.............................. .3 .3
----- -----
Total income tax liability...................................... $11.0 $11.0
===== =====
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996 and 1995 are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits, other than pensions.................. $198.5 $194.6
Pension obligations........................................... 82.3 83.4
Employee compensation and other benefits...................... 36.5 60.2
Capital leases, net........................................... 54.3 56.6
Net operating loss carryforwards.............................. 247.1 207.8
Other, net.................................................... 84.0 86.7
------ ------
Total deferred tax assets................................... 702.7 689.3
====== ======
</TABLE>
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Property and spare parts, net............................. $ (34.6) $ (24.7)
Routes, gates, and slots, net............................. (158.7) (178.1)
Investment in affiliate................................... (42.7) (38.8)
------- -------
Total deferred tax liabilities.......................... $(236.0) $(241.6)
======= =======
Net deferred tax asset before valuation allowance......... 466.7 447.7
Deferred tax asset valuation allowance.................... (477.7) (458.7)
------- -------
Net deferred tax asset (liability)...................... $ (11.0) $ (11.0)
======= =======
</TABLE>
The valuation allowance arises primarily from the amortization of
intangibles, representing taxable temporary differences, the reversal of which
extends beyond the period in which deductible temporary differences are
expected to reverse. The net deferred tax liability, after giving effect to
the valuation allowance, arises primarily in years after 2020.
F-18
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the provision (credit) for income taxes is as follows (amounts
in thousands):
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- ------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 1, DECEMBER 1,
1996 1995 1995 1994
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Current, primarily foreign............................................. $450 $1,370 $(96) $960
Deferred............................................................... -- -- -- --
---- ------ ---- ----
Total provision (benefit) for income taxes, net...................... $450 $1,370 $(96) $960
==== ====== ==== ====
</TABLE>
Income tax expense for the periods presented below differs from the amounts
which would result from applying the federal statutory tax rate to pretax
income, as follows:
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income tax benefit at United States statutory rates................... $(93,652) $(11,294) $(118,408) $(151,504)
Amortization of reorganization value in excess of amounts allocable to
identifiable assets.................................................. 14,683 4,894 1,976 2,870
Meals and entertainment disallowance.................................. 4,257 1,419 2,838 4,663
Foreign taxes......................................................... 450 1,370 (96) 960
Net operating loss not benefitted and other items..................... 74,712 4,981 113,594 143,971
-------- -------- --------- ---------
Income tax expense (benefit).......................................... $ 450 $ 1,370 $ (96) $ 960
======== ======== ========= =========
</TABLE>
A provision for income tax on the extraordinary gain from the extinguishment
of debt in the eight months ended August 31, 1995 was not required as such
income is excluded from taxation under the Internal Revenue Code of 1986, as
amended.
In May 1993, TWA and the Internal Revenue Service reached an agreement (the
"IRS Settlement") to settle both: (i) the IRS' proof of claim in the '93
Reorganization in the amount of approximately $1.4 billion covering
prepetition employment and income taxes of TWA, and (ii) the audit of TWA's
federal income tax returns through 1992. Pursuant to the IRS Settlement, TWA
paid $6 million to the IRS through the application of funds owed to TWA by
certain governmental agencies and issued a note in the amount of $19 million
payable in quarterly installments over a six year period (also see Note 8--
Debt). As a result of the IRS Settlement, TWA increased its tax basis in
certain of its assets and will be allowed no benefit of any federal net
operating loss or credit carryforward from 1992 or any prior year. Federal
income tax losses incurred by TWA subsequent to 1992 may not be carried back
to pre-1993 years.
The Company estimates that it has tax net operating loss carryforwards
amounting to approximately $625 million at December 31, 1996 expiring in 2008
through 2011 if not utilized before then to offset taxable income. Section 382
of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations
issued thereunder, imposed limitations on the ability of corporations to use
NOLs if the corporation experiences a more than 50% change in ownership during
certain periods. In connection with the change of ownership caused by the
F-19
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reorganization, the Company elected to reduce its NOLs in accordance with
Section 382 of the Code and regulations issued thereunder. If another
ownership change were to occur prior to September 1997, the annual limitations
on the Company's utilization of its then existing NOLs would be reduced to
zero. Changes in ownership in periods thereafter could substantially restrict
the Company's ability to utilize its tax net operating loss carryforwards. In
addition, the tax net operating loss carryforwards are subject to examination
by the IRS and thus are subject to adjustment or disallowance resulting from
any such IRS examination. For financial reporting purposes, the tax benefits
from substantially all of the tax net operating loss carryforwards will, to
the extent realized in future periods, have no impact on the Company's
operating results, but instead be applied to reduce reorganization value in
excessive amounts allocable to identifiable assets.
6. EMPLOYEE BENEFIT PLANS:
Substantially all of TWA's employees are covered by noncontributory defined
benefit retirement plans that were frozen on January 1, 1993. While many of
TWA's employees continue participation in these plans, they have not accrued
any additional benefits since the date the plans were frozen. Employees hired
after the freeze are not entitled to participate in these defined benefit
retirement plans. TWA's policy has been to fund the defined benefit plans in
amounts necessary for compliance with the funding standards established by the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The retirement plans for Pilots, Flight Attendants and Dispatchers provide
benefits determined from career average earnings, with Pilots having minimum
benefits after ten years of service. Employees (other than Passenger Service
Employees) represented by the IAM earn retirement plan benefits of stated
amounts for each year of service. The Retirement Plan for U.S. Noncontract
Employees (including Passenger Service Employees) provides pension benefits
that are based on the employee's compensation during the last five years prior
to retirement, with compensation subsequent to 1988 frozen at the 1988 pay
level. Foreign plans provide benefits that meet or exceed local requirements.
Normal retirement is age 60 for Pilots and Flight Attendants, and age 65 for
nonflight personnel. The age at which employees can receive supplemental
benefits for early retirement varies by labor group, but ranges from age 45 to
age 64.
As noted above, in January 1993, TWA's defined benefit plans covering
domestic employees (the "Pension Plans") were frozen and Pichin Corporation, a
Delaware corporation formed by the Icahn Entities, assumed sponsorship of the
Pension Plans and is now responsible for management and control of the Pension
Plans. Pursuant to an agreement (the "Comprehensive Settlement Agreement")
among the Company, the Icahn Entities, the Pension Benefit Guarantee
Corporation (the "PBGC") and unions representing TWA employees, TWA retains
only specified obligations and liabilities in respect of the Pension Plans,
which include (i) payment obligations under the PBGC Notes, and (ii) the
obligation to continue to act as the benefits administrator responsible for,
among other things, determining and administering the payment of Pension Plan
benefits (also see Note 8--Debt).
Pichin Corporation is obligated to make the required minimum funding
payments to each of the Pension Plans, subject to reduction for any payments
made under the PBGC Notes. The PBGC may not terminate the Pension Plans,
except under section 4042(a)(2) of ERISA or at the request of Pichin
Corporation, so long as the Icahn Entities and Pichin Corporation have
complied with all terms of the Comprehensive Settlement Agreement relating to
the PBGC. Upon the occurrence of certain significant events (as defined)
including, but not limited to, a sale of substantially all of TWA's assets, a
merger involving TWA or a liquidation under Chapter 7 under the Bankruptcy
Code, and at the request of Pichin Corporation, the Pension Plans will be
terminated. After such a termination, the liability of Pichin Corporation and
all members of its controlled group will be limited to an
F-20
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost............ $ 577 $ 274 $ 493 $1,190
Interest cost........... 992 583 1,040 3,053
Actual return on assets. (505) (100) (200) (864)
Net amortization and
deferral............... (355) -- -- --
Net pension expense..... 709 757 1,333 3,379
</TABLE>
Actuarial assumptions used for determining pension costs were:
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Discount rate for
interest cost.......... 7.50% 7.00% 8.50% 8.50%
Rate of increase in
future compensation
levels................. 5.50 5.50 5.50 7.50
Expected long-term rate
of return on plan
assets................. 9.00 11.00 11.00 11.00
</TABLE>
F-21
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status (with benefit obligations determined using the current
estimated discount rate of 7.5% and 7.0% at December 31, 1996 and 1995
respectively) and amounts recognized in the Consolidated Balance Sheets at
December 31, 1996 and 1995, for defined benefit plans covering foreign
employees, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995
----------------------- ----------------------------
PLANS IN WHICH PLANS IN WHICH
----------------------- ----------------------------
ACCUMULATED
ASSETS BENEFITS
EXCEED EXCEED ACCUMULATED
ACCUMULATED ACCUMULATED ASSETS BENEFITS
BENEFITS ASSETS EXCEED BENEFITS ASSETS
----------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Actuarial present value
of benefit obligations:
Vested benefit
obligation........... $44,200 $ 7,153 $ 23,986 $13,958
Nonvested benefit
obligation........... -- 1,198 14 2,338
------- ------- -------- -------
Accumulated benefit
obligation........... 44,200 8,351 24,000 16,296
Projected benefit
obligation more than
accumulated benefit
obligation........... 3,983 5,882 1,327 8,273
------- ------- -------- -------
Projected benefit
obligation........... 48,183 14,233 25,327 24,569
Plan assets at fair
value (a).............. 50,703 -- 47,814 --
------- ------- -------- -------
Projected benefit
obligation more
(less) than plan
assets at fair value. (2,520) 14,233 (22,487) 24,569
Unrecognized net gain
(loss)................. 7,307 11,696 -- 949
------- ------- -------- -------
Pension liability
(asset) before
adjustment............. 4,787 25,929 (22,487) 25,518
Adjustment to reduce
pension assets to
estimated recoverable
amount................. -- -- 18,222 (b) --
------- ------- -------- -------
Pension liability
(asset) recognized in
Consolidated Balance
Sheets............... $ 4,787 $25,929 $ (4,265) $25,518
======= ======= ======== =======
</TABLE>
- --------
(a) Plan assets are invested in cash equivalents, international stocks, fixed
income securities and real estate.
(b) The adjustment at December 31, 1995 represented the amount by which the
net pension asset exceeded the amount estimated to be recoverable pursuant
to a planned termination of a pension plan covering certain foreign
employees. United Kingdom law requires the reduction of retirement plan
assets when such assets exceed 105% of plan liabilities. In 1996, assets
in TWA's United Kingdom Pension Plan exceeded liabilities by approximately
$20 million. This surplus was eliminated by terminating the existing UK
Pension Plan and establishing a new pension plan for UK employees. The
surplus assets were split between TWA and the participants of the UK Plan,
with plan participants receiving their share in enhanced pension benefits,
and TWA receiving, in December 1996, a reversion from the original plan of
$9.7 million.
TWA has several defined contribution plans covering most of its employees.
Total pension expense for these plans was $58.0 million, $14.1 million, $26.8
million, $46.0 million, for the year ended December 31, 1996, the four months
ended December 31, 1995, the eight months ended August 31, 1995 and the year
ended December 31, 1994, respectively. Such defined contribution plans
include: (a) trust plans established pursuant to collective bargaining
agreements with certain employee groups providing for defined Company
contributions generally 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
F-22
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contributions up to a maximum of 10% of the employee's pay. Pursuant to the 92
Labor Agreements, Company contributions were suspended for certain defined
contribution plans for the period September 1, 1992 through August 31, 1995.
