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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7815
TRANS WORLD AIRLINES, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 43-1145889
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification Number.)
ONE CITY CENTRE
515 NORTH 6TH STREET
ST. LOUIS, MISSOURI 63101
(Address of principal executive offices, including zip code.)
(314) 589-3000
(Registrant's telephone number, including area code.)
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, par value $.01 per share American Stock Exchange
Warrants (expiring August 23, 2002) American Stock Exchange
11 1/2% Senior Secured Notes due 2004 American Stock Exchange
Series A Participating Cumulative Preferred Stock Purchase Rights American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
8% Cumulative Convertible Exchangeable Preferred Stock,
par value $.01 per share
9 1/4% Cumulative Convertible Exchangeable Preferred Stock,
par value $.01 per share
8% Secured Notes due 2001
Warrants (expiring April 1, 2002)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes /X/ No / /
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 20, 1998, is approximately $690,583,400.
As of March 20, 1998, 51,719,673 shares of the registrant's Common
Stock, par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for the Annual Meeting of
Stockholders on May 19, 1998 - Part III
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PART I
Item 1. Business
Trans World Airlines Inc. ("TWA" or the "Company") is a Delaware
corporation organized in 1978 and is the successor to the business of its
predecessor corporation, Transcontinental & Western Air, Inc., originally
formed in 1934. The Company's principal executive offices are located at One
City Centre, 515 N. Sixth Street, St. Louis, Missouri 63101 and its telephone
number is (314) 589-3000.
TWA is the eighth largest U.S. air carrier (based on revenue passenger
miles ("RPMs") for the full-year 1997), whose primary business is
transporting passengers, cargo and mail. During 1997, the Company carried
approximately 23.4 million passengers and flew approximately 25.1 billion
RPMs. As of December 31, 1997, TWA provided regularly scheduled jet service
to 89 cities in the United States, Mexico, Europe, the Middle East, Canada
and the Caribbean. As of December 31, 1997, the Company operated a fleet of
185 jet aircraft.
North American Route Structure
TWA's North American operations have a hub-and-spoke structure, with 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"). The North American system serves 36 states,
the District of Columbia, Puerto Rico, Mexico, Canada and the Caribbean. The
JFK and St. Louis hub systems are designed to allow TWA to support both its
North American and transatlantic connecting flights. During 1997, TWA's North
American passenger revenues accounted for approximately 85.9% of its total
passenger revenues versus approximately 81.7% during 1996.
St. Louis
TWA is the predominant carrier at St. Louis, with approximately 365
scheduled daily departures as of December 31, 1997 serving 79 cities. In
1997, TWA had approximately a 74.5% share of airline passenger enplanements
in St. Louis excluding all commuter flights, while the next largest
competitor enplaned approximately 12.6%. Since 1995, TWA has added service
from its St. Louis hub to Reno, Nevada, Knoxville, Tennessee, Shreveport,
Louisiana, Steamboat Springs, Colorado, Palm Springs, California, Toronto,
Canada and the Mexican resort cities of Cancun, Puerto Vallarta and
Ixtapa/Zihuatenejo.
JFK
TWA serves 26 domestic and international cities from its JFK hub, with
approximately 40 daily departures. JFK is both the Company's and the
industry's largest international gateway from North America. The Company
offers non-stop flights from JFK to 8 cities in Europe and the Middle East as
well as 17 destinations in the U.S. and the Caribbean.
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Commuter Feed
TWA coordinates operation of its commuter feed into the Company's hubs
at St. Louis and JFK with Trans States Airlines, Inc. ("Trans States"). Trans
States, an independently owned regional commuter carrier, currently operates
approximately 169 daily flights into St. Louis and 56 flights into JFK. Trans
States' operations are coordinated to feed TWA's North American and
international flights. Management believes that these commuter operations are
an important source of traffic into the Company's domestic and international
route networks.
International Route Structure
TWA's international operations consist of both nonstop and through
service from JFK and St. Louis to destinations in Europe and the Middle East.
TWA's international operations are concentrated at JFK, where TWA has built a
hub system primarily designed to provide domestic traffic feed for its
transatlantic service. International cities served include: Barcelona, Cairo,
Lisbon, Madrid, Milan, Riyadh, Rome and 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 from JFK was discontinued on April 18, 1997. In 1997, TWA's
international passenger revenues accounted for approximately 14.1% of total
revenues versus approximately 18.3% in 1996.
On April 28, 1997, TWA announced it had filed an application with the
U. S. Department of Transportation (the "DOT") seeking approval of code-share
service with Royal Jordanian Airline. The DOT approved the code-share on
October 1, 1997. The agreement calls for the joint coding of TWA domestic
flights between seven U.S. cities and JFK and of Royal Jordanian Airline's
direct flights between JFK, Amsterdam and Amman, Jordan. Service began on
November 1, 1997. In addition, TWA and Royal Jordanian Airline recently
announced that they have requested an amendment to their statements of
authorization to add additional cities in the U.S. and in the Persian Gulf
area. The DOT has approved the application and TWA is seeking authority to
serve Bahrain, Qatar, Pakistan and India. It is anticipated that such
authority will be received in the second quarter of 1998. On October 24,
1997, TWA announced that it had signed an agreement with Spanish carrier Air
Europa to provide code share service. Under the agreement, which still
requires governmental approval, TWA will place its TW flight code on Air
Europa flights operating between Madrid and Barcelona, on the one hand, and
Palma and Malaga, Spain, on the other hand. Air Europa will place its UX
flight code on TWA flights operating between both Madrid and Barcelona, on
the one hand, and JFK, on the other hand, and to numerous U.S. points beyond
JFK. The code share service is anticipated to commence in the second quarter
of 1998. Pursuant to their agreements, both Royal Jordanian Airline and Air
Europa have moved their operations to the Company's JFK terminal. On February
11, 1998, TWA announced that it had applied to the DOT seeking authority to
operate 28 frequencies of code share service between St. Louis and Japan in
cooperation with Delta Air Lines. The application proposed to start code
share service to Tokyo and Nagoya as soon as possible after approval, and to
Osaka and Fukuoka on October 28, 1998. TWA also applied for non-stop route
authority from St. Louis to Tokyo beginning June 1, 1999. On March 16, 1998
the DOT issued an order authorizing the Company to serve the St. Louis-Tokyo
market with 7 weekly frequencies and allocating 14 of the weekly frequencies
for U.S.-Japan code share service. The DOT allowed
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interested parties ten days to object and seven additional days to reply to
objections. It is anticipated that a final order will be issued by the DOT
in early April.
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.
Changes to Management Team
On December 20, 1996, Michael J. Palumbo was appointed Senior Vice
President and Chief Financial Officer of the Company. He had previously been
Vice President and Treasurer. On February 12, 1997, the Company's Board of
Directors (the "Board of Directors" or the "Board") named Gerald L. Gitner, a
member of the Board since 1993, as Chairman and Chief Executive Officer of
the Company. Mr. Gitner, who had been named acting Chief Executive Officer in
December 1996, replaced Jeffrey H. Erickson, who on October 24, 1996
announced his intention to leave as the Company's President and Chief
Executive Officer. On December 3, 1997, the Board named William F. Compton, a
TWA pilot and a director of the Company since November 1993, as President and
Chief Operating Officer of the Company. Mr. Compton had been appointed
Executive Vice President, Operations in March 1997. He had been acting in
such position since December 14, 1996. On May 29, 1997 the Board elected
Donald M. Casey as Executive Vice President, Marketing. On October 29, 1997
James F. Martin was elected as Senior Vice President, Human Resources. On
December 31, 1997, Roden A. Brandt resigned as Senior Vice President,
Planning, but will remain as a consultant to the Company through April 30,
1998. On January 28, 1998, the Board appointed Kathleen A. Soled, Esq. to
serve as the Company's Senior Vice President and General Counsel replacing
Richard P. Magurno, Esq. who resigned on January 28, 1998. Ms. Soled had been
the Company's Vice President, Legal and Corporate Secretary.
Recent Securities Offerings
On December 2, 1997, the Company consummated a Rule 144A/Regulation S
private placement offering of 1,725,000 shares of 9 1/4% Cumulative
Convertible Exchangeable Preferred Stock (the "9 1/4% Preferred Stock") which
raised net proceeds of approximately $82.2 million (the "1997 Preferred Stock
Offering"). On December 9, 1997, the Company consummated a Rule
144A/Regulation S offering of $140.0 million aggregate principal amount of
11 1/2% Senior Secured Notes due 2004 (the "11 1/2% Notes") which raised net
proceeds of approximately $133.5 million (the "11 1/2% Notes Offering"). On
December 30, 1997, a wholly-owned, bankruptcy-remote subsidiary of the
Company consummated a Rule 144A/Regulation S private placement offering of
$100.0 million aggregate principal amount of 9.80% Airline Receivable Asset
Backed Notes due 2001 (the "Receivables Securitization Notes") which raised
net proceeds of approximately $97.0 million (the "Receivables Securitization
Offering"). A portion of the net proceeds from the 11 1/2% Notes Offering and
the Receivables Securitization Offering was used to repay existing
indebtedness. On March 3, 1998, the Company consummated a Rule
144A/Regulation S offering of $150.0 million aggregate principal amount of
11 3/8% Senior Notes due 2006 which raised net proceeds of approximately
$144.9 million.
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The Company is currently negotiating the acquisition of three Boeing
767-231 ETOPS airframes and six accompanying engines (collectively, the
"Aircraft") currently being leased by the Company in exchange for the
proposed issuance of (i) $43.2 million aggregate principal amount of the
Company's 11 3/8% Senior Secured Notes due 2003, which would have a first
priority security interest in the Aircraft (the "Aircraft Secured Notes"),
and (ii) $31.8 million aggregate principal amount of the Company's Mandatory
Conversion Equity Notes due 1999 (the "Equity Notes" and, together with the
Aircraft Secured Notes, the "Aircraft Notes"), which would have a second
priority security interest in the Aircraft and be convertible into shares of
Common Stock based upon a formula to be set forth in the Equity Notes (the
"Aircraft Offering"). The Aircraft Notes would be issued in a private
placement to the sellers of the Aircraft. The Aircraft Notes would not be
registered under the Securities Act and could not be transferred or sold in
the United States absent registration or an applicable exemption from
registration requirements. There can be no assurance that this transaction
will be consummated.
Recent Strategic Initiatives
Management believes that certain strategic initiatives undertaken by
the Company beginning in late 1996 have contributed to the Company's improved
financial and operating results. TWA's management began to implement such
strategic initiatives in response to a significant deterioration in the
Company's operating performance and financial condition during the second
half of 1996. This deterioration was primarily caused by (i) an overly
aggressive expansion of TWA's capacity and planned flight schedule,
particularly during the 1996 summer season, which forced the Company to rely
disproportionately on lower-yield feed traffic and bulk ticket sales to fill
the increased capacity of its system; (ii) the delayed delivery of four older
747s intended to increase capacity for incremental international operations
during the summer of 1996; and (iii) unexpected maintenance delays due to the
capacity increase, higher levels of scheduled narrow-body heavy maintenance
and increased contract maintenance performed for third parties. These factors
caused excessive levels of flight cancellations, poor on-time performance,
increased pilot training costs and higher maintenance expenditures and
adversely affected the Company's yields and unit costs. In addition, the
crash of TWA Flight 800 on July 17, 1996 distracted management's attention
from core operating issues and led to lost bookings and revenues. The Company
also experienced a 27.6% increase in fuel costs in 1996 versus 1995,
primarily due to a 22.3% increase in the average fuel price paid per gallon
during the year.
The primary focus of the Company's new strategic initiatives is to
reestablish TWA's operational reliability and schedule integrity and overall
product quality in order to attract higher-yield passengers and enhance
overall productivity, which should improve the Company's financial results.
As the initial steps in implementing this strategy, the Company temporarily
reduced its flight schedule during the first quarter of 1997 to more closely
match aircraft available for active service and worked to reduce the number
of aircraft in maintenance backlog by increasing overtime and utilizing
maintenance capacity made available by the termination of an unprofitable
aircraft maintenance contract with the U.S. government.