Such suspension has been extended through August 31, 1997. In connection with
the Comprehensive Settlement Agreement, TWA agreed to make contributions to
defined contribution plans aggregating 2% of eligible wages for 1993 through
1995, and 3.3% thereafter. The Company made the 1994 contribution payment on
June 20, 1995. Commencing on July 1, 1995, TWA is required to make such
contributions on a monthly basis.
In addition to providing retirement benefits, TWA provides certain health
care and life insurance benefits for retired employees, their spouses and
qualified dependents. Substantially all employees may become eligible for
these benefits if they reach specific retirement age criteria while still
actively employed by TWA. SFAS No. 106 requires that the expected cost of
providing postretirement benefits other than pensions be accrued over the
years that the employee renders service, in a manner similar to the accounting
for pension benefits.
The following table sets forth a reconciliation of the accrued
postretirement benefit cost as of December 31, 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Actives fully eligible......................... $163 $165
Other actives.................................. 144 150
Retirees....................................... 225 208
---- ----
Total APBO................................... 532 523
Unrecognized cumulative loss..................... (29) (30)
---- ----
Accrued postretirement benefit cost.............. $503 $493
==== ====
</TABLE>
The components of net periodic postretirement benefit cost are as follows
(in millions):
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost.......................................................... $10.0 $ 3.0 $ 5.4 $ 9.5
Interest cost......................................................... 35.4 11.0 25.5 34.5
----- ----- ----- -----
Total................................................................. $45.4 $14.0 $30.9 $44.0
===== ===== ===== =====
</TABLE>
The discount rate used to determine the APBO was 7.5% at December 31, 1996
and 7.0% at December 31, 1995. The discount rate used to determine net
periodic postretirement benefit costs was 7.0% for the year ended December 31,
1996, 7.0% for the four months ended December 31, 1995, 8.5% for the eight
months ended August 31, 1995 and 7.0% for the year ended December 31, 1994.
The assumed health care cost trend rate used in measuring the APBO was 8.0% in
1997 declining by 1% per year to an ultimate rate of 5%. If the assumed health
care cost trend rate was increased by 1 percentage point, the APBO at December
31, 1996 would be increased by approximately 10% and 1996 periodic
postretirement benefit cost would increase approximately 10%.
F-23
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CONTINGENCIES:
On July 17, 1996, TWA Flight 800 crashed shortly after departure from JFK en
route to Paris, France. There were no survivors among the 230 passengers and
crew members aboard the Boeing 747 aircraft. The Company is cooperating fully
with all federal, state and local regulatory and investigatory agencies to
ascertain the cause of the crash, but to date a cause has not been determined.
While TWA is currently the defendant in a number of lawsuits, TWA is unable to
predict the amount of claims relating to the crash which may ultimately be
made against the Company and how those claims might be resolved. TWA maintains
substantial insurance coverage and, at this time, management has no reason to
believe that such insurance coverage will not be sufficient to cover the
claims arising from the crash. Therefore, TWA believes that the resolution of
such claims will not have a material adverse effect on its financial condition
or results of operations. The Company is unable to identify or predict the
extent of any adverse effect on its revenues, yields, or results of operations
which has resulted or may result from the public perception of the crash.
During 1992, TWA and several other major airlines agreed to settle certain
class action antitrust litigation. Pursuant to the settlement agreement, which
was approved by the United States District Court for the Northern District of
Georgia in 1994, TWA paid $1 million and, together with five other carriers,
issued approximately $400 million in face amount of certificates for discounts
of approximately 10% on future domestic air travel on any of the six carriers.
TWA will reflect the certificates that are redeemed for travel on TWA as a
reduction in revenue as the transportation is provided. While TWA presently
does not have any reason to expect that the face amount of the discount
coupons that will be redeemed for travel on TWA in the future will not
reasonably approximate the face amount of discount coupons that TWA
contributed to the settlement, it is reasonably possible that the actual face
amount of discount coupons redeemed by TWA could be substantially different,
considering the interchangeability of the discount coupons and that the face
amount of the discount coupons contributed by all of the participating
carriers and distributed to claimants aggregated approximately $400 million.
Therefore, while the settlement agreement could have the effect of reducing
TWA's future revenues and cash flows from levels that might otherwise be
realized, because of the uncertainties as to the face amount of the discount
coupons that will ultimately be redeemed by TWA and uncertainties as to the
impact that the distribution of discount coupons will have on traffic levels,
TWA is unable to reasonably estimate any such effects.
On October 22, 1991, a judgment in the amount of $12,336,127 was entered
against TWA in an action in the New York District Court by Travellers
International A.G. and its parent company, Windsor, Inc. (collectively,
"Travellers"). On November 4, 1991, TWA posted a cash undertaking of
$13,693,101, which was charged to expense, for a stay of execution of the
judgment pending the appeal. On March 10, 1992, the Company commenced an
adversary proceeding against Travellers in the Bankruptcy Court seeking to
avoid the cash undertaking on the grounds that it constitutes a preferential
transfer or, in the alternative, to find that the cash undertaking constitutes
property of the estate. In March 1993, Travellers filed a petition for a writ
of certiorari in the United States Supreme Court seeking to require TWA to
litigate its claims against Travellers in the New York District Court and not
the Bankruptcy Court. The petition was denied by the United States Supreme
Court in April 1993. A trial of the adversary proceeding took place in
Bankruptcy Court in February 1994 and in December of 1994, the Bankruptcy
Court reached a decision in this proceeding which is favorable to the Company.
Upon appeal, the District Court affirmed in part and reversed in part the
bankruptcy courts decision. Both parties have appealed the matter to the Third
Circuit Court of Appeals. The Company believes that in the event the District
Court's decision is affirmed, the ultimate result will not be materially
different than the decision of the bankruptcy court. Pursuant to the Icahn
Financing Facilities, amounts received pursuant to these proceedings must be
used to repay, in part, TWA's obligations thereunder.
TWA is subject to numerous environmental laws and regulations administered
by various state and federal agencies. Although the Company believes adequate
reserves have been provided for all known environmental
F-24
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contingencies, it is possible that additional reserves might be required in
the future which could have a material effect on the results of operations or
financial condition of the Company. However, the Company believes that the
ultimate resolution of known environmental contingencies should not have a
material adverse effect on the financial position or results of operations
based on the Company's knowledge of similar environmental sites.
Since May 1991, TWA's employees in Israel have claimed that the Company
should be required to collateralize its contingent payment of termination
indemnities. This matter deals only with collateralization of a contingent
payment obligation. The employees have asserted that the amount necessary to
collateralize the contingent payment of termination indemnities could be as
much as $25 million. The Company denies any obligation to collateralize and
asserts that any obligation to collateralize any termination indemnity is not
a current obligation.
In February 1995, a number of actions were commenced in various federal
district courts against TWA and six other major airlines alleging that the
companies conspired and agreed to fix, lower and maintain travel agent
commissions on the sale of tickets for domestic air travel in violation of the
United States antitrust laws. Generally the complaints in these actions seek
treble damages and injunctive relief on behalf of a nationwide class of travel
agents. Certain of these actions also claim violations of various state laws.
On May 9, 1995 TWA announced settlement, subject to court approval, of the
referenced actions and reinstated the traditional 10 percent commission on
domestic air fares. A final court order has not yet been entered; however,
there has been entered an interim order approving the settlement.
On November 9, 1995, ValuJet Air Lines, Inc. ("ValuJet") instituted a
lawsuit against TWA and Delta Air Lines ("Delta") in the United States
District Court for the Northern District of Georgia, alleging breach of
contract and violations of certain antitrust laws with respect to the
Company's lease of certain takeoff and landing slots at LaGuardia
International Airport in New York. On November 17, 1995, the court denied
ValuJet's motion to temporarily enjoin the lease transaction and the Company
and Delta consummated the lease of the slots. ValuJet subsequently amended its
original complaint. On July 12, 1996, the Federal Court in Atlanta granted
summary judgment in TWA's favor in the ValuJet litigation on all claims and
counts raised in the ValuJet amended complaint. The order granting summary
judgment to TWA was not a final order and was not directly appealable due to
an outstanding claim against Delta. While ValuJet's counsel has stated that an
appeal will be filed at a later date, the Company intends to vigorously defend
itself in any future action and believes all of the allegations that have been
made to date are without merit.
In addition, based on certain written grievances or complaints filed by
ValuJet, the Company was informed that the United States Department of Justice
("DOJ"), Antitrust Division, was investigating the circumstances of the slot
lease transaction to determine whether an antitrust violation has occurred.
During the course of its investigation, the DOT was informed of the summary
judgment described above. Since the date of the judgment, TWA is unaware of
whether the DOJ has undertaken further investigative efforts, the status of
the investigation or any future plans of the DOJ or other regulatory bodies
with respect to the ValuJet lawsuit. While TWA is hopeful the summary judgment
will be persuasive to the various regulatory bodies petitioned by ValueJet, it
will cooperate with any further investigations and strongly believes that the
slot lease transaction was not in violation of antitrust laws.
On September 6, 1995 TWA announced that the operations of its wholly owned
subsidiary, Trans World Express, Inc. ("TWE"), would be discontinued on
November 6, 1995. TWA has entered into an agreement with an unaffiliated
entity, Trans States Airlines, Inc., to provide feeder service into TWA's JFK
hub, which commenced on November 7, 1995. TWA does not currently expect that
the liquidation of TWE will have a material adverse impact on the financial
position or results of operations of TWA.
Pursuant to the '92 Labor Agreements, the Company agreed to pay to employees
represented by the IAM a cash "bonus' for the amount by which overtime
incurred by the IAM from September of 1992 through August
F-25
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995 was reduced below specified thresholds. This amount was to be offset by
the amount by which medical savings during the period for the same employees
did not meet certain specified levels of savings. The obligation is payable in
three equal annual installments beginning in 1998. The Company has estimated
the net overtime bonus owed to the IAM to be approximately $26.3 million and
has reflected this amount as a noncurrent liability in the accompanying
balance sheets. Such amount reflects a reduction of approximately $10.0
million pursuant to the final calculation of the liability and an agreement to
reduce proportionately the obligation based upon the size of the reduction of
indebtedness achieved by the "95 Reorganization. The IAM, while not providing
a calculation of its own, has disputed the method by which management has
computed the net overtime bonus and has indicated that they believe the amount
due to the IAM is much greater than the amount which has been estimated by
management.
In connection with certain wage increases afforded to non-contract
employees, employees represented by the IFFA have asserted and won an
arbitration ruling that, if sustained, would require that the Company provide
additional compensation to IFFA represented employees. The Company estimates
that at December 31, 1996 such additional compensation would aggregate
approximately $6 million. The Company denies any such obligation and intends
to pursue an appeal of the arbitration ruling. As such, no liability has been
recorded by the Company at December 31, 1996.
In connection with the "95 Reorganization, the Company entered into a letter
agreement with employees represented by the ALPA whereby if the Company's
flight schedule, as measured by block hours, does not exceed certain
thresholds a defined cash payment would be made to the ALPA. The defined
thresholds were exceeded during the measurement periods through December 31,
1996 and no amount was therefore owed to the ALPA as of that date. The
Company, however, anticipates that a liability will be incurred during 1997 as
a result of the Company's planned reductions in capacity. The amount of the
liability, if any, will be dependent on the amount by which the targeted block
hours flown during the year exceed the actual block hours flown. Based upon
current plans, the Company estimates its obligation under this agreement will
not exceed $12.0 million in 1997.
The Company is also defending a number of other actions which have arisen in
the ordinary course of business, and are insured or the likely outcome of
which the management of the Company does not believe may be reasonably be
expected to be materially adverse to the Company's financial condition or
results of operations.
F-26
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT:
Substantially all of TWA's assets are subject to liens and security
interests relating to long-term debt and other agreements.
Long-term debt (net of unamortized discounts) outstanding at each balance
sheet date was:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
12% Senior Secured Reset Notes due 1998 (a)......... $ 111,799 $ 145,184
12% Contingent Payment Rights due 1996 (b).......... -- 11,265
8% IAM Backpay Notes (c)............................ 12,090 11,037
PBGC Notes (d)...................................... 198,672 201,164
Icahn Financing Facilities (e)...................... 125,102 187,977
Equipment Trust Certificates (f).................... 8,963 17,929
Various Secured Notes, 4.0% to 12.4, due 1997-2001
(g)................................................ 75,478 103,847
Installment Purchase Agreements, 10.0% to 10.53%,
due 1997-2003 (h).................................. 109,034 111,033
Predelivery Financing Agreement (i)................. 19,862 --
IRS Deferral Note (j)............................... 8,708 10,937
WORLDSPAN Note (k).................................. 31,224 31,224
----------- -----------
Total long-term debt................................ 700,932 831,597
Less current maturities............................. 92,447 67,566
----------- -----------
Long-term debt, less current maturities............. $ 608,485 $ 764,031
=========== ===========
</TABLE>
- --------
(a) The 12% Senior Secured Reset Notes due 1998 pay interest semi-annually,
payable either in cash or, as to the first four interest payments, at the
Company's option, in whole or in part, in Common Stock, beginning August
1, 1995, subject to certain conditions. The Company elected to pay
interest due and payable for the first two periods and one-half of the
interest due and payable February 1, 1997 (fourth period) in common stock.
The outstanding notes have a stated principal amount of $124.8 million and
$170.0 million at December 31, 1996 and 1995, respectively, and are
reflected net of the unamortized discount of $13.0 million and $24.8
million at December 31, 1996 and 1995. The notes are secured by a first
lien on certain slots, equipment and spare parts.
During 1996, the Company consummated a series of privately negotiated
exchanges with a significant holder of the 12% Senior Secured Reset Notes
which resulted in the return to the Company of approximately $45.3 million
principal amount of 12% Senior Secured Reset Notes and $1.5 million in
accrued interest thereon in exchange for the issuance of approximately 4.5
million shares of Company Common Stock (See Note 14).
(b) The Contingent Payment Rights, arising under the terms of the "95
Reorganization, were paid in 1996.
(c) The 8% IAM Backpay Notes have a stated principal amount of $22.0 million
and $22.9 million at December 31, 1996 and 1995, respectively. The notes
are reflected net of the unamortized discount of $9.9 million and $11.9
million at December 31, 1996 and 1995, respectively, which reflects an
effective interest rate of approximately 24.4% at December 31, 1996. The
notes mature in 2001 and pay interest semi-annually. The notes are secured
by a subordinate lien on TWA's interest in Worldspan and a lien on
approximately $2.2 million in proceeds from the sale of Midcoast Aviation.
During December 1996, ownership of the notes was transferred from the
Indenture Trustee to current and former IAM union members who participated
in the 1992 labor agreement.
(d) The PBGC Notes have a stated unpaid principal balance of $232.9 million
and $244.3 million at December 31, 1996 and 1995, respectively. The notes
are reflected net of unamortized discounts of $34.3 million and
F-27
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$43.2 million at December 31, 1996 and 1995, respectively, to reflect an
effective interest rate of approximately 13.0%. Interest on the PBGC Notes
is payable semi-annually at an average stated rate of 8.19% per annum.
Principal payments are due in semi-annual installments beginning in 1999
through 2003, however, due to certain note provisions mandatory prepayments
are required. Additional prepayments could arise from the election of
Karabu to apply the purchase price for tickets purchased under the Ticket
Agreement to a reduction of the PBGC Notes (see Note 3). The Notes are non-
recourse notes secured by first liens on TWA's international routes and
TWA's leasehold interest in the Kansas City maintenance facility and
certain fixtures and equipment.
(e) The Icahn Financing Facilities include a $75 million Asset Based Facility
and a $125 million Receivables Facility, which had principal balances of
$46.9 million and $78.2 million, respectively, at December 31, 1996. The
loans are due in January 2001 and interest is payable monthly at a rate of
prime plus 1.75% per annum. Collateral for the Icahn Loans include a
number of aircraft, engines, and related equipment, along with
substantially all of the Company's receivables. The notes evidencing the
Icahn Loans are security for certain obligations of the Icahn Entities to
the PBGC. Prepayments of the Icahn Loans could arise from the election of
Karabu to apply the purchase price for tickets purchased under the Ticket
Agreement to a reduction of the Icahn Loans (see Note 3).
(f) The Equipment Trust Certificates pay interest semi-annually at a rate of
11% per annum and are subject to mandatory redemptions beginning in April
1994 and continuing until September 1997. The certificates are secured by
certain aircraft, engines and other equipment.
(g) Various Secured Notes represent borrowings to finance the purchase or
lease of certain flight equipment and other property.
(h) Installment Purchase Agreements represent borrowings to finance the
purchase of four Boeing 767-231 and one Boeing 747-238 aircraft. The
borrowings mature in monthly installments through 2003, and require
interest at rates ranging from 10.0% to 10.53% per annum.
(i) The Predelivery Financing Agreements represent borrowings from the engine
manufacturer to finance prepayments on the purchase of five Boeing 757
aircraft. The borrowings mature upon delivery of the aircraft beginning in
February 1997 and continuing through October 1997. Interest is payable
quarterly at a rate of LIBOR plus 3.5%.
(j) The IRS Deferral Note represents unpaid amounts due under the terms of a
settlement reached in 1993 for taxes and interest owed to the IRS. The
note requires payment of interest quarterly at a rate of 7% per annum and
matures in 1999.
(k) The Worldspan Note represents amounts owed to Worldspan, a 25% owned
affiliate of TWA, for prior services and advances. The note pays interest
at maturity at a rate of prime plus 1% per annum and matures in 1999. The
note is secured by a pledge of TWA's partnership interest in Worldspan.
At December 31, 1996, aggregate principal payments due for long-term debt
for the succeeding five years were as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
YEAR THOUSANDS)
---- -----------
<S> <C>
1997.......................................................... $ 92,447
1998.......................................................... 181,915
1999.......................................................... 95,990
2000.......................................................... 73,347
2001.......................................................... 201,558
</TABLE>
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.
F-28
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LEASES AND RELATED GUARANTEES:
Eighteen of the aircraft in the Company's fleet at December 31, 1996 were
leased under capital leases. The remaining lease periods for these aircraft
range from one to ten years. The Company has options and/or rights of first
refusal to purchase or re-lease most of such aircraft at market terms upon
termination of the lease. The Company has guaranteed repayment of certain of
the debt issued by the owner/lessor to finance some of the aircraft under
capital lease to the Company; however, the scheduled rental payments will
exceed the principal and interest payments required of the owner/lessor.
Aggregate annual rentals in 1997 will be approximately $42.3 million for the
18 aircraft held under capital leases.
One hundred twenty nine of the aircraft in TWA's fleet at December 31, 1996
were leased under operating leases. Other than seven leases on a month-to-
month basis, the remaining lease periods range from three months to 15 years.
Upon expiration of the current leases, TWA has the option to re-lease most of
such aircraft for specific terms and/or rentals with some of the renewal
options being subject to fair market rental rates.
Buildings and facilities leased under capital and operating leases are
primarily for airport terminals and air transportation support facilities.
Leases of equipment, other than flight equipment, include some of the
equipment at airports and maintenance facilities, flight simulators, computers
and other properties.
Pursuant to an agreement between the City of St. Louis and TWA in November
1993 (the "Asset Purchase Agreement"), the City of St. Louis waived a $5.3
million pre-petition claim and provided TWA with two installments of $24.7
million and $40 million pursuant to sale/leaseback transactions involving
certain of TWA's assets located at Lambert-St. Louis Airport and other
property and assets located in St. Louis including gates, terminal support
facilities at the airport, hangar/St. Louis Ground Operations Center complex,
Flight Training Center and equipment and tenant improvements at these various
St. Louis facilities.
Under the Asset Purchase Agreement, TWA leased back the properties involved
under a month-to-month agreement subject to automatic renewal so long as TWA
is not in default thereunder, such agreement having a term otherwise expiring
December 31, 2005. Such term is subject to early termination in the event of
certain events of default, including non-payment of rents, cessation of
service, or failure to relocate and maintain its corporate headquarters within
the City or County of St. Louis, or relocate and maintain a reservations
office within the City of St. Louis. Under the Asset Purchase Agreement, TWA
has the right to use 57 gates and terminal support facilities at Lambert-St.
Louis Airport. The City has certain rights of redesignation of TWA's gates in
the event TWA's flight activity at St. Louis is reduced below a threshold
level of 190 daily flight departures during any given monthly period. The
related leases are classified as capital leases for financial reporting
purposes.
The Company's acquisition of 11 new aircraft during 1982 and 1983, one
Lockheed L-1011 and ten Boeing 767s, created certain tax benefits that were
not of immediate value in the Company's federal income tax returns and,
therefore, such tax benefits were sold to outside parties under so-called
"Safe Harbor Leases" as permitted by IRS regulations. Pursuant to the sales
agreements, the Company is required to indemnify the several purchasers if the
tax benefits cannot be used because of circumstances within the control of the
Company. As of December 31, 1996, the Company's contingent indemnification
obligations in connection with the tax benefit transfers were collateralized
by bank letters of credit aggregating $11,510,000 for which the Company has
posted $11,510,000 in cash collateral to secure its reimbursement obligations
and the bank letters of credit. In addition, the Company has pledged
$7,413,000 in cash collateral to secure its obligation with respect to four of
the tax benefit transfers and has pledged flight equipment having a net book
value of $23,359,000 to secure its obligation with respect to two of the tax
benefit transfers.
F-29
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 future minimum lease payments for capital leases and
future minimum lease payments, net of sublease rentals of immaterial amounts,
for long-term leases, were as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE PAYMENTS
-----------------------
CAPITAL OPERATING
YEAR LEASES LEASES
---- ---------- ------------
(AMOUNT IN THOUSANDS)
<S> <C> <C>
1997................................................ $ 64,601 $ 302,811
1998................................................ 56,416 304,226
1999................................................ 52,664 303,802
2000................................................ 49,249 284,538
2001................................................ 45,008 265,714
Subsequent.......................................... 87,173 1,704,364
---------- ------------
Total............................................. 355,111 $ 3,165,455
============
Less imputed interest............................... 91,820
----------
Present value of capital leases..................... 263,291
Less current portion................................ 42,501
----------
Obligations under capital leases, less current
portion............................................ $ 220,790
==========
</TABLE>
Included in the Minimum Lease Payments for Operating Leases are increased
rental rates related to lessor financing of engine hush-kits for 21 aircraft
plus estimates of increased rentals for nine additional aircraft yet to be
financed. The estimated amounts assume an eight year extension of the
respective aircraft leases from date of hush-kit installation. Also included
in the Minimum Lease Payments for Operating Leases are rentals related to an
agreement entered into in 1996 providing for the lease of ten Boeing 757
aircraft, with delivery of the first aircraft in July 1996 and the final
aircraft in July 1997, as well as estimated rentals related to an agreement
entered into in 1996 for the lease of fifteen new and three used McDonnell
Douglas MD-83 aircraft, with delivery of the aircraft between February 1997
and April 1999.