TWA has significantly enhanced its operational reliability and schedule
integrity since the first quarter of 1997. According to statistics reported
to the DOT, TWA improved from tenth among the 10 largest U.S. scheduled
commercial airlines in domestic on-time performance in 1996 to second in
1997. TWA also canceled 5,413 fewer flights in 1997 than in 1996, improving
its percentage of scheduled flights completed to 98.0% compared to 96.2% for
1996.
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 older, heavier,
maintenance-intensive aircraft are phased out and replaced by newer aircraft.
These changes are intended to simplify the Company's fleet structure, thereby
reducing the number of aircraft types to decrease overall crew training and
aircraft
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maintenance costs (although resulting in increased short-term transition crew
training costs). Additional efficiencies should be realized through increased
standardization of aircraft parts, supplies and cabin equipment that must be
inventoried throughout TWA's system. Despite the higher capital costs
associated with owning or leasing new and later model aircraft, the Company
believes that corresponding reductions in operating costs will offset these
increased costs. Management believes this initiative will further improve
operating performance while allowing the Company to achieve Stage 3
compliance with the Airport Noise and Capacity Act of 1990 (the "Noise Act")
by the year 2000 without further downsizing.
In the first quarter of 1997, as part of its efforts to improve
near-term operational reliability, the Company announced plans to accelerate
retirement of the 14 747s (four-engine, 3-pilot wide-body jets with an
average age of approximately 25.6 years) and the 11 L-1011s (three-engine,
three-pilot wide-body jets with an average age of approximately 22.6 years)
remaining in its fleet as of December 31, 1996. All of the L-1011s and 747s
have been retired. These older, less efficient and less reliable aircraft
have been replaced with new or later-model used 757, 767 and MD-80 aircraft.
Management believes that these smaller aircraft are more appropriately sized
to the routes served and, by reducing the Company's reliance on lower-yield
feed traffic to fill capacity, have resulted in higher load factors and
improved yields. Further, these newer twin-engine, two-pilot aircraft are
expected to provide efficiencies in fuel, flight crew and maintenance
expenses, while reducing long-term pilot training costs by enabling TWA to
have fewer aircraft types in the fleet. Such aircraft should also permit TWA
to more effectively utilize its yield management system. In 1996, TWA entered
into agreements to lease 10 new 757s and to purchase an additional 10 new 757
aircraft. As of February 1, 1998, TWA had taken delivery of 15 of such
aircraft. The Company also acquired the right, subject to certain conditions,
to purchase up to 20 more new 757 aircraft from the manufacturer. In
addition, the Company entered into agreements with a major operating lessor
to lease two 767-300ERs with deliveries in 1998. In 1996, the Company entered
into an agreement with the manufacturer to acquire 15 new MD-83s. As of
February 1, 1998, the Company had taken delivery of seven of the MD-83s, and
expects to take delivery of six additional planes during 1998 and two
additional planes in 1999. The Company also entered into an agreement for the
lease of nine late-model used MD-82s, which were delivered in 1997 and early
1998. The Company also intends to retire eight of its older 727s in 1998,
which are expected to be replaced with MD-80s. As a result of this fleet
restructuring, the Company's mix of narrow-body and wide-body aircraft
shifted to approximately 90%/10% as of December 31, 1997 versus 80%/20% as of
year-end 1996, while TWA's average number of seats per aircraft declined to
141 from 161 over the same period. As of December 31, 1997, the average age
of its fleet had decreased to 16.9 years from 19.0 years at year-end 1996.
The Company is in negotiations to acquire 24 new MD-83 aircraft from the
manufacturer. If an agreement is reached, it is anticipated that such agreement
will provide for delivery of the aircraft in 1999. TWA has also entered into
an agreement with a third party aircraft lessor for the sale and leaseback of
fifteen B727-200A aircraft owned by the Company. The aircraft are scheduled to
be delivered on March 31, 1998 and leased to TWA under leases which expire in
1999 and 2000.
During 1996 and 1997, the Company outfitted 30 of its DC9-30 aircraft
with "hush-kits" in order to bring such aircraft into compliance with Stage 3
requirements of the Noise Act. The Company is considering "hush-kitting"
additional aircraft as well as other alternatives including acquisition of
Stage 3 compliant aircraft as replacements for non-compliant aircraft to
assure compliance with Stage 3 noise requirements, in particular the
replacement of DC9 aircraft with newer model aircraft. See "Regulatory
Matters--Noise Abatement." While the Company is seeking financing for certain
of its planned capital expenditures, a substantial portion of such
expenditures is expected to utilize
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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.
Route Structure Optimization
The Company has been optimizing its route structure by redeploying
assets to markets in which it believes it has a competitive advantage and
limiting its commitments in other markets.
Domestically, the Company believes the greatest opportunities for
improved operating results will continue to come from focusing additional
resources on its St. Louis hub in order to leverage its strong market
position. The Company already dominates operations at St. Louis, with
approximately 74.5% of total enplanements in 1997, excluding commuter
traffic. In addition, the Company enjoys certain advantages in the Midwest
due to its established route system, strong brand identity and concentrated
presence in that market. Because St. Louis is located in the center of the
country, it is well-suited to function as an omni-directional hub for both
north-south and east-west transcontinental traffic. Therefore, TWA believes
it is better positioned to offer more frequencies and connecting
opportunities to many travelers in its key Midwestern markets than competing
airlines. To capitalize on these advantages, the Company has increased its
number of daily departures at St. Louis from 229 in 1993 to approximately 365
as of December 31, 1997. In addition, beginning in 1995, the Company has
increased service to the north and south with service to 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 has been to reduce and streamline international operations
to focus on markets that it believes can support non-stop service and to
maximize utilization of the JFK facility. As a result, since 1994, the
Company has eliminated service to several European cities and reduced its
service to and from Paris. In addition, during 1996 and 1997 the Company
increased service from JFK to the Caribbean, Florida and to certain other
domestic cities to increase utilization of the Company's JFK facility,
particularly during off-peak time periods, and to provide feed traffic for
its international operations. On February 11, 1998, the Company applied to
the DOT seeking authority to operate 28 frequencies of code share service
between St. Louis and Japan in cooperation with Delta Air Lines. The
application proposes to start code share service to Tokyo and Nagoya as soon
as possible after approval, and to Osaka and Fukuoka on October 28, 1998. TWA
also applied for non-stop route authority from St. Louis to Tokyo beginning
June 1, 1999. On March 16, 1998 the DOT issued an order authorizing the
Company to serve the St. Louis-Tokyo market with 7 weekly frequencies and
allocating 14 of the weekly frequencies for U.S.-Japan code share service.
The DOT allowed interested parties ten days to object and seven additional
days to reply to objections. It is anticipated that a final order will be
issued by the DOT in early April.
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
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international routes also has increased operating efficiencies and on-time
performance at JFK, since these smaller aircraft are better suited to the
physical limitations of TWA's terminals. As a result of these changes, TWA's
international scheduled capacity (as measured by ASMs) decreased 32.3% in
1997 versus 1996 and represented 19.5% of total scheduled capacity for 1997
versus 25.6% for 1996. The Company believes that this decrease in
international operations, together with the rationalization of fleet size
described above, will help deseasonalize TWA's business, with the difference
between TWA's seasonal average daily peak and trough capacities anticipated
to be approximately 4.2% in 1998, versus 16.9% in 1997 and 20.5% in 1996.
While the Company believes that the deseasonalization of operations will
reduce quarter to quarter fluctuations in the future, there can be no
assurance that such deseasonalization will occur.
Customer Service; Travel Agent Commissions
The Company is focusing on improving the quality of its air travel
product and the service provided to passengers by TWA personnel. The Company
believes that its increased focus on quality, certain new marketing
initiatives and the steps taken to restore operational reliability and
schedule integrity in 1997 have resulted and will allow TWA to attract a
greater percentage of higher-yield passengers. Ongoing initiatives include:
Focus on Business Traveler. Based on customer research, the Company has
targeted business travelers and is therefore tailoring its marketing and
advertising efforts to emphasize the Company's positioning as a full-service,
high-value airline providing service to popular business destinations
throughout the U.S. The Company believes that its convenient flight schedules
and connections, as well as its centrally located hub at St. Louis, are
important in providing service which is attractive to these travelers.
The Company is introducing a series of marketing initiatives designed
to attract a greater percentage of higher-yield business passengers.
In March 1995, TWA introduced Trans World One, a premium business class
service in its international and certain trans-continental non-stop markets.
This product has recently been enhanced and relaunched with advertising and
promotional support. Trans World One is available in 767 equipment and in
selected 757 equipment. Overall service is being improved, including check-in,
on-board comfort, food service and priority baggage return. TWA is also
increasing first class cabin seating in its narrow-body domestic aircraft
by 60% and is planning a series of airport and in-flight enhancements. This
domestic service was launched in early 1998 as Trans World First. The Company
has also implemented a specially designed service for short-haul business
markets, in the first quarter of 1998 named TWQ. The Company is 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 introduced a revamped frequent flier program under the name "Aviators"
in the first quarter of 1998 effective May 1, 1998. The Company has already
implemented several new initiatives to improve its frequent flier program. A
Platinum level was introduced in the third quarter of 1997 to offer the
Company's most attractive travel benefits for its highest mileage customers.
Platinum level travelers and travelers purchasing first class or full fare
coach tickets will also be given mileage bonuses equal to the base dollar
amount paid for their tickets, in addition to other existing bonuses.
Further, TWA
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joined the American Express Membership Rewards Program, allowing members the
opportunity to earn additional miles for amounts charged on the American
Express Card.
Leisure Traveler. Within the leisure travel market, TWA is positioned
as a high-quality, competitive-fare carrier. Management believes that TWA's
cost structure and attractive route system position it well to compete for
leisure traffic. Further, TWA's Getaway Program, which was the original
airline tour program, has a leading position in this sector.
Travel Agent Commissions. Until recently TWA paid the full traditional
10% commission on tickets for domestic transportation on TWA sold by
independent travel agents without the cap of $50 and $25 per domestic
round-trip and one-way tickets, respectively, which most other major airlines
imposed in 1995, and paid an 11% commission on tickets for international
transportation. On October 2, 1997, the Company reduced its commissions on
tickets for domestic and international transportation to 8% and 10%,
respectively, without the cap imposed by most other major airlines. Although
the Company cannot 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
"Travel Agencies--Travel Agent Commissions."
Labor Relationship
Management believes TWA has a generally cooperative relationship with
its employees, including employees represented by unions. At various times,
the Company's employees have demonstrated significant loyalty and commitment
to TWA's future by, among other things, agreeing to various wage and work
rule concessions to improve productivity in connection with the `93 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 the Air Line Pilots Association,
International ("ALPA") and the International Association of Machinists and
Aerospace Workers ("IAM") to elect four of the Company's 15 directors. On
March 6, 1997, the IAM assumed representation of the Company's flight
attendants formerly represented by the Independent Federation of Flight
Attendants ("IFFA") and IFFA was decertified. Union and non-union employees
are also eligible under the Employee Stock Incentive Plan ("ESIP") to
increase their level of stock ownership through grants and purchases of
additional shares over a five year period commencing in 1997. For information
concerning the ESIP, see "Employees" below.
Each of the Company's union contracts became amendable as of August 31,
1997, and negotiations have begun with respect to all three major contracts.
While management believes that the negotiation process for the new contracts
will result in extended contracts mutually satisfactory to the parties, there
can be no assurance 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
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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 programs through which TWA has
sought to institutionalize throughout all levels of its organization the
importance of running an airline with operational reliability and schedule
integrity. These programs provide certain operating and procedural guidelines
for enhancing performance and improving overall product quality. In addition,
in 1996 the Company introduced Flight Plan 97, which paid eligible employees
a $65 bonus for each month that TWA finished in the top five in all three
performance categories tracked by the DOT (on-time performance, customer
complaints and baggage handling) and a total of $100 if TWA also ranked first
in at least one of such categories. Based on the Company's performance in
September 1997, eligible employees earned their first bonus under this
program, a $100 payment for ranking first in on-time performance, fourth in
customer complaints and fifth in baggage handling. This program has been
enhanced as Flight Plan 98 and now provides that in any quarter where the
Company places first in the on-time DOT-tracked performance category for the
entire quarter (and assuming that no bonus over $100 was paid to employees
during that quarter) the eligible employees would receive a $100 bonus.
Investment in Technology
Management believes significant opportunities exist for the Company to
increase revenues and reduce costs by investing in available technology that
provides the Company and its employees with the information necessary to
operate its business more effectively and to improve customer service. The
Company has taken a significant step forward in this area by installing a
computerized yield management system. The need to build a historical database
for such yield management system has delayed full realization of benefits
expected from such system; however, as this database grows during 1998, it is
expected to allow the Company to improve significantly its ability to
estimate demand flight-by-flight for each class of fares and manage the
allocation of seats accordingly. Given TWA's prior lack of a computerized
yield management system, the Company's management believes that as this
database grows the system will offer significant opportunities for revenue
improvement. In 1996, the Company implemented a "QIK-Res" system at its
reservation center in Norfolk, Virginia. QIK-Res is a front-end reservations
software program designed to improve customer service. Management believes
the system has demonstrated its effectiveness at Norfolk and intends to
pursue the possibility of extending the system to its reservation center in
St. Louis. TWA is also in the process of installing state-of-the-art computer
hardware for ticket counter and gate podiums at St. Louis using "QIK-Chek"
software to improve passenger service and data collection while simplifying
the ticket and check-in process.
Cost and Efficiency Initiatives
Management believes that maintaining a low cost structure is crucial to
the Company's business strategy. TWA's airline operating cost per ASM
(adjusted for subsidiaries, restructuring and earned stock contributions)
increased from 8.12 cents in 1995 to 8.76 cents in 1996 and to 8.97 cents in
1997. The primary contributors to these increases were increases in
maintenance costs and costs associated with flight crew training which
occurred primarily during the first six months of 1997. Despite these
increases, management believes that TWA's operating costs remain below the
average of the six largest full service carriers. The Company intends to
continue to pursue, among other things, route
9
<PAGE> 11
optimization, increased labor efficiencies, fleet modernization and
rationalization, and investment in technological advances in order to improve
operating results. During 1997, TWA realized cost efficiencies in
maintenance, reflecting the elimination of TWA's maintenance backlog during
the first quarter of 1997, as well as the reduced maintenance requirements
for the newer aircraft already added to TWA's fleet. In addition, as
described above, the Company's fleet renewal plan is expected to provide
efficiencies in fuel, flight crew and training expenses, while the JFK
restructuring has eliminated certain unprofitable routes and reduced certain
operating costs. TWA's average number of employees per aircraft has decreased
from 131.0 as of December 31, 1996 to 120.7 as of December 31, 1997, which is
generally consistent with industry standards.
The Company has increased to 12 the number of connecting "banks" of
flights operating into its St. Louis hub to increase further the utilization
of its aircraft. TWA has installed a new ticketless system and has begun to
test automatic ticket machines in selected markets. In mid-1996, the Company
initiated programs allowing customers to book reservations directly via
on-line network systems, and during the second quarter of 1997, TWA began to
provide bookings via the Internet. It is expected that distribution costs
will be reduced as travelers use these on-line booking vehicles and
ticketless systems. In addition, TWA is implementing a number of programs to
reduce computer reservation systems booking fees, both internally and from
travel agents. Such booking fees are separate transaction fees that are paid
in addition to any travel agent commission. TWA will continue to explore
other opportunities to reduce costs and improve efficiency in the areas of
aircraft maintenance, airport operations, purchasing, distribution, ticket
delivery, food service, cargo delivery operations and administrative
functions.
Travel Agencies
Travel Agent Commissions
Consistent with most other airlines, tickets sold for travel on TWA are
sold by travel agents as well as directly by the Company. During 1997,
approximately 81.9% of all ticket sales on TWA were sold by travel agents.
Until October 2, 1997, TWA paid the full traditional 10% commission on
tickets for domestic transportation on TWA sold by independent travel agents
without the cap of $50 and $25 per domestic round-trip and one-way tickets,
respectively, which most other major airlines imposed in 1995 and paid an 11%
commission on tickets for international transportation. On October 2, 1997,
the Company reduced its commission on tickets for domestic and international
transportation to 8% and 10%, respectively, without the cap imposed by most
of the major airlines. Although the Company cannot 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 an 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").
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<PAGE> 12
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%, 38%, 32% and 5%,
respectively. Management believes that its participation in Worldspan, L.P.
("Worldspan") has given it direct access to an efficient distribution system.
Worldspan continues to expand its offering and coverage, further benefiting 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 Frequent Flight Bonus Program ("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 Rewards 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 and liability insurance expenses expected to be incurred on a
per passenger basis. No profit or overhead margin is included in the accrual
for incremental costs. No liability is recorded for airline, hotel or car
rental award certificates that are to be honored by other parties because
there is no cost to TWA for these awards.
At December 31, 1996, FFB participants had accumulated mileage credits
for approximately 751,689 free awards, compared with accumulated mileage
credits for approximately 938,319 free awards at December 31, 1997. Because
TWA expects that some award certificates will never be redeemed, the
calculations of the accrued liability for incremental costs at December 1996
and 1997 were based on approximately 71.5% and 63.0%, respectively, of the
accumulated credits. Mileage for FFB participants who have accumulated less
than the minimum number of mileage credits necessary to claim a free award is
excluded from the calculation of the accrual.
The accrued liability at December 31, 1996 was approximately $20.4
million compared to approximately $19.6 million at December 31, 1997.
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<PAGE> 13
TWA's customers redeemed free awards representing approximately 4.5%
and 4.9% of TWA's RPMs in 1996 and 1997, respectively.
Aircraft Fuel
TWA's worldwide aircraft fuel requirements are met by in excess of
twenty different suppliers. The Company has contracts with some of these
suppliers, the terms of which vary as to price, payment terms, quantities and
duration. The Company also makes incremental purchases of fuel based on price
and availability. To assure adequate supplies of jet fuel and to provide a
measure of control over price, the Company trades fuel, ships fuel and
maintains fuel storage facilities to support key locations. Petroleum product
prices, including jet fuel, are primarily driven by crude oil costs. The
market's alternate uses of crude oil to produce petroleum products other than
jet fuel (e.g., heating oil and gasoline) as well as the adequacy of refining
capacity and other supply constraints affect the price and availability of
jet fuel. Changes in the price or availability of fuel could materially
affect the financial results of the Company.
During 1996, aircraft fuel prices increased significantly, however,
such prices declined moderately during 1997. The following table details
TWA's fuel consumption and costs for the three years ended December 31, 1995,
1996 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Gallons consumed (in millions) 804.2 838.9 730.3
Total cost<F1> (in millions) $458.6 $585.2 $480.9
Average cost per gallon 57 cents 70 cents 66 cents
Percentage of operating expenses 13.9% 15.6% 14.3%
<FN>
- ----------
<F1> Excludes into-plane fees.
</TABLE>
Competition
Since the passage of the Airline Deregulation Act of 1978, the airline
industry has been characterized by intense competition, consolidation of
existing carriers, the formation of international and domestic alliances and
the advent of numerous low-cost, low-fare new entrants. A number of airlines
have filed for bankruptcy and/or ceased operations. In addition, several
carriers have introduced or announced plans to introduce low-cost, short-haul
jet service, which may result in increased competition to TWA. Airlines offer
discount fares, a wide range of schedules, frequent flier mileage programs
and ground and in-flight services as competitive tools to attract passengers
and increase market share. Intense price competition has accelerated the
efforts of airline managements to reduce costs and improve productivity in
order to withstand greater levels of discounting. TWA's services are subject
to varying degrees of competition, depending in part on whether such services
are operated over domestic or international routes. Because of the relative
ease with which U.S. carriers can enter new domestic markets, TWA's domestic
services are subject to increases or decreases in competition from other air
carriers. Changes in intensity of competition in the deregulated domestic
environment cannot be predicted.
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<PAGE> 14
The level of competition in international markets is normally governed
by the terms of bilateral agreements between the U.S. and the foreign
countries involved. Many of the bilateral agreements permit an unlimited
number of carriers to operate between the U.S. and the foreign country.
Competition in some international markets is limited to a specified number of
carriers and flights on a given route by the terms of the air transport
agreements between the U.S. and the foreign country. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--General" 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 December 31, 1997, the Company had approximately 22,321 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 Collective Bargaining Agreements
with ALPA, IAM and IFFA (collectively the "`94 Labor Agreements") 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
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<PAGE> 15
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 (as defined herein, see "Corporate
Reorganizations" below), TWA issued to certain trusts established for the
benefit of its unionized employees shares of Employee Preferred Stock; such
stock being issued in three separate series designated the ALPA Preferred
Stock, the IAM Preferred Stock and the IFFA Preferred Stock. Except for
certain rights with respect to the election of directors, the Employee
Preferred Stock has rights substantially identical to the Common Stock. TWA
also issued an aggregate of 1,026,694 shares of Common Stock to a trust
established for the benefit of certain of TWA's other employees. The value of
shares issued to the Company's non-union employees was intended to reflect
the estimated value to the Company of the concessions granted by these
employees. The equity securities issued on the `95 Effective Date resulted in
the employees of the Company initially owning approximately 30% of the then
outstanding Common Stock and Common Stock equivalents of the Company.
In recognition of the fact that as a result of the `95 Reorganization,
the percentage of the Company's stock owned by the Company's employees was
substantially reduced, the Company adopted as of the `95 Effective Date the
ESIP pursuant to which the Company would grant, commencing in 1997, to
certain trusts established for the benefit of its union and non-union
employees certain additional shares of Common Stock and Employee Preferred
Stock. The ESIP provides that the first stock grant under the plan would be
made on July 15, 1997 in an amount sufficient to increase the employee
ownership of the combined total number of then outstanding shares of Common
Stock and Employee Preferred Stock by 2.0% if the average closing price of
the Common Stock on the American Stock Exchange, or such other exchange or
market which is then the principal market on which the Common Stock is listed
or admitted to trading, for 30 consecutive trading days (the "Average Closing
Price") exceeded a target price of $11.00 per share during the period from
January 1, 1997 to July 14, 1997. If the target price of $11.00 per share is
not exceeded, the grant would instead be made, if at all, on July 15 of the
next year (up to and including July 15, 2002) in which the Average Closing
Price of the Common Stock exceeds such target price prior to July 15 of that
year. In each of 1998 through 2002, additional shares of Employee Preferred
Stock and Common Stock will become subject to grant under this program in an
amount sufficient to increase the employee ownership by 1.5% in 1998, 1.5% in
1999, 1.0% in 2000, 1.0% in 2001 and 1.0% in 2002 (subject to adjustment as
described below) based on the combined total number of shares of Common Stock
and Employee Preferred Stock outstanding as of the applicable July 15 grant
date, with the target price applicable to the additional shares made
available for grant in such year equal to $12.10 in 1998, $13.31 in 1999,
$14.64 in 2000, $16.11 in 2001 and $17.72 in 2002. Each such grant is
cumulative and, where the applicable target price is not met in the initial
grant year, the applicable grant is carried forward and is subject to grant
in future years up to and including July 15, 2002 in the manner described
above. To protect against the dilutive effect of certain stock issuances,
the ESIP provides for an adjustment (the "Adjustment") to the grants
described above in the event the Company issues additional Common Stock to
third parties for cash or property or in lieu
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<PAGE> 16
of cash payments on the 12% Senior Secured Reset Notes (the "12% Reset
Notes") or the Company's Mandatorily Redeemable 12% Preferred Stock (both the
12% Reset Notes and the Mandatorily Redeemable 12% Preferred Stock have been
retired). To the extent that a sale of additional capital stock for cash
results in a decline in the percentage of employee ownership of the combined
total number of shares of Common Stock and Employee Preferred Stock below a
level equal to the Adjusted Base Ownership Percentage (as defined in the
ESIP), one-quarter of the difference between the new percentage of employee
ownership and the Adjusted Base Ownership Percentage (but in no event greater
than 1.0% in each year) would be added to the percentage of Employee
Preferred Stock and Common Stock to be granted to union employees and
non-union employees, respectively, under the ESIP in each of the years 1999
through 2002, assuming the target prices are met. Furthermore, if TWA issues
additional shares of Common Stock with an aggregate value of more than $20
million to third parties for cash or a reduction in debt at a price equal to
or greater than $11.00 per share (the "Equity Issuance Acceleration
Trigger"), the last two scheduled grants under the ESIP are to be aggregated
and these shares allocated equally to the remaining installments in the
program. In addition, pursuant to the ESIP, employees have the right
commencing July 15, 1997 through July 15, 2002, to purchase additional shares
of Employee Preferred Stock in amounts up to an aggregate of 2.0% of the
combined total number of outstanding shares of Common Stock and Employee
Preferred Stock at a discount of 20.0% from the then current market price.