10. MANDATORILY REDEEMABLE 12% PREFERRED STOCK:
Pursuant to the '95 Reorganization the Company issued 1,089,991 shares of
the 1,510,000 authorized shares of Mandatorily Redeemable 12% Preferred Stock
to the holders of the 8% Senior Secured Notes. The Mandatorily Redeemable 12%
Preferred Stock had an aggregate redemption value of approximately $109.0
million, was cumulative, and had an initial liquidation preference of $100 per
share. Commencing November 1995, dividends accrued at the rate of 12% of the
liquidation preference per share per annum, payable quarterly in arrears on
the first day of each February, May, August and November. Subject to certain
limitations, the dividends could be paid in Common Stock at the option of the
Company, and the Company elected to pay the February 1, 1996 dividend in
Common Stock and subsequently issued 317,145 shares. For purposes of
determining the number of shares of Common Stock to distribute, such Common
Stock was valued at 90% of the fair market value, based upon trading prices
for the twenty days prior to the record date for the dividend payment.
On March 22, 1996, the Company announced a call for redemption on April 26,
1996 (the "Redemption Date") of all of its issued and outstanding 12%
Preferred Stock at a redemption price per share equal to $75.00, plus accrued
dividends to and including the Redemption Date of $2.8667 per share. On April
26, 1996, the Company paid an aggregate of $84.9 million in redemption of the
12% Preferred Stock and payment of accrued dividends.
F-30
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1,742,922 and 1,746,874 Seven Year Warrants outstanding at
December 31, 1996 and 1995, respectively. All warrants to purchase shares of
Common stock for nominal consideration had been exercised at December 31,
1996.
In March 1996, the Company completed an offering, pursuant to Rule 144A of
the Securities Act of 1933 (the "Act"), of 3,869,000 shares of its 8%
Preferred Stock, with a liquidation preference of $50 per share. Each share of
the 8% Preferred Stock may be converted at any time, at the option of the
holder, unless previously redeemed or exchanged, into shares of Common Stock
at a conversion price of $20.269 per share (equivalent to a conversion rate of
approximately 2.467 shares of Common Stock for each share of 8% Preferred
Stock), subject to adjustment.
The 8% Preferred Stock may not be redeemed prior to March 15, 1999. On or
after March 15, 1999, the 8% Preferred Stock may be redeemed, in whole or in
part, at the option of the Company, at specified redemption prices. The 8%
Preferred Stock may be exchanged, in whole but not in part, at the option of
the Company, for the Company's 8% Convertible Subordinated Debentures Due 2006
(the "Debentures") on any dividend payment date beginning March 15, 1998 at
the rate of $50 principal amount of Debentures for each share of 8% Preferred
Stock outstanding at the time of exchange; provided that all accrued and
unpaid dividends, whether or not earned or declared, on the 8% Preferred Stock
to the date of exchange have been paid or set aside for payment and certain
other conditions are met. Pursuant to the registration rights agreement
between the Company and the initial purchases of the 8% Preferred Stock, the
Company was obligated to register resales of the 8% Preferred Stock, the
Debentures, and the underlying shares of Common Stock issuable upon conversion
thereof. In
F-31
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
addition, the Company must use its best efforts to keep the shelf registration
effective until March 22, 1999. If the shelf registration does not remain
effective until such date, the Company may be required to pay liquidated
damages in amounts of up to $0.0125 per week per share of 8% Preferred Stock.
In December 1995, the Company adopted a Shareholders Rights Plan. Each
holder of Common Stock or Employee Preferred Stock received a dividend of one
right for each share, entitling the holder to buy one one-hundredth of a share
of a new series of preferred stock at a purchase price of $47.50. The rights
may become exercisable only under certain conditions whereby certain persons
(as defined) become the owner of or commence a tender offer for certain
specified percentages of TWA's voting stock and may be redeemed by TWA at
$0.01 per right prior to such time. In the event the rights become
exercisable, holders would be entitled to receive, without payment of a
purchase price, additional shares of Common Stock or be entitled to purchase
Common Stock having a market value of twice the purchase price.
12. EARNED STOCK COMPENSATION:
Pursuant to the "94 Labor Agreements and "95 Reorganization, on the "95
Effective Date, approximately 4.7 million shares of Employee Preferred Stock
and 1.0 million shares of Common Stock were distributed and allocated to
employees through employee stock ownership plans for the benefit of union
(other than the ALPA represented employees) and noncontract employees,
respectively. The distribution of these shares resulted in a charge to
operations in the eight months ended August 31, 1995 of $43.2 million, based
upon the market price of TWA's Common Stock at the time.
Additionally, a "Rabbi Trust" was established to receive the distribution of
approximately 1.7 million shares of Employee Preferred Stock attributable to
ALPA represented employees. The Rabbi Trust will distribute to an employee
benefit plan (the "ESOP") one-third of the shares annually beginning August
1995, subject to certain conditions. Accordingly, operating results for 1996,
the four months ended December 31, 1995 and the eight months ended August 31,
1995 include charges of approximately $6.9 million, $2.0 million and $5.1
million, respectively, representing the value of shares allocated and shares
earned, but unallocated, for such periods, based upon the market price of
TWA's Common Stock. The charge to earnings for shares to be allocated to ALPA
represented employees in the future will be based upon the value of the shares
at that time. Accordingly, material changes in this non-cash charge may occur
in periods prior to the allocation of the shares and such changes may be
unrelated to the Company's operating performance during such periods.
Operating results for the eight months ended August 31, 1995 include a non-
cash charge of approximately $8.0 million, representing the excess of the fair
market value of the shares distributed to employees over the purchase price
paid for shares which were sold to employees pursuant to the Equity Rights
offering.
Also pursuant to the "94 Labor Agreements and the "95 Reorganization, the
Company has adopted a seven year employee stock incentive program (the "ESIP")
pursuant to which TWA will grant its union and non-union employees additional
shares of Employee Preferred Stock and Common Stock (the "Incentive Shares"),
respectively, and such employees will be entitled to purchase additional
shares of such stock under certain circumstances through an employee stock
purchase arrangement. The ESIP has been designed to enable TWA's employees to
increase their level of ownership from 30% to 40% of the combined total number
of outstanding Common Stock and Employee Preferred Stock over the seven year
period.
The first stock grant under the ESIP is to be made on July 15, 1997 in an
amount that would increase the level of employee ownership by 2% of the
combined total number of then outstanding shares of Common Stock and Employee
Preferred if the closing price of the Common Stock exceeds a target price of
$11.00 per share following January 1, 1997 or would be made on any date
thereafter if the price of the Common Stock exceeds such target price. In
subsequent years through the end of the seven year term of the ESIP, the
increase in the
F-32
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
number of shares of Employee Preferred Stock to be granted under this program
would be equivalent to 1.5% in 1998, 1.5% in 1999, 1.0% in 2000, 1.0% in 2001
and 1.0% in 2002 of the combined total number of shares of Common Stock and
Employee Preferred Stock, and the target prices would increase to $12.10 in
1998, $13.31 in 1999, $14.64 in 2000, $16.11 in 2001 and $17.72 in 2002. If
TWA issues additional shares of Common Stock with an aggregate value of more
then $20 million to third parties for cash or a reduction in debt at a price
equal to or greater then $11.00 per share, the last two scheduled installments
of the ESIP would be aggregated and these shares allocated equally to the
remaining installments in the program. In addition, pursuant to the ESIP,
employees would have the right after July 15, 1997, to purchase over the seven
year term of the ESIP additional shares of Employee Preferred Stock in amounts
up to an aggregate of 2% of the combined total number of outstanding Common
Stock and Employee Preferred Stock at a discount of 20% from the market price.
The employees' right to purchase additional shares of Employee Preferred Stock
would be accelerated and become immediately exercisable if there is a merger,
sale or consolidation of TWA (where TWA is not the surviving entity) at a
merger, sale or consolidation price equivalent to or in excess of $17.72 per
share of Common Stock at a 20% discount from the merger, sale or consolidation
price relating to such a transaction.
The percentage of employee ownership could decline below 30% in the event
the Company issues additional Common Stock to third parties for cash or
property or in lieu of cash payments on the 12% Senior Secured Reset Notes. To
the extent that as a result of the sale for cash of additional capital stock,
the percentage of employee ownership of the combined total number of shares of
Common Stock and Employee Preferred Stock declines below a level equal to the
Adjusted Maximum Percentage (as defined below) minus eight percentage points
plus the percentage equivalent to any Incentive Shares already issued, one-
quarter of the difference between the new percentage of employee ownership and
the level just determined (but in no event greater than 1% in each year) times
the combined total number of shares of Common Stock and Employee Preferred
Stock outstanding would be added to the amount of Employee Preferred Stock to
union employees and Common Stock to non-union employees to be issued under the
ESIP in each of the years 1999 through 2002 assuming the target prices are met
in each of such years.
In the event of a merger, sale or consolidation of TWA where TWA is not the
surviving entity, TWA would issue to employees at or prior to the consummation
of such a transaction: (i) a number of shares of Employee Preferred Stock and
Common Stock to which the employees would have otherwise been entitled under
the ESIP during its seven year term assuming the trading price of the Common
Stock during such term was the merger, sale or consolidation price, provided,
that if the merger, sale or consolidation price falls between two target
prices, the number of shares to be issued will be based on an interpolation
between the target prices, (ii) if the employee ownership percentage is less
than 35% of the combined total number of outstanding shares of Common Stock
and Employee Preferred Stock, a number of shares of Employee Preferred Stock
and Common Stock equal to the difference between the number of shares already
distributed under the ESIP and a number of shares equivalent to 2.0%, 3.5% or
5.0%, respectively, of the then combined total number of outstanding Common
Stock and Employee Preferred Stock depending on the merger, sale or
consolidation price, but in no event shall shares issued pursuant to this
paragraph increase the employee ownership percentage above 35%, or (iii) if,
following the issuance by the Company of additional shares of Common Stock to
third parties for cash or property equal to 1% of the number of shares of
Common Stock outstanding immediately following the Restructuring and the
employee ownership percentage is below the lesser of 35% and the Adjusted
Maximum Percentage, TWA shall at the option of each employee effect an
immediate cash contribution to the employee's respective pension plan or make
an immediate cash payment to each employee equal to an amount determined as
the number of shares necessary to increase the employee ownership percentage
to the lesser of 35% and the Adjusted Maximum Percentage of the merger, sale
or consolidation price. The Adjusted Maximum Percentage is defined to mean a
level of the percentage of employee ownership following a reduction below 38%
but to no lower than 30% in a manner proportionate to the aggregate proceeds,
if any, received from the issuance of additional Common Stock to third parties
for cash or property up to $200 million.