Should all of the target prices be met or exceeded within the time periods
specified and should the entire discount stock purchase option be exercised,
the various employee stock trusts would receive a total of 10.0% (as adjusted
as described below) of the Company's outstanding Common Stock, with the exact
amount issued dependent upon the number of shares outstanding as of the date
of each grant and option exercise.
The ESIP separately provides that if additional shares of Employee
Preferred Stock and Common Stock are distributed following the `95 Effective
Date in respect of the `95 Reorganization, employees will be entitled to
receive an additional number of shares of Employee Preferred Stock and Common
Stock such that the employees will retain the same level of ownership. Union
representatives and the Company agreed to a one-time distribution pursuant to
this provision of the ESIP in an aggregate amount of 525,856 shares of
Employee Preferred Stock and Common Stock. As part of that agreement, since
additional ESIP shares were not issued to the employees in July 1997, an
additional 405,750 shares of Employee Preferred Stock and Common Stock were
issued to the employee trusts and, to the extent that additional shares are
granted under the ESIP, the Company will receive a credit towards the new
grant for these previously issued shares, in that amount.
While the $11.00 target price was not exceeded as of July 15, 1997 and
no target price grant was made on that date, on February 17, 1998, the
Average Closing Price for the Company's Common Stock did exceed the $11.00
target price with respect to the first scheduled grant. As a result, the
initial grant in an amount sufficient to increase the employee ownership by
2.0% based on the then outstanding Common Stock and Employee Preferred Stock
will be made on July 15, 1998. Based on the current outstanding Voting
Equity (as defined in the ESIP) of 57,890,907 shares, the number of shares of
Employee Preferred Stock and Common Stock to be issued to the employees under
the ESIP on that date is 1,515,472. TWA is entitled to a credit against this
number in the amount of 405,750 shares due to the prior grant to employees as
described above. On March 4, 1998, the Average Closing Price for the
Company's Common Stock did exceed the $12.10 target price with respect to the
1998 grant of 1.5%. As a result, the 1998 grant in an amount sufficient to
increase the employee ownership by 1.5% based on the then outstanding Common
Stock and Employee Preferred Stock will also be made on July 15, 1998. Based
on the current outstanding Voting Equity, the number of
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<PAGE> 17
additional shares of Employee Preferred Stock and Common Stock to be issued
to the employees under the ESIP on that date for the 1998 grant is 1,172,354.
The number of shares to be granted could be increased if the last two grants
are accelerated pursuant to the Equity Issuance Acceleration Trigger.
Furthermore, based on issuances of Common Stock to date, the Adjustment has
resulted in a revised grant schedule of 1.5% in 1998, 1.84% in 1999, 1.34% in
2000, 1.34% in 2001 and 1.34% in 2002. Assuming the Aircraft Offering is
consummated and taking into account the Common Stock issued upon conversion of
the Equity Notes, the grants for the years 1999-2002 would further increase
pursuant to the Adjustment to: 1.91% in 1999, 1.41% in 2000, 1.41% in 2001 and
1.41% in 2002. Finally, in the event that the Aircraft Offering is consummated
and the final conversion price of the Equity Notes to be issued in connection
with the Aircraft Offering is in excess of $11.00 per share, the Equity
Issuance Acceleration Trigger will be met and the final two scheduled
installments will be aggregated and these shares will be allocated equally to
the remaining installments in the program. As a result, the remaining grants
would be as follows: 2.705% in 1997 (already vested and payable on July 15,
1998); 2.205% in 1998 (already vested and payable on July 15, 1998); 2.615% in
1999 if the Average Closing Price exceeds $13.31 and 2.115% in 2000 if the
Average Closing Price exceeds $14.64.
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.
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 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 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. At the request
of the IAM, a mediator was appointed on March 27, 1998 in connection with the
negotiations on the collective bargaining agreement covering flight attendants.
In the opinion of management, the Company's financial resources are not as
great as those of most of its competitors, and, therefore, any substantial
increase in its labor costs as a result of any new labor agreements or any
cessation or disruption of operations due to any strike or work action could by
particularly damaging to the Company.
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Regulatory Matters
Slot Restrictions
The Company's ability to increase its level of operations at certain
domestic cities currently served is affected by the number of slots available
for takeoffs and landings. At JFK, LaGuardia, Chicago O'Hare and Ronald
Reagan Washington National airports, which have been designated "High Density
Airports" by the Federal Aviation Administration (the "FAA"), there are
restrictions on the number of aircraft that may land and take off during peak
hours. In the future, these take-off and landing time slot restrictions and
other restrictions on the use of various airports and their facilities may
result in further curtailment of services by, and increased operating costs
for, individual airlines, including TWA, particularly in light of the
increase in the number of airlines operating at such airports. On April 1,
1986, the FAA implemented a final rule relating to allocated slots at the
High Density Airports. This rule, as since amended, contains provisions
requiring the relinquishment of slots for nonuse and permits carriers, under
certain circumstances, to sell, lease or trade their slots to other carriers.
TWA does not anticipate losing any slots as a result of these new rules;
however the higher use rates required by these rules do increase the risk
that TWA might lose slots in the future because of nonuse and decrease TWA's
ability to adjust its flight schedules at the High Density Airports.
Most international points served by TWA also are slot-controlled.
Control over International Routes
TWA's international certificates are granted by the DOT for indefinite
or fixed-term periods, depending on the route. TWA is authorized to provide
transatlantic service from major cities in the U.S. to points in Europe,
North Africa, the Middle East and Asia. Some of these authorized routes are
not currently served by TWA. Many of the European markets served by TWA are
"limited entry" markets in which, as a result of agreements between the
United States and foreign governments, TWA has traditionally competed with a
limited number of other carriers. During the past several years, however, the
U.S. government has encouraged competition in international markets and
entered into bilateral agreements with various foreign governments that
provide for expanded exchanges of routes and traffic rights, reduction of
governmental controls over fares and avoidance of limits on capacity and
charter services. Competition in international markets has increased
dramatically over the past several years as major U.S. carriers have
initiated and/or continued to expand their international operations. Foreign
flag carriers have continued to expand service and the DOT has indicated its
support for further expansion of opportunities of foreign carriers to serve
new points in the U.S. No assurance can be given that TWA will continue to
have the advantage of all the "limited entry" markets in which it currently
operates or that additional carriers will not be permitted to operate in one
or more of these markets or that TWA in general will not face substantial
unexpected competition. Competition in the international market is further
complicated by the fact that pricing levels on some transatlantic routes are
influenced by subsidies that certain foreign carriers receive from their
governments and by the presence of smaller, low-cost carriers.
Certain portions of TWA's transatlantic route authority have been
granted on a fixed-term basis. On May 4, 1993, the bilateral air transport
agreement between the U.S. and France lapsed. In the absence of a new
bilateral agreement, the U.S. and France are currently operating on a system
of comity and reciprocity. Under this regime, carriers are permitted to
maintain historical levels of service, but few or no new services are
permitted. Cessation of service to any authorized markets
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<PAGE> 19
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.
As of December 31, 1997, approximately 69% of TWA's active fleet met
the Stage 3 standards. TWA's ability to comply with the federal requirements
within the time specified, or with more restrictive local noise restrictions,
by acquiring newer aircraft and by phasing out or retrofitting older aircraft
that are not in compliance with the Stage 3 standards, will depend upon its
ongoing financial condition, its ability to renegotiate existing leases for
such aircraft and its ability to obtain financing to acquire the requisite
number of Stage 3 aircraft or retrofit kits. TWA is considering
"hush-kitting" additional aircraft as well as other alternatives to assure
compliance with Stage 3 noise requirements, and has already acquired a number
of Stage 3 aircraft while phasing out several Stage 2 aircraft. However,
there can be no assurance that TWA will be able to satisfy all applicable
noise level requirements without further downsizing.
18
<PAGE> 20
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.
Aging Aircraft Maintenance
The FAA issued several Airworthiness Directives ("ADs") in 1990
mandating changes to maintenance programs for older aircraft to ensure that
the oldest portion of the nation's fleet remains airworthy. The FAA required
that these older aircraft undergo extensive structural modifications prior to
the later of the accumulation of a designated number of flight cycles or 1994
deadlines established by the various ADs. Most of the Company's aircraft are
currently affected by these aging aircraft ADs. The Company monitors its
fleet of aircraft to ensure safety levels which meet or exceed those mandated
by the FAA.
In 1996 and 1997, TWA spent approximately $3.4 million and $4.2
million, respectively, to comply with aging aircraft maintenance
requirements. Based on information currently available to TWA and its current
fleet plan, TWA estimates that costs associated with complying with these
aging aircraft maintenance requirements will aggregate approximately $19.8
million for 1998 through 2001. These cost estimates assume, among other
things, that newer aircraft will replace certain of TWA's existing aircraft
and as a result, the average age of TWA's fleet will be significantly
reduced. There can be no assurance that TWA will be able to implement fully
its fleet plan.
Safety
TWA is subject to FAA jurisdiction with respect to aircraft maintenance
and operations, including equipment, dispatch, communications, training,
flight personnel and other matters affecting air safety. The FAA has the
authority to issue new or additional regulations. To ensure compliance with
its regulations, the FAA requires the Company to obtain operating,
airworthiness and other certificates which are subject to suspensions or
revocation for cause. In addition, a combination of FAA and
19
<PAGE> 21
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 currently limited to $3.00 per enplanement and
to $12.00 per round trip, although Congress is considering allowing airports
to raise the PFCs. As a result of competitive pressure, the Company and other
airlines have been limited in their abilities to pass on the cost of the PFCs
to passengers through fare increases.
Environmental
The Company is subject to regulation under major environmental laws
administered by state and federal agencies, including the Clean Air Act, the
Clean Water Act, the Comprehensive Environmental Response Compensation and
Liability Act of 1980 and the Resource Conservation and Recovery Act. In some
locations there are also county and sanitary sewer district agencies which
regulate the Company. The Company believes that it is in substantial
compliance with applicable environmental regulations. See, "Item 3. 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.
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
20
<PAGE> 22
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 "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations").
`95 Reorganization
Notwithstanding the reduction in levels of debt and obligations
achieved through the `93 Reorganization, the Company emerged from the `93
Reorganization in a too highly leveraged position and, despite progress in
increasing revenues and reducing costs, continued to experience significant
operating losses. With the hiring of a new management team in 1994, the
assumptions underlying the Company's operating plans, upon which its ability
to service its post `93 Reorganization obligations depended, were recognized
as unrealistic and unachievable. As a consequence, the Company was forced to
seek a second financial restructuring.
In the second quarter of 1995, the Company solicited and received
sufficient acceptances to effect the proposed "prepackaged" plan of
bankruptcy. Therefore, on June 30, 1995, the Company filed a prepackaged
Chapter 11 plan of reorganization, which with certain modifications was
confirmed by the United States Bankruptcy Court in St. Louis (the "Bankruptcy
Court") on August 4, 1995. On August 23, 1995, approximately eight weeks
after filing the prepackaged Chapter 11 plan, the `95 Reorganization became
effective (the "`95 Effective Date") 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 (see "Item 3.
Legal Proceedings -
21
<PAGE> 23
Icahn Litigation"). 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.
In connection with and as a precondition to the `95 Reorganization, in
August and September of 1994, the Company entered into the `94 Labor
Agreements, amending existing collective bargaining agreements, with the IAM,
ALPA and IFFA, the three labor unions who then represented approximately 84%
of the Company's employees. The `94 Labor Agreements provided for an
extension of certain previously agreed wage concessions, modifications to
work rules and the deletion of certain provisions of the then existing labor
agreements, including elimination of so-called snapbacks, i.e., the automatic
restoration of wage reductions granted in such agreements at the end of their
term to levels that prevailed prior to the concessionary agreement. During
1994 and 1995, the Company also implemented a number of similar cost savings
initiatives with respect to domestic non-union and management employees,
primarily through reducing head count, altering benefit packages, and
continuing wage reductions which had been scheduled to expire. See
"Employees."
Item 2. Properties
A significant portion of TWA's assets are pledged to secure
indebtedness. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Flight Equipment
As of December 31, 1997, TWA operated a fleet of 185 aircraft, of which
36 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 December 31, 1997
are listed below.
<TABLE>
<CAPTION>
Average Seats in
Age Standard TWA
Type Owned<F2> Leased<F3> Total<F4> of Aircraft Configuration
- ---- --------- ---------- --------- (in years) -------------
----------
<S> <C> <C> <C> <C> <C>
Douglas DC-9-10 -- 7 7 31.0 77
Douglas DC-9-30 -- 36 36 28.0 100
Douglas DC-9-40 -- 3 3 23.2 100
Douglas DC-9-50 -- 12 12 20.9 115
Douglas MD-80/83<F1> -- 65 65 9.6 142
Boeing 727-200<F1> 25 5 30 22.2 146
Boeing 747<F1> 1 2 3 27.3 433
Boeing 757 4 11 15 0.7 180
Boeing 767 6 8 14 13.3 192
-- --- --- ----
Total 36 149 185 16.9
== === === ====
22
<PAGE> 24
<FN>
- ----------
<F1> Excludes the following aircraft which are not in the active fleet: four
Boeing 727-100s, four Boeing 727-200s, eight Boeing 747-100s, two
Boeing 747-200s, 10 L-1011s and two Douglas MD-80s.
<F2> A significant portion of TWA's owned flight equipment is pledged to
secure its indebtedness.
<F3> For a discussion of certain terms of the leases, see Note 9 to the
Consolidated Financial Statements.
<F4> For information concerning compliance of the above-referenced aircraft
with the Noise Act, see "Regulatory Matters-Noise Abatement."
</TABLE>
Real Property
TWA utilizes or has rights to utilize airport and terminal facilities
located in or near the cities it serves under lease agreements or other
arrangements with the governmental authorities exercising control over such
facilities.
At St. Louis, TWA has preferential use rights to 57 gates and 40 ticket
counter positions, and ramp, baggage and other supporting ground facility
space. TWA's domestic-international hub at JFK operates out of two passenger
terminal facilities (Terminals 5 and 6). TWA is the lessee at JFK of a total
of 29 gates, 102 ticket counter positions, and ramp, baggage and other
supporting ground facility space. TWA occupies both Terminal 5 and Terminal 6
as a holdover tenant pursuant to expired agreements of lease with the Port
Authority of New York and New Jersey (the "Port Authority"). Such holdover
tenancies are with the consent of the Port Authority pursuant to a Term Sheet
dated August 12, 1993 (the "Term Sheet"), which extended TWA's right to
occupy Terminals 5 and 6, provided TWA paid the rent set forth in the Term
Sheet, made certain specified financed improvements to Terminals 5 and 6, and
was otherwise in compliance with the expired leases. TWA's tenancy is
currently on a month-to-month basis and no lease has been signed. The Company
has recently consolidated for the near term most of its JFK operations into
Terminal 5, using only limited facilities in Terminal 6. TWA has currently
subleased a majority of the 13 gates in Terminal 6 to other carriers.
TWA's overhaul base is located on approximately 250 acres of leased
property at the Kansas City International Airport, Kansas City, Missouri. The
overhaul base is TWA's principal maintenance base where TWA performs major
maintenance and repair services for its aircraft fleet. The overhaul base is
owned by the City of Kansas City, Missouri and leased to TWA along with other
facilities until May 31, 2000. TWA leases office space and other facilities
in a number of locations in the U.S. and abroad. In December 1993, pursuant
to a sale/leaseback with the City of St. Louis, TWA leased a two-story ground
operations building near the St. Louis Airport and an adjacent 165,000 square
foot, five-story flight training facility. The lease of these properties is
covered under a month-to-month agreement subject to automatic renewal so long
as TWA is not in default thereunder, such agreement having a term otherwise
expiring December 31, 2005. Such term is subject to early termination in the
event of certain events of default, including non-payment of rents, cessation
of service, failure to maintain corporate headquarters within the City or
County of St. Louis or failure to maintain a reservations office within the
City of St. Louis. For a description of certain environmental corrective
actions that TWA anticipates will be required at the overhaul base, see "Item
3. Legal Proceedings."
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<PAGE> 25
TWA's corporate headquarters are located at One City Centre, 515 N.
Sixth Street, St. Louis, Missouri where TWA has subleased approximately
56,700 square feet through February 28, 2000. TWA's St. Louis area
reservation facility and customer relations department is located in
approximately 48,000 square feet in the City of St. Louis, Missouri. In June
1996, TWA opened a new reservation facility in Norfolk, Virginia, comprised
of approximately 40,000 square feet and having 455 work stations. The
facility is leased for a twenty-five year term.
Item 3. Legal Proceedings
Icahn Litigation
On June 14, 1995, the Company signed the Extension and Consent
Agreement with Karabu Corp. ("Karabu"), a company controlled by Carl Icahn,
to extend the term of certain financing provided by Karabu (the "Icahn
Loans") from January 8, 1995 to January 8, 2001 and to obtain the consent of
Karabu and certain other affiliates of Mr. Icahn to certain modifications to
promissory notes issued by the PBGC (the "PBGC Notes") as part of the '93
Reorganization. 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 or directly to the general public.
Karabu, however, has been marketing System Tickets through travel agents and
directly to the general public. TWA has demanded that Karabu cease doing so,
and Karabu has stated that it disagrees with the Company's interpretation
concerning sales through travel agents or directly to the general public. In
December 1995, the Company filed a lawsuit against Karabu, Mr. Icahn, and
certain affiliated companies seeking damages and to enjoin further violations
of the Ticket Agreement. Mr. Icahn countered by threatening to file his own
lawsuit and to declare a default on the Icahn Loans, which financing was then
secured by receivables and certain flight equipment pledged under one or more
security agreements (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
(the "TWA Petition") on March 20, 1996 in the St. Louis County Circuit Court
against Mr. Icahn, Karabu and certain other entities affiliated with Icahn
(collectively, the "Icahn Defendants"). The TWA Petition alleges that the
Icahn Defendants are violating the Ticket Agreement by, among other things,
marketing and selling
24
<PAGE> 26
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 and compensatory damages. 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 decision
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 seeking damages and other relief and alleging tortious
interference with prospective economic advantage based on alleged violations
of the Ticket Agreement. This suit is similar to the previous action with
respect to which the Icahn Complaint related. The defendants removed this
case to the United States District Court for the Southern District of New
York and have moved to dismiss the case on the grounds of lack of personal
jurisdiction, res judicata and failure to state a claim. This action is
pending.
On October 15, 1997, Karabu filed suit in New York Supreme Court, New
York County, seeking a declaratory judgment that even if TWA were to pay in
full the outstanding balance due on the Icahn Loans, Karabu would have no
obligation to release any portion of its lien on TWA's accounts receivable
and/or aircraft and engine collateral so long as the TWA Petition in the
Missouri lawsuit is pending or in the event that TWA is awarded damages as a
result of the TWA Petition. By stipulation of the parties in December 1997,
this claim was dismissed with prejudice. On November 12, 1997, however,
Karabu amended its complaint to add a claim alleging that TWA had failed to
make the appropriate payment to the PBGC in June 1997. TWA believes that it
has in fact made the proper payment as it came due and that there is no merit
in this claim. This action is pending.
Although the Company intends to press its claims vigorously, it is
possible that Karabu's interpretation of the Ticket Agreement regarding
system discount ticket sales by the Icahn Defendants through travel agents or
directly to the general public could be determined, either by a court or
otherwise, to be correct. In such event, unless the Company took appropriate
action to mitigate the effect of such sales, the Company could suffer
significant loss of revenue that could reduce overall passenger yields on a
continuing basis during the term of the Ticket Agreement.
25
<PAGE> 27
Other Actions
On July 17, 1996, TWA Flight 800 crashed shortly after departure from
JFK en route to Paris, France. There were no survivors among the 230
passengers and crew members aboard the Boeing 747 aircraft. The Company is
cooperating fully with all federal, state and local regulatory and
investigatory agencies to ascertain the cause of the crash, which to date has
not been determined. The National Transportation Safety Board held hearings
relating to the crash in December 1997 and is continuing its investigation.
While TWA is currently a defendant in a number of lawsuits relating to the
crash, it is unable to predict the amount of claims which may ultimately be
made against the Company or how those claims might be resolved. TWA maintains
substantial insurance coverage, and at this time management has no reason to
believe that such insurance coverage will not be sufficient to cover the
claims arising from the crash. Therefore, TWA believes that the resolution of
such claims will not have a material adverse effect on its financial
condition or results of operations.
On May 31, 1988, the U.S. Environmental Protection Agency ("EPA") filed
an administrative complaint seeking civil penalties as well as other relief
requiring TWA to take remedial procedures at TWA's maintenance base in Kansas
City, Missouri, alleging violations resulting from TWA's past hazardous waste
disposal and related environmental practices. Simultaneously, TWA became a
party to a consent agreement and a consent order with the EPA pursuant to
which TWA paid a civil penalty of $100,000 and agreed to implement a schedule
of remedial and corrective actions and to perform environmental audits at
TWA's major maintenance facilities. In September 1989, TWA and the EPA signed
an administrative order of consent, which required TWA to conduct extensive
investigations at or near the overhaul base and to recommend remedial action
alternatives. TWA completed its investigations and on February 17, 1996,
submitted a Corrective Measures Study ("CMS") to the Missouri Department of
Natural Resources ("MDNR") and the EPA. On August 19, 1997 the MDNR and the
EPA approved the CMS. On February 27, 1998 MDNR notified TWA of the EPA's
preliminary decision to issue a hazardous waste post-closure permit for TWA's
maintenance facility, subject to public comment. Upon final approval of the
permit, an additional order will be issued and the required corrective
actions implemented. TWA presently estimates the cost of the corrective
action activities under the existing and anticipated orders to be
approximately $7 million, a majority of which represents costs associated
with long-term groundwater monitoring and maintenance of the remedial
systems. Although the Company believes adequate reserves have been provided
for all known environmental contingencies, it is possible that additional
reserves might be required in the future which could have a material adverse
effect on the results of operations or financial condition of the Company.
However, the Company believes that the ultimate resolution of known
environmental contingencies should not have a material adverse effect on the
financial position or results of operations based on the Company's knowledge
of similar environmental sites.