F-33
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The ESIP also provides that if additional shares are distributed following
the "95 Effective Date in respect of the "95 Reorganization, employees will be
entitled to receive an additional number of shares of Common Stock and
Employee Preferred Stock such that the employees will retain the same level of
ownership. Pursuant to the "95 Reorganization, TWA issued 2,069,898 shares of
common stock as conditional consideration to the 12% Senior Secured Notes.
Union representatives and the Company have tentatively agreed that the number
of "Fill-Up Shares" to be issued pursuant to the ESIP is approximately
932,000. Under the agreement, approximately 526,000 shares will be distributed
immediately (the "Initial Fill-Up Shares") and the remaining shares (the
"Credit Shares") will be issued in July of 1997 if the 1997 target price is
not met. If the 1997 ESIP target price is not met, the Credit Shares
distributed may be used as a credit against future grants under the ESIP. TWA
will record a charge in 1997 for the fair value of the Initial Fill-Up Shares
as of the date those shares are distributed. The issuance of the Fill-Up
Shares is subject to approval by the Company's Board of Directors. The number
of shares of Employee Preferred Stock outstanding at December 31, 1996 does
not reflect any such additional shares. Shares granted or purchased at a
discount under the ESIP will generally result in a charge equal to the fair
value of shares granted and the discount for shares purchased a the time when
such shares are earned. If the ESIP's target prices for the Common Stock are
realized, the minimum aggregate charge for the years 1997 to 2002, based on
the number of Common Stock and Employee Preferred Stock outstanding at
December 31, 1996 (including Initial Fill-Up Shares) and excluding the impact
of any merger, sale or consolidation of TWA, would be approximately $58
million. The charge for any year, however, could be substantially higher if
the market prices of the Common Stock exceed the respective yearly target
prices.
13. STOCK OPTION PLANS:
The Company's 1994 Key Employee Incentive Stock Plan (the "KESIP"), as
amended, provides for the award of incentive and nonqualified stock options
for up to 14% of the Common Stock and Employee Preferred Stock outstanding as
of the start of each fiscal year (approximately 3.4 million shares at January
1, 1997). Options granted under the KESIP have a five year life after the
final vesting period and vest at the rate of 34% upon the first anniversary of
the award date, 33% upon the second and 33% upon the third anniversary of the
award date. Unvested shares are subject to forfeiture under certain
circumstances.
A summary of the Company's outstanding stock options as of December 31, 1996
and 1995, and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,228,000 $ 4.68 1,398,576 $4.64
Granted................. 453,000 11.65 829,424 4.74
Exercised............... (191,316) 4.64 -- --
Forfeited............... (463,300) 7.43 -- --
---------- ----------
Outstanding at end of
year................... 2,026,384 5.61 2,228,000 4.68
========== ==========
Options exercisable at
year-end............... 1,307,530 475,516
Weighted average fair
value of options
granted during the
year................... $ 6.79 $ 3.03
</TABLE>
The per share weighted average fair value of options granted during 1996 and
1995 were estimated using the Black Scholes option pricing model assuming
risk-free interest rates of 6.6% and 6.0% in 1996 and 1995, respectively, an
expected volatility factor of 85% and an expected life of three years.
F-34
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about fixed stock options at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
RANGE NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.64 to 6.78......... 1,757,184 3.0 years $ 4.64 1,255,850 $ 4.64
7.06 to 8.12......... 20,000 3.8 years 7.95 6,800 7.95
10.62 to 15.81......... 238,100 7.4 years 11.97 39,780 10.64
16.25 to 18.37......... 11,100 4.3 years 17.85 5,100 18.37
--------- ---------
$ 4.64 to 18.37......... 2,026,384 1,307,530
========= =========
</TABLE>
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies
APB Opinion No. 25 and related Interpretations in accounting for its plans.
However, pro forma disclosures as if the Company adopted the fair value based
method of measurement for stock-based compensation plans under SFAS 123 in
1996 and 1995 are presented below.
Had compensation cost for the Company's grants for stock-based compensation
plans been determined using the fair value method under SFAS No. 123, the
Company's net loss pro forma, and net loss per common share for 1996 and 1995
would approximate the amounts below (in millions except per share data):
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss......................... (284,815) (285,716) (30,138) (30,350)
Net loss per common share........ (7.27) (7.30) (1.05) (1.06)
</TABLE>
The pro forma amounts do not give any effect to options granted prior to
January 1, 1995.
Operating results include charges of $2.2 million, $0.02 million and $0.02
million for the year ended December 31, 1996, the eight months ended August
31, 1995 and the four months ended December 31, 1995, respectively, to reflect
the excess of the market price of TWA's common stock on the date of grant over
the exercise price, over the vesting period. The 1996 charge includes $1.8
million in respect to the accelerated vesting of certain awards in connection
with the severance of certain officers.
14. EXTRAORDINARY ITEMS:
In 1996, the Company consummated a series of privately negotiated exchanges
with a significant holder of the 12% Senior Secured Reset Notes which resulted
in the return to the Company of approximately $45.3 million in 12% Senior
Secured Reset Notes and approximately $1.5 million in accrued interest thereon
in exchange for the issuance of approximately 4.5 million shares of Company
Common Stock. As a result of the exchange of the 12% Senior Secured Notes, the
Company recorded an extraordinary non-cash charge of $8.2 million representing
the difference between the fair value of the common stock issued (based upon
the trading price of the Company's common stock on the dates of exchanges) and
the carrying value of the Senior Secured Reset Notes retired.
During 1996, the Company recorded an extraordinary charge of approximately
$1.6 million due to the early extinguishment of a portion of the PBGC Notes as
a result of Karabu applying approximately $6.4 million in ticket proceeds as
prepayments on the PBGC Notes.
F-35
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The extraordinary gain recorded in the four months ended December 31, 1995
was due to the cancellation of debt as a result of a settlement between Trans
World Express, Inc. ("TWE"), a subsidiary, and an aircraft lessor. The
extraordinary gain recorded in the eight months ended August 31, 1995 was for
the discharge of indebtedness pursuant to the Company's "95 Reorganization.
The extraordinary charge recorded in 1994 was for a prepayment premium of
approximately $2.0 million related to the sale and lease back of four
McDonnell Douglas MD-80 aircraft.
15. DISPOSITION OF ASSETS:
Disposition of assets resulted in net losses of approximately $1,135,000 and
$206,000 during 1996 and for the eight months ended August 31, 1995,
respectively, and net gains of $3,330,000 and $1,072,000 for the four months
ended December 31, 1995 and during 1994, respectively.
In 1996, TWA recorded a gain of approximately $8.0 million in connection
with the hull insurance settlement for the aircraft destroyed in the Flight
800 incident. The gain was offset by a loss of $8.3 million on the sale of
expendable aircraft parts and losses on other miscellaneous dispositions.
In November 1995, TWA entered into an agreement to sublease certain of TWA's
leased commissary facilities in Los Angeles. As part of this agreement, TWA
sold its commissary furnishings and equipment, resulting in a gain of $2.0
million.
The 1994 net gain included a gain of approximately $1.3 million on the
divestiture of three subsidiaries, Midcoast Aviation, Inc., Travel Marketing
Services, Inc. and World Marketing Services, Inc.
16. SPECIAL CHARGES AND OTHER NONRECURRING ITEMS:
The 1996 operating loss includes an aggregate of approximately $85.9 million
in special charges and nonrecurring items, primarily as follows: (i)
approximately $26.7 million to reflect the write-off of the carrying value of
TWA's New York-Athens route authority over which TWA has elected to
discontinue service, (ii) approximately $53.7 million to reflect the reduction
in carrying value of TWA's owned L-1011 and B-747 aircraft and related spare
parts which are expected to be retired from service over the next year and
(iii) approximately $5.5 million for employee severance liabilities related to
the termination of service to Athens and Frankfurt. The write-down of owned
aircraft and related spare parts was based upon managements estimates of the
net proceeds to be received upon the disposition of these assets.
Additionally, the Company has obligations under operating leases for B-747
aircraft aggregating approximately $50 million over the next seven years.
Management currently estimates that it will be able to recover substantially
all of these costs pursuant to subleases of these aircraft and, accordingly,
no provision has been made for any such costs at this time. Management's
estimates relative to the costs of the retirement of the L-1011 and B-747
fleets and related spare parts are based upon current market conditions,
preliminary discussions with interested parties and other factors. The actual
costs could differ materially from the current estimates.
The operating income for the eight months ended August 31, 1995, includes a
special charge of $1.7 million for shut-down related expenses of TWE.
The 1994 operating loss includes an aggregate of $175.1 million in costs
associated with special charges and nonrecurring items as further described
below.
In the fourth quarter of 1994, TWA recorded a charge of $36.3 million to
salaries, wages and benefits to reflect the estimated portion of the
obligation earned to date for payments due to employees represented by the IAM
for overtime savings in excess of certain targeted levels established in the
"92 Labor Agreement (see Note 7).
F-36
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1994, TWA undertook several strategic operational initiatives to
improve its competitiveness and reduce its cost structure. Special charges
recorded in 1994 include the following principal components: (i) approximately
$61 million to reflect the write-off of the carrying value of certain
international route authorities which were no longer expected to be utilized
in connection with the restructuring of such operations, (ii) approximately
$34 million to reflect the write-off of pre-delivery payments and related
capitalized interest for certain aircraft on order (also see Note 18--Aircraft
Commitments), (iii) approximately $24 million to reflect the reduction in the
carrying value of certain owned aircraft and spare parts which, under the
Company's fleet plan, were expected to be retired and sold and (iv)
approximately $15 million for furlough pay and severance costs related to
reduction in the number of employees.
17. OTHER CHARGES AND CREDITS:
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------- -------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Expenses associated with the restructuring of debt and flight
equipment leases..................................................... $ -- $ 3,000 $11,000 $ 11,100
Provisions for losses resulting from claims and litigation judgments
against TWA.......................................................... 235 26 351 200
Foreign currency transaction (gains) losses net....................... (642) 1,156 384 (1,941)
Finance charge income earned on receivables carried by TWA............ (8,030) (2,662) (6,198) (9,557)
Credits related to settlement of various contract disputes, litigation
and other matters.................................................... (2,500) -- -- --
Equity in (earnings)/losses of TWA's investment in Worldspan.......... (11,919) 11,535 (3,607) 3,616
Miscellaneous other nonoperating charges (credits)--net (a)........... (7,742) (5,444) (4,309) (32,265)
-------- ------- ------- --------
Total Other Charges and Credits....................................... $(30,598) $ 7,611 $(2,379) $(28,847)
======== ======= ======= ========
</TABLE>
- --------
(a) The amount for 1994 includes certain nonrecurring income amounts
aggregating approximately $21.1 million relating to the reduction of
certain liabilities established on the "93 Effective Date (also see Note
20--Supplemental Financial Information (Unaudited)).
18. AIRCRAFT COMMITMENTS:
TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce plc
relating to the purchase of ten A330-300 twin-engine wide body aircraft and
related engines, spare parts and equipment for an aggregate purchase price of
approximately $1.1 billion. The agreements, as amended, require the delivery
of the aircraft in 1999 and 2000 and provide for the purchase of up to ten
additional aircraft. TWA has not yet made arrangements for the permanent
financing of the purchases subject to the agreements. In the event of
cancellation, predelivery payments of approximately $18 million would be
subject to forfeiture.