On October 22, 1991, judgment in the amount of $12,336,127 was entered
against TWA in an action in the United States District Court for the Southern
District of New York by Travellers International A.G. and its parent company,
Windsor, Inc. (collectively, "Travellers"). The action commenced in 1987, as
subsequently amended, sought damages from TWA in excess of $60 million as a
result of TWA's alleged breach of its contract with Travellers for the
planning and operation of Getaway Vacations. In order to obtain a stay of
judgment pending appeal, TWA posted a cash undertaking of $13,693,101. In
connection with the `93 Reorganization, TWA sought to have the matter
ultimately determined by the Bankruptcy Court and claimed that the cash
undertaking
26
<PAGE> 28
constituted a preference payment. Following prolonged litigation with respect
to jurisdiction, the United States Supreme Court determined that the entire
matter should be addressed by the bankruptcy court, and in February 1994, the
bankruptcy court determined the matter in a manner favorable to TWA. Upon
appeal, the District Court affirmed in part and reversed in part the
bankruptcy court's decision. On January 20, 1998, the Court of Appeals for
the Third Circuit reversed the District Court and affirmed the findings of
the bankruptcy court. Travellers sought reconsideration by the Third Circuit
which reconsideration was denied. Travellers has advised they will appeal
this decision.
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.
ValuJet has settled its claim with Delta and appealed the grant of summary
judgment to the 11th Circuit Court of Appeals. Settlement discussions are
ongoing.
In addition, based on certain written grievances or complaints filed by
ValuJet, the Company was informed that the United States Department of
Justice ("DOJ"), Antitrust Division, was investigating the circumstances of
the slot lease of certain takeoff and landing slots to Delta at LaGuardia to
determine whether an antitrust violation has occurred. During the course of
its investigation, the DOJ was informed of the summary judgment described
above. Since the date of the judgment, TWA is unaware of whether the DOJ has
undertaken further investigative efforts, the status of the investigation or
any future plans of the DOJ or other regulatory bodies with respect to the
ValuJet allegations. While TWA believes the summary judgment should be
persuasive to the various regulatory bodies petitioned by ValuJet, it will
cooperate with any further investigations.
The Company is also defending a number of other actions which have
either arisen in the ordinary course of business or are insured or the
cumulative effect of which management of the Company does not believe may
reasonably be expected to be materially adverse.
Item 4. Submission of Matters to Vote of Security Holders
No meeting of Security Holders was held during the fourth quarter of
1997.
27
<PAGE> 29
PART II
Item 5. Market for Common Stock and Dividend Policy
General
On August 23, 1995, all of the Company's previously outstanding equity
securities were canceled and certificates with respect thereto thereafter
evidenced only the right to receive Common Stock and the other consideration
specified in the '95 Reorganization. Also pursuant to the '95
Reorganization, holders of certain debt securities of the Company received
shares of Common Stock. Information regarding the trading price range of
pre-'95 Reorganization common stock is not comparable with data provided for
the Common Stock and is not included herein. For information concerning the
'95 Reorganization, see "Item 1. Business--Corporate Reorganizations."
The Common Stock is listed for trading on the American Stock Exchange.
The following table sets forth the range of high and low prices for shares of
the Common Stock (as reported in the Wall Street Journal) for the periods
indicated:
<TABLE>
<CAPTION>
Period High Low
- ------ ---- ---
<S> <C> <C>
1996
First Quarter 20.500 9.125
Second Quarter 23.625 14.125
Third Quarter 15.125 8.125
Fourth Quarter 9.688 6.500
1997
First Quarter 8.437 5.1875
Second Quarter 10.8125 5.875
Third Quarter 8.75 6.00
Fourth Quarter 12.3125 6.50
1998
First Quarter (through March 20) 15.125 9.25
</TABLE>
Since 1978, the Company has not paid any cash dividends on any of its
Common Stock. The Company currently plans to retain all earnings to finance
its business and to reduce its leverage rather than paying cash dividends on
the Common Stock. Payments of any cash dividends in the future will depend
on the financial condition, results of operations and capital requirements of
TWA as well as other factors deemed relevant by its Board of Directors,
including applicable restrictions in various agreements relating to
indebtedness.
As of March 20, 1998, there were (i) 51,719,673 shares of the Company's
Common Stock outstanding and 21,098 holders of record of the Common Stock,
and (ii) 6,168,890 shares of Employee Preferred Stock issued and outstanding
and nine holders of record of the Employee Preferred Stock.
Sales of Unregistered Securities
In March 1996, the Company issued and sold 3,869,000 shares of its 8%
Cumulative Convertible Exchangeable Preferred Stock ( the "8% Preferred
Stock") in transactions exempt from the
28
<PAGE> 30
registration requirements of the Securities Act pursuant to Rule 144A and
Regulation S. The Company filed a shelf registration statement, No.
333-04977, pursuant to Rule 415 of the Securities Act, which was declared
effective August 16, 1996, to allow the holders of the 8% Preferred Stock to
make public offerings of such stock.
Pursuant to certain Exchange Agreements with Elliott Associates L. P.
and Westgate International L. P. reported on a Form 8-K filed on September
20, 1996, the Company exchanged 12,163,009 shares of Common Stock for $97.05
million principal amount of its 12% Reset Notes plus approximately $2.9
million in accrued interest thereon in a series of transactions between July
1996 and August, 1997. The Common Stock was issued pursuant to the exemption
granted by Section 3(a)(9) of the Securities Act. The 12% Reset Notes were
registered and issued pursuant to the Company's registration statement on
Form S-4 filed with the Commission on May 12, 1995.
In December 1997, the Company issued and sold 1,725,000 shares of its
9 1/4% Preferred Stock in transactions exempt from the registration
requirements of the Securities Act pursuant to Rule 144A and Regulation S.
The Company filed a shelf registration statement, No. 333-44689, pursuant to
Rule 415 of the Securities Act, to allow the holders of the 9 1/4% Preferred
Stock to make public offerings of such stock. The registration statement for
the 9 1/4% Preferred Stock was declared effective on February 5, 1998.
29
<PAGE> 31
Item 6. Selected Financial Data
The selected financial data presented below relate to periods in the
years ended December 31, 1997 and 1996, the four months ended December 31,
1995, the eight months ended August 31, 1995, the year ended December 31,
1994, the two months ended December 31, 1993 and the ten months ended October
31, 1993. This data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements. The consolidated
financial data for the above periods was derived from the audited
consolidated financial statements of the Company. Certain amounts have been
reclassified to conform with presentations adopted in 1997.
During the period from 1992 through 1995, TWA underwent two separate
Chapter 11 reorganizations, the first in 1992-93 and the second in 1995. In
connection with the '95 Reorganization, TWA has applied fresh start reporting
in accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which has resulted in
the creation of a new reporting entity for accounting purposes and the
Company's assets and liabilities being adjusted to reflect fair values on the
'95 Effective Date. A description of the adjustments to the financial
statements arising from the consummation of the '95 Reorganization and the
application of fresh start reporting is contained in Note 19 to the
Consolidated Financial Statements. For accounting purposes, the '95
Effective Date is deemed to be September 1, 1995. Because of the application
of fresh start reporting, the financial statements for periods after the
'95 Reorganization are not comparable in all respects to the financial
statements for periods prior to the reorganization. Similarly, the
Consolidated Financial Statements for the periods prior to the '93
Reorganization are not consistent with periods subsequent to the '93
Reorganization. Accordingly, a vertical black line separates these periods.
Preferred stock dividend requirements and earnings per share of the
predecessor companies have not been presented as these amounts are not
meaningful.
<TABLE>
<CAPTION>
Prior
Predecessor
Reorganized Company Predecessor Company Company
-------------------------------------- -------------------------------------- -----------
Year Year Four Months Eight Months Year Two Months Ten Months
Ended Ended Ended Ended Ended Ended Ended
December 31, December 31, December 31, August 31, December 31, December 31, October 31,
1997 1996 1995 1995 1994 1993 1993
------------ ------------ ------------ ------------ ------------ ------------ -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues $3,327,952 $3,554,407 $1,098,474 $2,218,355 $3,407,702 $520,821 $2,633,937
Operating income (loss)<F1> (29,260) (198,527) 10,446 14,642 (279,494) (58,251) (225,729)
Loss before income taxes and
extraordinary items<F2> (89,335) (274,577) (32,268) (338,309) (432,869) (88,140) (362,620)
Provision (credit) for income taxes 527 450 1,370 (96) 960 (248) 1,312
Loss before extraordinary items (89,862) (275,027) (33,638) (338,213) (433,829) (87,892) (363,932)
Extraordinary items, net of income
taxes<F3> (20,973) (9,788) 3,500 140,898 (2,005) -- 1,075,581
Net income (loss) (110,835) (284,815) (30,138) (197,315) (435,834) (87,892) 711,649
Per share amounts<F4>:
Loss before extraordinary items $ (1.98) $ (6.60) $ (1.15)
Net loss (2.37) (7.27) (1.05)
30
<PAGE> 32
<CAPTION>
Reorganized Company Predecessor Company
------------------------------------- -------------------------
December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents<F5> $ 237,765 $ 181,586 $ 304,340 $ 138,531 $ 187,717
Current assets 632,957 625,745 737,301 603,806 728,303
Net working capital (deficiency) (303,988) (336,416) (81,913) (1,238,216) (106,703)
Flight equipment, net 626,382 472,495 455,434 508,625 660,797
Total property and equipment, net 741,765 614,207 600,066 693,045 886,116
Intangible assets, net 1,118,864 1,184,786 1,275,995 921,659 1,024,846
Total assets 2,773,848 2,681,939 2,868,211 2,512,435 2,958,862
Current maturities of long-term debt
and capital leases<F6> 88,460 134,948 110,401 1,149,739 108,345
Long-term debt, less current maturities<F6> 736,540 608,485 764,031 -- 1,053,644
Long-term obligations under capital leases, less
current maturities 182,922 220,790 259,630 339,895 376,646
Shareholders' equity (deficiency)<F7> 268,284 238,105 302,855 (417,476) 18,358
<FN>
<F1> Includes special charges of $85.9 million in 1996, $1.7 million in the
eight months ended August 31, 1995 and $138.8 million in 1994. For a
discussion of these and other non-recurring items, see Note 16 to the
Consolidated Financial Statements.
<F2> The eight months ended August 31, 1995 includes charges of
$242.2 million related to reorganization items. The ten months ended
October 31, 1993 includes a charge of $342.4 million related to the
settlement of pension obligations and income of $268.1 million related
to reorganization items.
<F3> The extraordinary items in 1997 and 1996 are the result of the early
extinguishment of certain debt. The extraordinary item in the four
months ended December 31, 1995 was the result of the settlement of a
debt of a subsidiary, while the extraordinary item in the eight months
ended August 31, 1995 represents the gain on the discharge of
indebtedness pursuant to the consummation of the '95 Reorganization.
The extraordinary item in 1994 represents the charge for a prepayment
premium related to the sale and lease back of four McDonnell Douglas
MD-80 aircraft. The extraordinary item in 1993 represents the gain on
discharge of indebtedness pursuant to the consummation of the
'93 Reorganization.
<F4> No effect has been given to stock options, warrants, convertible
preferred stock or potential issuances of additional Employee
Preferred Stock as the impact would have been anti-dilutive.
<F5> Includes cash and cash equivalents held in international operations and
by subsidiaries which, based upon foreign monetary regulations and
other factors, might not be immediately available to the Company.
<F6> Long-term debt in 1994 was reclassified to current maturities as a
result of certain alleged defaults and payment defaults.
<F7> No dividends were paid on the Company's outstanding common stock during
the periods presented above.
</TABLE>
31
<PAGE> 33
Item 7. 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 747's
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 commencing
in late 1996 and continuing throughout 1997 was to reestablish TWA's
operational reliability and schedule integrity and overall product quality in
order to attract higher-yield passengers and enhance overall productivity,
which should improve the Company's financial results. As the initial steps
in implementing this strategy, the Company temporarily reduced its flight
schedule during the first quarter of 1997 to more closely match aircraft
available for active service and worked to reduce the number of aircraft in
maintenance backlog by increasing overtime and utilizing maintenance capacity
made available by the termination of an unprofitable aircraft maintenance
contract with the U.S. government. 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 revenue per available seat mile ("RASM")
and cost per available seat mile ("CASM") can have a significant impact on
the Company's financial results. The Company has experienced significant
losses (excluding extraordinary items) on an annual basis since the early
1990s, except in 1995 when the Company's combined operating profit was $25.1
million. The airline industry has consolidated in recent years as a result
of mergers, alliances 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
32
<PAGE> 34
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. 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 costs reductions. In the opinion of
management, the Company's financial resources are not as great as those of
most of its competitors, and therefore, any substantial increase in its labor
costs as a result of any new labor agreements or any cessation or disruption
of operations due to any strike or work action could be particularly damaging
to the Company.