During 1996 TWA entered into a purchase agreement with the Boeing Company
relating to the purchase of ten Boeing Model 757-231 aircraft and related
engines, spare parts and equipment for an aggregate purchase
F-37
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
price of approximately $500 million. The agreement requires the delivery of
the aircraft in 1997, 1998 and 1999, and provides for the purchase of up to
ten additional aircraft. Furthermore, to the extent TWA exercises its options
for additional aircraft, the Company will have the right to an equal number of
additional option aircraft. TWA has obtained commitments for debt financing
for approximately 80% of the total costs associated with the acquisition of
eight of the original ten aircraft and obtained commitments for 100% of the
total costs of the remaining two original aircraft. Such commitments are
subject to the lender's and lessor's ongoing evaluation of the financial
condition of TWA.
Required future expenditures under the purchase agreements described above,
including an estimate of price escalation as defined in the subject agreements
and exclusive of secured financing, are as follows (amounts in millions):
<TABLE>
<CAPTION>
AVSA BOEING
----- ------
<S> <C> <C>
1997........................................................ 49.1 248.5
1998........................................................ 49.8 97.0
1999........................................................ 515.4 143.0
2000........................................................ 532.5 --
</TABLE>
19. FRESH START REPORTING:
Pursuant to SOP 90-7, TWA adopted fresh start reporting which has resulted
in the creation of a new reporting entity and the Company's assets and
liabilities being adjusted to reflect fair values on the "95 Effective Date.
For accounting purposes, the "95 Effective Date was deemed to be September 1,
1995. In the fresh start reporting, an aggregate value of $270 million was
assigned to TWA's Common Stock and Employee Preferred Stock. These values were
established by management with the assistance of its financial advisors. These
valuations considered TWA's expected future performance, relevant industry and
economic conditions, and analyses and comparisons with comparable companies.
The reorganization value of TWA has been allocated to the Reorganized
Company's assets and liabilities in a manner similar to the purchase method of
accounting for a business combination. Management obtained valuations from
independent third parties which, along with other market and related
information and analyses, were utilized in assigning fair values to assets and
liabilities. A summary of the impact of the "95 Reorganization and the related
fresh start adjustments is presented below. The fresh start adjustments
resulted in, among other things, the allocation of substantial amounts to
reorganization value in excess of amounts allocable to identifiable assets,
the amortization of which, while not requiring the use of cash, will
significantly affect future operating results.
F-38
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the impact of the "95 Reorganization Plan and the related fresh
start adjustments is presented below (amounts in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 1, 1995
-------------------------------------------------------------------
PREDECESSOR DEBT FRESH START OTHER REORGANIZED
COMPANY DISCHARGE(A) ADJUSTMENTS(B) ADJUSTMENTS(C) COMPANY
----------- ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equiva-
lents................. $ 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 affili-
ated 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 un-
der capital leases.... 42,643 -- (647) -- 41,996
Advance ticket sales... 253,642 -- -- -- 253,642
Accounts payable and
other accrued ex-
penses................ 518,030 24,466 3,739 -- 546,235
---------- --------- --------- -------- ----------
Total.................. 1,286,825 (380,199) 3,092 -- 909,718
---------- --------- --------- -------- ----------
Liabilities Subject To
Chapter 11
Reorganization Proceed-
ings................... 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 lia-
bilities 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 cap-
ital.................. 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.
F-39
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) To record adjustments to reflect assets and liabilities at fair values.
The adjustments to record the fair values of assets and liabilities
resulted in a nonrecurring charge to reorganization items of approximately
$228.8 million in the eight months ended August 31, 1995. Charges to
reorganization items were recorded for various fees and expenses related
to the consummation of the "95 Plan aggregating approximately $13.4
million. Significant elements of the adjustments to record the fair value
of assets and liabilities are summarized below:
-- Adjustments to reflect the fair value of owned property and equipment
under capital leases.
-- Adjustments to reflect the fair value of TWA's international route
authorities, take-off and landing time slots and airport gate leaseholds.
-- Adjustments to record the present value of the liabilities for
postretirement medical and life insurance benefits and certain foreign
pension plans to reflect the current postretirement benefit obligation
and projected benefit obligation, respectively, utilizing current
discount rates.
-- An adjustment to reduce deferred income taxes to reflect the impact of
the preceding adjustments.
(c) To record adjustments to reflect the elimination of the remaining deficit
in shareholders' equity after the adjustments arising from (a) and (b)
above and to reflect the associated reorganization value in excess of
amounts allocable to identifiable assets.
F-40
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED):
Selected consolidated financial data (unaudited) for each quarter within 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- ---------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
REORGANIZED COMPANY
YEAR ENDED DECEMBER 31, 1996
Operating revenues.............. $ 782,433 $965,808 $1,002,867 $ 803,299
========= ======== ========== =========
Special charges (note 16)....... $ -- $ -- $ -- $ 85,915
========= ======== ========== =========
Operating income (loss)......... $ (54,191) $ 62,028 $ 26,019 $(232,383)
========= ======== ========== =========
Disposition of assets, gains
(losses)--net.................. $ (214) $ 239 $ (87) $ (1,073)
========= ======== ========== =========
Income (loss) before
extraordinary item............. $ (37,107) $ 25,262 $ (6,905) $(256,277)
========= ======== ========== =========
Extraordinary items............. $ -- $ -- $ (7,420) $ (2,368)
========= ======== ========== =========
Net income (loss)............... $ (37,107) $ 25,262 $ (14,325) $(258,645)
========= ======== ========== =========
Per share amounts:
Earnings (loss) before
extraordinary items and
special dividend requirements. $ (.98) $ .46 $ (.24) $ (5.51)
========= ======== ========== =========
Extraordinary items and special
dividend requirements......... $ (.48) $ -- $ (.16) $ (.05)
========= ======== ========== =========
Net income (loss).............. $ (1.46) $ .46 $ (.40) $ (5.56)
========= ======== ========== =========
REORGANIZED COMPANY
FOUR MONTHS ENDED DECEMBER 31,
1995
Operating revenues.............. $ -- $ -- $ 293,890 (a) $ 804,584
========= ======== ========== =========
Operating income................ $ -- $ -- $ 9,308 (a) $ 1,138
========= ======== ========== =========
Disposition of assets, gains
(losses)--net.................. $ -- $ -- $ (50)(a) $ 3,380
========= ======== ========== =========
Loss before extraordinary item.. $ -- $ -- $ (2,347)(a) $ (31,291)
========= ======== ========== =========
Extraordinary items............. $ -- $ -- $ -- (a) $ 3,500
========= ======== ========== =========
Net loss........................ $ -- $ -- $ (2,347)(a) $ (27,791)
========= ======== ========== =========
Per share amounts:
Loss before extraordinary
items......................... $ -- $ -- $ (.16)(a) $ (.93)
========= ======== ========== =========
Extraordinary items............ $ -- $ -- $ -- (a) $ .09
========= ======== ========== =========
Net loss....................... $ -- $ -- $ (.16)(a) $ (.84)
========= ======== ========== =========
PREDECESSOR COMPANY
EIGHT MONTHS ENDED AUGUST 31,
1995
Operating revenues.............. $ 692,320 $860,506 $ 665,529 (b) $ --
========= ======== ========== =========
Special charges (note 16)....... $ -- $ -- $ 1,730 (b) $ --
========= ======== ========== =========
Operating income (loss)......... $ (76,261) $ 54,382 $ 36,521 (b) $ --
========= ======== ========== =========
Reorganization items............ $ -- $ -- $ 242,243 (b) $ --
========= ======== ========== =========
Disposition of assets, gains
(losses)--net.................. $ (271) $ (67) $ 132 (b) $ --
========= ======== ========== =========
Income (loss) before
extraordinary item............. $(122,795) $ 5,168 $ (220,586)(b) $ --
========= ======== ========== =========
Extraordinary items............. $ -- $ -- $ 140,898 (b) $ --
========= ======== ========== =========
Net income (loss)............... $(122,795) $ 5,168 $ (79,688)(b) $ --
========= ======== ========== =========
</TABLE>
- --------
(a) One month ended September 30, 1995
(b) Two months ended August 31, 1995
F-41
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The results for each period include all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods.
The consolidated financial results on an interim basis are not necessarily
indicative of future financial results on either an interim or annual basis.
TWA's air transportation business is highly seasonal with the second and third
quarters of the calendar year historically producing substantially better
operating results than the first and fourth quarters.
The results for the fourth quarter of 1996 includes an adjustment to reduce
aircraft fuel and oil costs by approximately $8.8 million, as a result of
federal fuel excise taxes paid which are expected to be refunded to the
Company.
The results for the fourth quarter of 1995 include several adjustments to
operating expenses to reflect changes in estimates, including a reduction in
passenger sales commissions of approximately $6.7 million and a reduction in
employee benefits and workers compensation costs of $6.2 million.
21. FOREIGN OPERATIONS:
TWA conducts operations in various foreign countries, principally in Europe
and the Middle East. Operating revenues from foreign operations were
approximately $719.2 million in the year ended December 31, 1996, $228.7
million in the four months ended December 31, 1995, $474.4 million in the
eight months ended August 31, 1995 and $794.1 million in the year ended
December 31, 1994.
22. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires disclosures with regards to fair values of all financial instruments,
whether recognized or not recognized in the balance sheet, subject to certain
exceptions. Solely for purposes of complying with this accounting standard,
the Company has estimated the fair value of certain of its financial
instruments, as further described below. Because no market exists for a
significant portion of TWA's financial instruments, fair value estimates
provided below are based on judgments regarding current economic conditions,
risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. The
discussion of financial instruments below conforms with the presentation in
the Consolidated Balance Sheet and relates to the amounts at December 31, 1996
and 1995.
(a) Cash, cash equivalents and receivables: The carrying amounts of these
assets is estimated to approximate fair value due to the generally short
maturities of these instruments.
(b) Other investments and receivables: The carrying amount of these
assets are estimated to approximate fair value due to the generally short
maturities of the underlying instruments which are, however, classified as
long-term assets because TWA's ability to access these amounts is generally
restricted by contractual provisions.
(c) Accounts payable and other accrued liabilities: The carrying amount
of these liabilities are estimated to approximate fair value due to the
generally short maturities of these instruments.
(d) Debt: At December 31, 1996 and December 31, 1995, approximately
$111.8 million and $145.2 million, respectively, of the carrying value of
TWA's debt was traded publicly. The aggregate market value
F-42
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of such debt was approximately $126.0 million and $160.4 million on those
dates, respectively. The Company believes the fair value of the remaining
debt which had an aggregate carrying value of approximately $589.1 million
and $686.4 million at December 31, 1996 and 1995, respectively, was
approximately $466.4 million and $644.5 million on those dates.
(e) Mandatorily Redeemable 12% Preferred Stock: At December 31, 1995 the
carrying value of TWA's Mandatorily Redeemable 12% Preferred Stock was
$61.4 million. The aggregate market value of such stock was approximately
$74.1 million on that date.
F-43
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1997 1996 1997 1996
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger...................... $799,203 $ 874,275 $2,211,253 $2,391,207
Freight and mail............... 32,106 38,548 94,913 111,495
All other...................... 77,072 90,044 208,963 248,406
-------- ---------- ---------- ----------
Total........................ 908,381 1,002,867 2,515,129 2,751,108
-------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits... 304,344 317,527 922,160 923,288
Earned stock compensation...... 1,106 (735) 4,179 4,306
Aircraft fuel and oil.......... 122,234 162,382 369,509 432,849
Passenger sales commissions.... 65,960 75,960 188,954 213,548
Aircraft maintenance materials
and repairs................... 27,507 53,529 109,636 158,485
Depreciation and amortization.. 36,623 39,518 112,154 118,347
Operating lease rentals........ 94,439 77,270 268,849 222,083
Passenger food and beverages... 21,552 31,218 61,411 84,052
All other...................... 170,859 220,179 508,074 560,294
-------- ---------- ---------- ----------
Total........................ 844,624 976,848 2,544,926 2,717,252
-------- ---------- ---------- ----------
Operating income (loss).......... 63,757 26,019 (29,797) 33,856
-------- ---------- ---------- ----------
Other charges (credits):
Interest expense............... 27,404 30,864 85,518 95,483
Interest and investment income. (2,944) (5,421) (8,962) (17,247)
Disposition of assets, gains
and losses--net............... (2,828) 87 (15,208) 62
Other charges and credits--net. (5,057) (9,481) (22,873) (26,185)
-------- ---------- ---------- ----------
Total........................ 16,575 16,049 38,475 52,113
-------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary items......... 47,182 9,970 (68,272) (18,257)
Provision (credit) for income
taxes........................... 33,906 16,875 479 493
-------- ---------- ---------- ----------
Income (loss) before
extraordinary items............. 13,276 (6,905) (68,751) (18,750)
Extraordinary items, net of
income taxes.................... (6,985) (7,420) (10,922) (7,420)
-------- ---------- ---------- ----------
Net income (loss)................ 6,291 (14,325) (79,673) (26,170)
Preferred stock dividend
requirements.................... 3,869 3,869 11,607 32,681
-------- ---------- ---------- ----------
Income (loss) applicable to
common shares................... $ 2,422 $ (18,194) $ (91,280) $ (58,851)
======== ========== ========== ==========
Per share amounts:
Earnings (loss) before
extraordinary item and special
dividend requirement.......... $ .17 $ (.24) $ (1.54) $ (.73)
Extraordinary item and special
dividend requirement.......... (.13) (.16) (.21) (.63)
-------- ---------- ---------- ----------
Net income (loss).............. $ .04 $ (.40) $ (1.75) $ (1.36)
======== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-44
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 104,565 $ 181,586
Receivables, less allowance for doubtful accounts,
$10,275 in 1997 and $12,939 in 1996.............. 251,347 239,496
Spare parts, materials and supplies, less
allowance for obsolescence, $12,212 in 1997 and
$11,563 in 1996.................................. 101,774 111,239
Prepaid expenses and other........................ 135,606 93,424
---------- ----------
Total........................................... 593,292 625,745
---------- ----------
Property:
Property owned:
Flight equipment................................ 488,409 339,150
Prepayments on flight equipment................. 14,037 39,072
Land, buildings and improvements................ 61,034 59,879
Other property and equipment.................... 63,957 60,750
---------- ----------
Total owned property.......................... 627,437 498,851
Less accumulated depreciation................... 102,137 71,810
---------- ----------
Property owned--net........................... 525,300 427,041
---------- ----------
Property held under capital leases:
Flight equipment................................ 168,403 172,812
Land, buildings and improvements................ 49,443 54,761
Other property and equipment.................... 7,185 6,570
---------- ----------
Total property held under capital leases...... 225,031 234,143
Less accumulated amortization................... 71,833 46,977
---------- ----------
Property held under capital leases--net....... 153,198 187,166
---------- ----------
Total property--net........................... 678,498 614,207
---------- ----------
Investments and other assets:
Investments in affiliated companies............... 118,290 108,173
Investments, receivables and other................ 151,839 149,028
Routes, gates and slots--net...................... 383,033 401,659
Reorganization value in excess of amounts
allocable
to identifiable assets--net...................... 751,661 783,127
---------- ----------
Total......................................... 1,404,823 1,441,987
---------- ----------
Total............................................... $2,676,613 $2,681,939
========== ==========
</TABLE>
See notes to consolidated financial statements
F-45
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt ............. $ 66,184 $ 92,447
Current obligations under capital leases.......... 38,423 42,501
Advance ticket sales.............................. 272,148 241,516
Accounts payable, principally trade............... 268,795 216,675
Accounts payable to affiliated companies.......... 5,996 4,894
Accrued expenses:
Employee compensation and vacations earned...... 115,392 116,846
Contributions to retirement and pension trusts.. 11,779 14,091
Interest on debt and capital leases............. 31,173 39,420
Taxes........................................... 17,665 19,018
Other accrued expenses.......................... 191,595 174,753
---------- ----------
Total accrued expenses........................ 367,604 364,128
---------- ----------
Total......................................... 1,019,150 962,161
---------- ----------
Long-term liabilities and deferred credits:
Long-term debt, less current maturities........... 593,825 608,485
Obligations under capital leases, less current
obligations...................................... 189,622 220,790
Postretirement benefits other than pensions....... 475,374 471,171
Noncurrent pension liabilities.................... 31,452 30,716
Other noncurrent liabilities and deferred credits. 147,359 150,511
---------- ----------
Total......................................... 1,437,632 1,481,673
---------- ----------
Shareholders' equity
8% cumulative convertible exchangeable preferred
stock, $50 liquidation preference; 3,869 shares
issued and outstanding........................... 39 39
Employee preferred stock, $0.01 liquidation
preference; special voting rights; shares issued
and outstanding: 1997-6,943; 1996-5,681.......... 69 57
Common stock, $0.01 par value, shares issued and
outstanding: 1997-50,666; 1996-41,763 ........... 507 418
Additional paid-in capital........................ 613,842 552,544
Accumulated deficit............................... (394,626) (314,953)
---------- ----------
Total......................................... 219,831 238,105
---------- ----------
Total............................................... $2,676,613 $2,681,939
========== ==========
</TABLE>
See notes to consolidated financial statements
F-46
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(79,673) $(26,170)
Adjustments to reconcile net loss to net cash used by
operating activities:
Employee earned stock compensation....................... 4,179 4,306
Depreciation and amortization............................ 112,154 118,347
Amortization of discount and expense on debt............. 10,905 8,096
Extraordinary loss on extinguishment of debt............. 10,922 7,420
Interest paid in common stock............................ 4,125 11,332
Equity in undistributed earnings of affiliates not
consolidated............................................ (10,424) (9,733)
Revenue from Icahn ticket program........................ (90,878) (52,169)
Net (gains)-losses on disposition of assets.............. (15,208) 62
Change in operating assets and liabilities:
Decrease (increase) in:
Receivables............................................. (12,618) (73,224)
Inventories............................................. 8,479 (3,326)
Prepaid expenses and other current assets............... (34,569) (48,826)
Other assets............................................ (9,723) 5,831
Increase (decrease) in:
Accounts payable and accrued expenses................... 58,897 83,430
Advance ticket sales.................................... 20,247 83,962
Other noncurrent liabilities and deferred credits....... 2,228 (61,412)
-------- --------
Net cash provided (used)............................... (20,957) 47,926
-------- --------
Cash flows from investing activities:
Proceeds from sales of property.......................... 22,186 5,916
Capital expenditures, including aircraft pre-delivery
deposits................................................ (58,161) (109,885)
Return of pre-delivery deposits related to leased
aircraft................................................ 10,740 --
Net decrease (increase) in investments, receivables and
other................................................... 7,632 (4,924)
-------- --------
Net cash used.......................................... (17,603) (108,893)
-------- --------
Cash flows from financing activities:
Net proceeds from long-term debt and warrants issued..... 47,175 2,750
Proceeds from sale and leaseback of certain aircraft..... 12,000 --
Repayments on long-term debt and capital lease
obligations............................................. (92,867) (91,696)
Refund due to retirement of 1967 bonds................... 5,318 --
Net proceeds from sale of preferred stock................ -- 186,163
Redemption of 12% Preferred Stock........................ -- (81,749)
Cash dividends paid on preferred stock................... (11,607) (10,620)
Net proceeds from exercise of equity rights, warrants and
options................................................. 1,520 301
-------- --------
Net cash provided (used)............................... (38,461) 5,149
-------- --------
Net decrease in cash and cash equivalents................. (77,021) (55,818)
Cash and cash equivalents at beginning of period.......... 181,586 304,340
-------- --------
Cash and cash equivalents at end of period................ $104,565 $248,522
======== ========
</TABLE>
See notes to consolidated financial statements
F-47
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
--------- --------
<S> <C> <C>
Cash paid during the period for:
Interest.................................................. $ 74,247 $ 86,465
========= ========
Income taxes.............................................. $ 80 $ 127
========= ========
Information about noncash operating, investing and financing
activities:
Promissory notes issued to finance aircraft acquisitions.. $ 112,121 $ 10,565
========= ========
Promissory note issued to finance aircraft predelivery
payments................................................. $ 4,654 $ 12,202
========= ========
Common Stock issued in lieu of cash dividends............. $ -- $ 3,255
========= ========
Property acquired and obligations recorded under new
capital transactions..................................... $ 619 $ 2,333
========= ========
Exchange of long-term debt for common stock:
Debt cancelled including accrued interest, net of
unamortized discount..................................... $ 48,835 $ 38,229
========= ========
Common Stock issued, at fair value........................ $ 56,028 $ 45,649
========= ========
Extraordinary loss........................................ $ 7,193 $ 7,420
========= ========
</TABLE>
ACCOUNTING POLICY
For purposes of the Statements of Consolidated Cash Flows, TWA considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
See notes to consolidated financial statements
F-48
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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. The
consolidated balance sheet at December 31, 1996 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 airline industry generally, and TWA specifically, has historically
experienced seasonal changes between quarterly periods, with the second and
third quarters usually out-performing the first and fourth. Accordingly, the
results for the three months and nine months ended September 30, 1997, should
not be read as indicators of future results for the full year.
2. INCOME TAXES
Income tax expense is recorded each quarter based on the estimated annual
effective rate. The tax provision recorded in the third quarter reflects the
reversal of previously recorded tax benefits as management currently expects a
taxable loss at year-end and the realization of the benefits of any tax loss
in future periods is presently subject to substantial uncertainty.
3. EXTRAORDINARY ITEMS
In the nine months ended September 30, 1996 the Company consummated a series
of privately negotiated exchanges with a significant holder of 12% Senior
Secured Reset Notes which resulted in the return to the Company of $42.0
million in 12% Senior Secured Reset Notes and approximately $1.4 million in
accrued interest thereon in exchange for the issuance of approximately 4.0
million shares of Company Common Stock. As a result of the exchange of the 12%
Senior Secured Reset Notes, the Company incurred an extraordinary non-cash
charge of $7.4 million in the third quarter of 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 the exchanges net
of purchaser's discount) and the carrying value of the 12% Senior Secured
Reset Notes retired.
During the nine months ended September 30, 1997 the Company continued the
series of privately negotiated exchanges with a significant holder of 12%
Senior Secured Reset Notes which resulted in the return to the Company of
$51.8 million in 12% Senior Secured Reset Notes and approximately $1.4 million
in accrued interest thereon in exchange for the issuance of approximately 7.7
million shares of Company Common Stock. All 12% Senior Secured Reset Notes
returned will be canceled leaving an outstanding principal balance of such
notes of approximately $72.5 million. As a result of the exchange of the 12%
Senior Secured Reset Notes, the Company incurred an extraordinary non-cash
charge of $7.2 million in the first nine months of 1997.