There are a number of uncertainties relating to agreements with
employees, the resolution of which could result in significant non-cash charges
to future operating results of the Company. Shares granted or purchased at a
discount under the ESIP will generally result in a charge equal to the fair
value of shares granted plus the discount for shares purchased at the time when
such shares are earned. If the ESIP's target prices for the Common Stock are
realized, the minimum aggregate charge for the years 1997 to 2002 (the 1997 and
1998 target prices having been met) would be approximately $108.8 million based
upon such target prices and the number of shares of Common Stock and Employee
Preferred Stock outstanding at January 30, 1998. The charge for any year,
however, could be substantially higher if the then market price of the Common
Stock exceeds certain target prices. On February 17, 1998, the first target
price of $11.00 was realized and a grant of 2% of the outstanding Common Stock
and Employee Preferred Stock will be made on July 15, 1998. Based on the
current number of outstanding shares of Common Stock and Employee Preferred
Stock and taking into account a credit with respect to the Company's required
contribution, the net contribution will be 1,109,722 shares and the non-cash
charge in the first quarter of 1998 will be approximately $12.3 million. In
addition, on March 4, 1998, the market price of the Company's Common Stock
exceeded the $12.10 target price for the 1998 grant for a 30-day period. As
a result, the Company will be required to make an additional contribution to
the relevant employee trusts of 1.5% of its Common Stock and Employee
Preferred Stock on July 15, 1998. Based on the current number of outstanding
shares of Common Stock and Employee Preferred Stock, that contribution would
be 1,172,354 shares and the non-cash charge would be approximately $14.2
million.
Pursuant to the '92 Labor Agreements, the Company agreed to pay to
employees represented by the IAM a cash bonus for the amount by which
overtime incurred by the IAM from September 1992 through August 1995 was
reduced below specified thresholds. This amount was to be offset by the
amount by which medical savings during the period for the same employees did
not meet certain specified levels of savings. The obligation is payable in
three equal annual installments beginning in 1998. The Company has estimated
the net overtime bonus owed to the IAM to be approximately $26.3 million and
has reflected this amount as a liability in the 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 Regoranization.
The IAM, while not providing a calculation of its own, has disputed the
method by which management has computed the net overtime bonus and has
indicated that it believes the amount due to the IAM is much greater than the
amount which has been estimated by management. TWA also entered into an
agreement which provides for an adjustment to existing salary rates of labor
represented employees based on the amount of the cash bonus for overtime
ultimately paid to the employees represented by the IAM as described in this
paragraph. The exact amount of such adjustment is not capable of being
determined until the amount of the IAM bonus payment is finally determined.
In addition, in connection with certain wage scale adjustments afforded
to non-contract employees, employees previously represented by the IFFA have
asserted and won an arbitration ruling with respect
33
<PAGE> 35
to the comparability of wage concessions made in 1994 that, if sustained,
would require that the Company provide additional compensation to such
employees. The Company estimates that at December 31, 1997 such additional
compensation that would be payable pursuant to the arbitration ruling would
be approximately $12.0 million. The Company denies any such obligation and
is pursuing an appeal of the arbitration ruling and a court award affirming
the ruling. Effective September 1, 1997, the Company also reduced the
overall compensation and benefits package for non-contract employees so as to
offset, in the Company's view, any claims by such employees previously
represented by IFFA for any retroactive or prospective wage increases. As
such, no liability has been recorded by the Company.
In connection with the '95 Reorganization, the Company entered into a
letter agreement with employees represented by ALPA whereby if the Company's
flight schedule, as measured by block hours, does not exceed certain
thresholds in 1996 and 1997, a defined cash payment would be made to ALPA.
The defined thresholds were exceeded during the measurements periods through
December 31, 1996 and no amount was therefore owed to ALPA as of that date.
A payment of approximately $2.6 million was due under the agreement on August
14, 1997 for the period January through June 1997. Management estimates that
its aggregate obligation for 1997 is approximately $9.5 million. The Company
made a payment of $2.6 million in January 1998 and anticipates payment of the
remaining $6.9 million on April 1, 1998.
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. Notwithstanding actions
taken to date and planned by management to improve the Company's future
operating results and performance, the Company anticipates reporting
operating and net losses in the first quarter of 1998, which losses may be
substantial.
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. 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 1997 and is continuing its
34
<PAGE> 36
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.
Following the crash of TWA Flight 800 in July 1996, the FAA implemented
new security measures primarily impacting international operations. The
Company does not believe that these measures have had any material effect on
its revenues or operating costs to date. Additionally, a special committee
appointed by the President to review aviation safety and airport security
issued its final report on February 12, 1997. The report contains several
recommendations. However, the Company is unable to predict which
recommendations will be adopted or their impact on the Company's future
operating results. Additional government mandated security measures could
have a direct adverse impact on the Company's operating costs to the extent
any such costs are directly assessed to commercial airlines or, if funded
through new taxes or user fees, could indirectly have an adverse impact on
the Company's future operating results in the event that the Company is not
able to fully pass on those charges in the form of ticket price increases.
Management believes that the Company benefitted from the expiration on
December 31, 1995 of the Ticket Tax, which imposed certain taxes including a
10% air passenger tax on tickets for domestic flights, a 6.25% air cargo tax
and a $6 per person international departure tax. The Ticket Tax was
reinstated on August 27, 1996 and expired again on December 31, 1996. At the
end of February 1997, the Ticket Tax was reinstated effective March 7, 1997
through September 30, 1997. Congress passed tax legislation reimposing and
significantly modifying the Ticket Tax, effective October 1, 1997. The
legislation includes the imposition of new excise tax and significant fee tax
formulas over a multiple year period, an increase in the international
departure tax, the imposition of a new arrivals tax, and the extension of the
Ticket Tax to cover items such as the sale of frequent flier miles.
Management believes that the imposition and modification of the Ticket Tax
have a negative impact on the Company, although neither the amount of such
negative impact nor the benefit previously realized by its expiration can be
precisely determined. However, management believes that the recent tax
legislation and any other increases of the Ticket Tax will result in higher
costs to the Company and/or, if passed on to consumers in the form of
increased ticket prices, might have an adverse effect on passenger traffic,
revenue and/or margins.
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.
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<PAGE> 37
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 ($839.1 million). The Company has evaluated its future
cash flows and, notwithstanding the operating loss experienced since the '95
Effective Date, expects that the carrying value of the intangibles at
December 31, 1997 will be recovered. However, the achievement of such
improved future operating results and cash flows are subject to considerable
uncertainties. In future periods these intangibles will be evaluated for
recoverability based upon estimated future cash flows. If expectations are
not substantially achieved, charges to future operations for impairment of
those assets may be required and such charges could be material.
The Company's ability to improve its financial position and meet its
financial obligations will depend upon a variety of factors, including:
significantly improved operating results, favorable domestic and
international airfare pricing environments, absence of adverse general
economic conditions, more effective operating cost controls and efficiencies,
and the Company's ability to attract new capital and maintain adequate
liquidity. No assurance can be given that the Company will be successful in
generating the operating results or attracting new capital required for
future viability.
<TABLE>
TWA's passenger traffic data, for scheduled passengers only and
excluding TWE, are shown in the table below for the indicated periods<F1>:
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NORTH AMERICA
Passenger revenues ($ millions) $ 2,512 $ 2,515 $ 2,292
Revenue passenger miles (millions)<F2> 19,737 19,513 17,902
Available seat miles (millions)<F3> 29,341 30,201 28,194
Passenger load factor<F4> 67.3% 64.6% 63.5%
Passenger yield (cents)<F5> 12.73 cents 12.89 cents 12.80 cents
Passenger revenue per available seat mile (cents)<F6> 8.56 cents 8.33 cents 8.13 cents
INTERNATIONAL
Passenger revenues ($ millions) $ 412 $ 563 $ 544
Revenue passenger miles (millions)<F2> 5,363 7,598 7,000
Available seat miles (millions)<F3> 7,123 10,393 9,719
Passenger load factor<F4> 75.3% 73.1% 72.1%
Passenger yield (cents)<F5> 7.68 cents 7.41 cents 7.78 cents
Passenger revenue per available seat mile (cents)<F6> 5.78 cents 5.42 cents 5.60 cents
TOTAL SYSTEM
Passenger revenues ($ millions) $ 2,924 $ 3,078 $ 2,836
Revenue passenger miles (millions)<F2> 25,100 27,111 24,902
Available seat miles (millions)<F3> 36,464 40,594 37,905
Passenger load factor<F4> 68.8% 66.8% 65.7%
Passenger yield (cents)<F5> 11.65 cents 11.35 cents 11.39 cents
Passenger revenue per available seat mile (cents)<F6> 8.02 cents 7.58 cents 7.48 cents
Operating cost per available seat mile (cents)<F7> 8.97 cents 8.76 cents 8.12 cents
Average daily utilization per aircraft (hours)<F8> 9.38 9.63 9.45
Aircraft in fleet being operated at end of period 185 192 188
<FN>
<F1> Excludes subsidiary companies.
<F2> The number of scheduled miles flown by revenue passengers.
<F3> The number of seats available for passengers multiplied by the number
of scheduled miles those seats are flown.
<F4> Revenue passenger miles divided by available seat miles.
<F5> Passenger revenue per revenue passenger mile.
<F6> Passenger revenue divided by scheduled available seat miles.
<F7> Operating expenses, excluding special charges, earned stock
compensation, other nonrecurring charges and subsidiaries, divided by
total available seat miles.
<F8> The average block hours flown per day in revenue service per aircraft.
</TABLE>
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<PAGE> 38
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31, 1996
Total operating revenues of $3,328.0 million for 1997 were $226.4
million or 6.4% less than the total operating revenues of $3,554.4 million
for the year ended December 31, 1996. The decrease was primarily reflected
in TWA passenger revenues, which were $153.9 million less than in 1996,
resulting from the elimination of certain unprofitable international
destinations and the planned reduction in capacity as the Company replaced
older L-1011 and B-747 aircraft with new B-757, B-767 and MD-80 aircraft on
many routes. Additionally, revenues from contract work decreased $41.8
million primarily due to the termination of an unprofitable aircraft
maintenance contract with the U. S. government and overall reduction in other
third party maintenance as the Company focused its resources on maintenance
of its own aircraft. Revenue from freight and mail also decreased $26.3
million as a result of the reduction in capacity.
As a result of the Company's planned retirement of older widebody
aircraft and elimination of unprofitable services, capacity and traffic
decreased in 1997 as compared to 1996. System-wide capacity, measured in
ASMs, decreased by 10.2% in 1997 as compared to 1996 (reflecting a 2.8%
decrease in domestic ASMs and a 31.5% decrease in international ASMs).
Passenger traffic volume, as measured by total RPMs in scheduled service,
decreased 7.4% in 1997 over 1996. Passenger load factor for 1997 was 68.8%
compared to 66.8% in 1996. TWA's yield per passenger mile increased from
11.35 cents in 1996 to 11.65 cents in 1997.
Reflecting the Company's efforts to improve productivity and reduce
operating costs, operating expenses declined to $3,357.2 million in 1997,
$395.7 million (10.5%) lower than the total operating expenses of $3,752.9
million for the year ended December 31, 1996, representing a net change in the
following expense groups:
Salaries, wages and benefits of $1,224.1 million for 1997 were $30.2
million (2.4%) less than 1996, primarily due to a decrease in the average
number of employees. The average number of employees declined 3.5% to 23,413
in 1997 as compared to 24,254 in 1996. A reduction of the number of
employees occurred in several areas, particularly those impacted by the
reduction in flying or maintenance of older narrow and widebody aircraft.