F-49
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
An additional extraordinary non-cash charge of $3.7 million was recorded
during the third quarter of 1997 relating to a $38.8 million extinguishment of
PBGC Notes under an agreement entered into by the Company with Karabu
Corporation, an entity affiliated with Carl C. Icahn ("Karabu"), in connection
with the '95 Reorganization.
4. LOSS PER SHARE
In computing the income (loss) applicable to common shares for the three
months and nine months ended September 30, 1997, the net income (loss) has
been decreased (increased) by dividend requirements on the 8% Cumulative
Convertible Exchangeable Preferred Stock (the "8% Preferred Stock"). In
computing the related net income (loss) per share, the income (loss)
applicable to common shares has been divided by the average aggregate number
of outstanding shares of Common Stock (49.3 million and 45.8 million for the
three months and nine months ended September 30, 1997, respectively) and
Employee Preferred Stock (6.8 million and 6.2 million for the three months and
nine months ended September 30, 1997, respectively) which, with the exception
of certain special voting rights, is the functional equivalent of Common
Stock. When dilutive, effect has been given to stock options, warrants or
potential issuances of additional Common Stock or Employee Preferred Stock.
The loss applicable to common shares for the three months and nine months
ended September 30, 1996 was similarly computed with the net loss being
increased by dividend requirements on the Mandatorily Redeemable 12% Preferred
Stock (the "12% Preferred Stock") (including amortization of the difference
between the fair value of the 12% Preferred Stock on the date of issuance and
the redemption value plus, with respect to the March 22, 1996 call for the
redemption, a special dividend requirement of approximately $20.0 million to
reflect the excess of the early redemption price over the carrying value of
the 12% Preferred Stock) and on the 8% Preferred Stock issued in March 1996.
In computing the related net loss per share, the loss applicable to common
shares was divided by the average aggregate number of outstanding shares of
Common Stock (39.3 million and 37.5 million for the three months and nine
months ended September 30, 1996, respectively) and Employee Preferred Stock
(5.7 million and 5.6 million for the three months and nine months ended
September 30, 1996, respectively). When dilutive, effect has been given to
stock options, warrants or potential issuances of additional Common Stock or
Employee Preferred Stock.
5. SENIOR SECURED NOTES AND REDEEMABLE WARRANTS
In March 1997, the Company offered 50,000 Units ("Units"), with each Unit
consisting of (i) one 12% Senior Secured Note due 2002 (a "Note"), in the
principal amount of $1,000, and (ii) one Redeemable Warrant (a "Warrant") to
purchase 126.26 shares of Common Stock at an exercise price of approximately
$7.92 per share (the "Offering"). The Notes are secured by a lien on certain
assets of the Company, including 1) the Company's beneficial interest in its
FAA designated take-off and landing slots at three high-density, capacity-
controlled airports, 2) currently owned and hereafter acquired defined ground
equipment of the Company used at certain domestic airports and 3) all of the
issued and outstanding stock of (a) a wholly-owned subsidiary of TWA holding
the leasehold interest in hangar at Los Angeles International Airport and (b)
three wholly-owned subsidiaries of TWA holding leasehold interests in gates
and related support space at certain domestic airports served by the Company.
The Company realized approximately $47.2 million (net of discounts and
commissions and estimated expenses) in proceeds from the Offering. The Company
used approximately $0.5 million of the proceeds from the Offering to release
certain of the collateral to be used to secure the Notes from a prior existing
lien and the remainder of the proceeds for general corporate purposes.
F-50
<PAGE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Offering was made pursuant to Rule 144A of the Securities Act of 1933,
as amended (the "Securities Act"), and, accordingly, the Units, Notes and
Warrants and underlying shares of Common Stock issuable upon exercise of the
Warrants were not registered under the Federal and state securities laws. The
Company filed registration statements with respect to (i) an offer to exchange
registered Notes for any and all outstanding Notes, and (ii) the Warrants and
underlying shares of Common Stock, and to thereby register the Notes and the
Warrants under the Securities Act. These registration statements became
effective on July 29, 1997.
6. PREFERRED STOCK
In March 1996, the Company completed an offering of 3,869,000 shares of its
8% Preferred Stock, with a liquidation preference of $50 per share. Each share
of the 8% Preferred Stock may be converted at any time, at the option of the
holder, unless previously redeemed or exchanged, into shares of Common Stock
at a conversion price of $20.269 per share (equivalent to a conversion rate of
approximately 2.467 shares of Common Stock for each share of 8% Preferred
Stock), subject to adjustment.
The 8% Preferred Stock may not be redeemed prior to March 15, 1999. On or
after March 15, 1999, the 8% Preferred Stock may be redeemed, in whole or in
part, at the option of the Company, at specified redemption prices.
The 8% Preferred Stock may be exchanged 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.
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. Such shares were redeemed 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.
7. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which revises the calculation and presentation
provisions of Accounting Principles Board Opinion 15 and related
interpretations. While statement No. 128 is effective for the Company's fiscal
year ending December 31, 1997, retroactive application will be required. The
Company believes that the adoption of Statement No. 128 will not have a
significant effect on its reported earnings per share.
8. CONTINGENCIES
For a description of various contingencies and other legal actions against
TWA, see "Managements' Discussion and Analysis of Financial Condition and
Results of Operations" and "--Business Legal Proceedings."
F-51
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER
OF TRANSMITTAL CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 4
FORWARD-LOOKING STATEMENTS................................................ 5
PROSPECTUS SUMMARY........................................................ 6
RISK FACTORS.............................................................. 17
USE OF PROCEEDS........................................................... 29
THE EXCHANGE OFFER........................................................ 29
THE COMPANY............................................................... 38
CAPITALIZATION............................................................ 46
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 50
BUSINESS.................................................................. 67
MANAGEMENT................................................................ 80
PRINCIPAL HOLDERS OF CAPITAL STOCK........................................ 84
DESCRIPTION OF NOTES...................................................... 88
BOOK-ENTRY, DELIVERY AND FORM............................................. 124
DESCRIPTION OF CAPITAL STOCK.............................................. 127
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, THE BY-LAWS AND
DELAWARE LAW............................................................. 135
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 139
PLAN OF DISTRIBUTION ..................................................... 142
LEGAL MATTERS ............................................................ 143
EXPERTS................................................................... 143
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
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TRANS WORLD AIRLINES, INC.
OFFER TO EXCHANGE 11 1/2% SENIOR SECURED NOTES DUE 2004, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF
ITS OUTSTANDING 11 1/2% SENIOR SECURED NOTES DUE 2004
------------------
PROSPECTUS
------------------
FEBRUARY 6, 1998
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<PAGE>
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.
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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
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*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)
</TABLE>
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*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)
*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(1)
4.20 --Registration Rights Agreement dated as of December 2, 1997 between
the Company and the Initial Purchases(1)
**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
4.22 --Form of 11 1/2% Senior Secured Note due 2004 (contained in Indenture
filed as Exhibit 4.21)
**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
**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
**5 --Opinion of Davis Polk & Wardell, 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)
</TABLE>
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*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)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
*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)
</TABLE>
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<TABLE>
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*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)
</TABLE>
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<TABLE>
<C> <S>
*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
**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
**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
**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
*11 --Statement of Computation of Per Share Earnings (included in
12/31/96 Form 10-K)
</TABLE>
II-7
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**12 --Statement of Computation of Ratio of Earnings to Fixed Charges
*13.1 --1996 Annual Report to Stockholders (Exhibit 13 to 12/31/96 10-K)
*13.2 --The Company's Quarterly Reports for the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997
**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 Company's 12/31/96 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
</TABLE>
- --------
* Incorporated by reference
** Previously filed with the SEC
(1) Incorporation herein by reference to exhibit of the same number in the
Registrant's Registration Statement on Form S-3, Registration Number 333-
44689.
(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 is 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.
II-8
<PAGE>
(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
preceeding) 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.
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 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, ON FEBRUARY 4, 1998.
TRANS WORLD AIRLINES, INC.
February 4, 1998
/s/ Michael J. Palumbo
By
-----------------------------------
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.
SIGNATURES TITLE DATE
/s/ Gerald L. Gitner Director, Chairman
- ------------------------------------- of the Board and February 4,
GERALD L. GITNER Chief Executive 1998
Officer (Principal
Executive Officer)
/s/ Michael J. Palumbo Senior Vice
- ------------------------------------- President and Chief February 4,
MICHAEL J. PALUMBO Financial Officer 1998
(Principal Financial
Officer and
Principal Accounting
Officer)
* Director
- ------------------------------------- February 4,
JOHN W. BACHMANN 1998
* Director
- ------------------------------------- February 4,
WILLIAM F. COMPTON 1998
* Director
- ------------------------------------- February 4,
EUGENE P. CONESE 1998
* Director
- ------------------------------------- February 4,
WILLIAM M. HOFFMAN 1998
Director February 4,
- ------------------------------------- 1998
EDGAR M. HOUSE
* Director
- ------------------------------------- February 4,
THOMAS H. JACOBSEN 1998
* Director
- ------------------------------------- February 4,
MYRON KAPLAN 1998
<PAGE>
SIGNATURES TITLE DATE
* Director
- ------------------------------------ February 4,
DAVID M. KENNEDY 1998
Director
* February 4,
- ------------------------------------ 1998
MERRILL A. MCPEAK
* Director
- ------------------------------------ February 4,
THOMAS F. MEAGHER 1998
* Director
- ------------------------------------ February 4,
WILLIAM O'DRISCOLL 1998
* Director
- ------------------------------------ February 4,
G. JOSEPH REDDINGTON 1998
* Director
- ------------------------------------ February 4,
BLANCHE M. TOUHILL 1998
* Director
- ------------------------------------ February 4,
STEPHEN M. TUMBLIN 1998
*By: /s/ Kathleen A. Soled February 4,
- ------------------------------------ 1998
KATHLEEN A. SOLED
AS ATTORNEY-IN-FACT
<PAGE>
EXHIBIT INDEX
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*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)
</TABLE>
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*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)
*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(1)
4.20 --Registration Rights Agreement dated as of December 2, 1997 between
the Company and the Initial Purchases(1)
**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
4.22 --Form of 11 1/2% Senior Secured Note due 2004 (contained in Indenture
filed as Exhibit 4.21)
**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
**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
**5 --Opinion of Davis Polk & Wardell, 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)
</TABLE>
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*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)
</TABLE>
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<TABLE>
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*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)
</TABLE>
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*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)
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<C> <S>
*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
**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
**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
**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
*11 --Statement of Computation of Per Share Earnings (included in
12/31/96 Form 10-K)
**12 --Statement of Computation of Ratio of Earnings to Fixed Charges
*13.1 --1996 Annual Report to Stockholders (Exhibit 13 to 12/31/96 10-K)
*13.2 --The Company's Quarterly Reports for the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997
**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 Company's 12/31/96 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
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* Incorporated by reference
** Previously filed with the SEC
(1) Incorporation herein by reference to exhibit of the same number in the
Registrant's Registration Statement on Form S-3, Registration Number 333-
44689.