Earned stock compensation charges of $4.2 million for 1997 and $9.1
million for 1996 represent primarily the non-cash compensation charge
recorded to reflect the expense associated with the distribution of shares of
stock on behalf of employees as part of the '95 Reorganization. For a
further discussion of future charges related to non-cash compensation, see
Note 12 to the Consolidated Financial Statements.
Aircraft fuel and oil expense of $480.9 million for 1997 was $104.3
million (17.8%) less than expenses of $585.2 million for the year ended
December 31, 1996. The decrease in expenses is primarily due to decreases in
the price of fuel ($28.2 million) and in gallons consumed ($76.1 million).
Passenger sales commission expense of $242.1 million for 1997 was $26.0
million (9.7%) less than the expense of $268.1 million in 1996 primarily
related to the $153.9 million decrease in TWA passenger revenues. Other
factors contributing to the decrease were a reduction in commission rates in
October 1997 and a decrease in the percentage of commissionable sales
resulting in decreases in commission expense of $7.1 million and $3.2
million, respectively.
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Aircraft maintenance materials and repairs expense of $138.4 million in
1997 represented a decrease of $69.8 million (33.5%) from $208.2 million for
1996. The decrease was primarily the result of higher levels of scheduled
maintenance in 1996, including heavy maintenance, a 3.0% decrease in flying
hours in 1997 versus 1996, addition of new aircraft and retirement of old
aircraft from TWA's fleet, and a decrease in contract repair work performed
by the Company for other air carriers and third parties. The average age of
TWA's operating fleet decreased from 19.0 years at December 31, 1996 to 16.9
years at December 31, 1997.
Depreciation and amortization expense decreased $11.4 million from
$161.8 million in 1996 to $150.4 million in 1997 primarily represented by
decreases in the provision for obsolescence ($7.0 million), depreciation of
aircraft ($3.0 million) and amortization of intangible assets ($1.2 million).
The decrease in obsolescence was significantly related to the retirement of
L-1011 and B-747 aircraft fleets and its replacement with newer aircraft
fleets. The decrease in aircraft depreciation was related to B-727-200,
B-747 and L-1011 fleets becoming fully depreciated partially offset by
increased depreciation on B-757, B-767 and DC9-30 fleets related to new
aircraft acquisitions and aircraft modifications on the DC9-30 aircraft
associated with noise compliance and aging aircraft. The decrease in
amortization of intangible assets was related to the 1996 write-off of the
carrying value of TWA's New York to Athens route authority as a result of
TWA's decision to discontinue unprofitable service to Athens and the sale of
three gates at Newark International Airport in early 1997.
Operating lease rentals of $370.8 million for 1997 were $67.8 million
(22.4%) more than the total rentals of $303.0 million for 1996. The increase
was primarily due to an increase in the average number of aircraft under
operating leases from 123 in 1996 to 137 in 1997 and higher lease rates
attributed to the introduction of newer aircraft into the fleet.
Passenger food and beverage expense of $83.2 million in 1997
represented a decrease of $26.9 million (24.4%) from $110.1 million for the
twelve months of 1996. The decrease was primarily due to a 29.7% reduction
in the number of passengers boarded on international flights resulting from
the 31.5% reduction in international scheduled ASMs together with savings
derived from changes and improved efficiencies in food and beverage service.
During the fourth quarter of 1996, special charges of $85.9 million
were recorded in connection with the Company's decision to modify its
international route structure and related aircraft fleet plan. The charges
included a write-off of the carrying value of TWA's New York-Athens route
authority ($26.7 million) and international employee severance liabilities
($5.5 million) related to the termination of service to Athens and Frankfurt.
The 1996 special charges also include a reduction in carrying value of TWA's
owned L-1011 and B-747 fleets ($32.2 million) and the related inventories
($21.5 million). These charges were based upon management's estimate of the
amounts to be realized upon the disposition of these assets when they are
removed from service. Actual amounts could materially differ from such
estimates. See Note 16 to the Consolidated Financial Statements for a
further discussion of these special charges.
All other operating expenses decreased $104.1 million (13.6%) to $663.1
million in 1997 from $767.2 million during the year ended December 31, 1996.
Decreases were noted in the cost of services sold ($19.3 million), cost of
services purchased ($23.0 million), advertising and publicity ($17.8
million), navigation charges ($9.4 million), landing fees ($6.4 million),
subsidiary expenses ($7.4 million), uncollectible accounts ($5.6 million),
taxes-other than income ($5.4 million) and numerous other miscellaneous
categories. These decreases were primarily related to TWA's planned
reductions in capacity (10.2% reduction in system scheduled ASMs) and
maintenance performed for third parties.
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Other charges (credits) were a net charge of $60.1 million for 1997 as
compared to $76.1 million for 1996. Interest expense decreased $12.8 million
in 1997 over 1996 as a result of the reduction of debt arising from the '95
Restructuring and additional reductions of debt during 1997 and 1996.
Interest income decreased by $8.8 million in 1997 primarily as a result of
lower levels of invested funds. Dispositions of assets resulted in a net
gain of $16.0 million in 1997, compared to a net loss of $1.1 million in
1996. The net gain in 1997 included $7.4 million from the sale of three
gates at Newark International Airport and $8.6 million from the sale of
aircraft, engines and other property. Other charges and credits-net were
unfavorable by $5.2 million in 1997 compared to 1996, primarily due to a $1.2
million decline in foreign currency translation adjustments, a $1.7 million
decrease in vendor discounts and a $2.5 million credit in 1996 to reflect a
litigation settlement.
The provision for income taxes in 1997 and 1996 related primarily to
foreign taxes. In future periods, the amortization of reorganization value
in excess of amounts allocable to identifiable assets and certain other
non-deductible items will likely result in the Company's effective tax rate
for financial reporting purposes exceeding statutory rates, notwithstanding
the Company's substantial net operating loss carryforwards. See Note 5 to
the Consolidated Financial Statements.
As a result of the above, the operating loss of $29.3 million for 1997
was $169.2 million less than the operating loss of $198.5 million for 1996.
The net loss of $110.8 million for 1997 was $174.0 million less than the net
loss of $284.8 million for 1996. The operating and net losses for 1996
included special charges for nonrecurring items of $85.9 million as further
described in Note 16 to the Consolidated Financial Statements. The 1996 net
loss also included $9.8 million in extraordinary charges related to the early
extinguishment of debt while the 1997 net loss included $21.0 million of such
charges.
Results of Operations for the Fiscal Year Ended december 31, 1996
Compared to the Four Months Ended December 31, 1995 and Eight
Months Ended August 31, 1995
In the following discussion, the results of operations for the fiscal
year ended December 31, 1996 is compared to the combined results of the four
months ended December 31, 1995 and eight months ended August 31, 1995 (twelve
months ended December 31, 1995) unless specified otherwise.
Total operating revenues of $3,554.4 million for 1996 were $237.6
million or 7.2% more than the total operating revenues of $3,316.8 million
for the year ended December 31, 1995. The increase was primarily reflected
in TWA passenger revenues which were $241.6 million higher than in 1995.
Additionally, revenues from contract work increased $15.7 million and revenue
from freight and mail increased $9.9 million. Operating revenues for 1995
included $35.9 million in passenger revenues from Trans World Express which
discontinued operations in November 1995.
Capacity and traffic increased in 1996 as compared to 1995. System-wide
capacity, measured in ASMs, increased by 7.1% in 1996 as compared to 1995
(representing increases in domestic and international ASMs of 7.1% and
7.0%, respectively). Passenger traffic volume, as measured by total RPMs in
scheduled service, increased 8.9% in 1996 over 1995. Passenger load factor
for 1996 was 66.8% compared to 65.7% in 1995. TWA's yield per passenger
mile decreased slightly from 11.39 cents in 1995 to 11.35 cents in 1996.
Although the yield per passenger mile declined only slightly year over year,
the yield during the second half of 1996 was 10.97 cents compared to 11.40
cents during the second half of 1995.
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Operating expenses of $3,752.9 million in 1996 reflect an increase of
$461.2 million (14.0%) over the total operating expenses of $3,291.7 million
for the year ended December 31, 1995, representing a net change in the
following expense groups:
Salaries, wages and benefits of $1,254.3 million for 1996 were $125.6
million (11.1%) more than 1995, primarily due to an increase in the average
number of employees, overtime costs required due to poor operating
performance in 1996 and lower productivity levels. The Company had an
average of 24,254 employees in 1996 as compared to 22,927 in 1995.
Earned stock compensation charges of $9.1 million for 1996 and $58.0
million for 1995 represent primarily the non-cash compensation charge
recorded to reflect the expense associated with the distribution of shares of
stock on behalf of employees as part of the '95 Reorganization.
Aircraft fuel and oil expense of $585.2 million for 1996 was $126.6
million (27.6%) over the total expenses of $458.6 million for 1995. This
increase is primarily due to an increase in the price of fuel (22.3%), an
increase in gallons consumed (4.3%) and the expiration in October 1995 of the
airlines' exemption from paying fuel taxes of 4.3 cents per gallon, which
impacted fuel expense by approximately $13.6 million.
Passenger sales commission expense of $268.1 million for 1996 was $2.1
million (0.8%) higher than the combined expenses of $266.0 million in 1995,
and is primarily related to the $241.6 million increase in TWA passenger
revenues offset by an increase in non-commissionable international tickets.
Aircraft maintenance materials and repairs expense of $208.2 million in
1996 represented an increase of $60.5 million (41.0%) from $147.7 million for
1995. The increase was primarily the result of higher levels of scheduled
maintenance in 1996, including heavy maintenance, a 3.6% increase in flying
hours and increased repair work performed by the Company for other air
carriers and third parties.
Depreciation and amortization expense of $161.8 million for 1996
increased slightly from combined expenses of $161.6 million for 1995.
Operating lease rentals of $303.0 million for 1996 were $24.1 million
(8.6%) more than the total rentals of $278.9 million for 1995. The increase
was primarily due to an increase in the average number of leased aircraft
from 119 in 1995 to 123 in 1996 and higher lease rates.
Passenger food and beverage expense of $110.1 million in 1996
represented an increase of $7.3 million (7.1%) from $102.8 million for the
twelve months of 1995. The increase is primarily due to the 8% increase in
the number of passengers boarded.
During the fourth quarter of 1996, special charges of $85.9 million
were recorded in connection with the Company's decision to modify its
international route structure and related aircraft fleet plan. The charges
included a write-off of the carrying value of TWA's New York-Athens route
authority ($26.7 million), international employee severance liabilities ($5.5
million) related to the termination of service to Athens and Frankfurt, and a
reduction in carrying value of TWA's owned L-1011 and B-747 fleets ($32.2
million) and the related inventories ($21.5 million), reflecting planned
retirement of such aircraft. See Note 16 to the Consolidated Financial
Statements for a further discussion of these special charges. Special
charges of $1.7 million were recorded in the third quarter of 1995 related to
the shutdown of TWE.
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All other operating expenses of $767.2 million in 1996 represented an
increase of $79.6 million (11.6%) from $687.6 million for the year ended
December 31, 1995. An increase in flight cancellations during 1996 resulted
in increased CRS fees related thereto ($19.4 million) and interrupted trip
expenses ($3.7 million). In addition, expenses relating to maintenance
services provided under a contract with the military increased approximately
$21.6 million in 1996 compared to 1995. The Company also experienced a
significant increase in professional/technical fees ($18.7 million) which was
primarily due to the use of contract programmers for ongoing development of
new systems and external consultants' fees for re-engineering.
Other charges (credits) were a net charge of $76.1 million for 1996 as
compared to $42.7 million and $353.0 million in the four month and the eight
month periods of 1995, respectively (included in the eight month period is a
charge of $242.3 million for reorganization items in connection with the
application of fresh start reporting pursuant to the '95 Reorganization).
Interest expense decreased $42.3 million in 1996 over 1995 as a result of the
reduction of debt arising from the '95 Restructuring and additional
reductions of debt during 1996. Interest income increased by $3.5 million in
1996 primarily as a result of higher levels of invested funds. Other charges
and credits-net improved $35.8 million in 1996 compared to 1995, primarily
due to a $19.8 million improvement in the Company's share of earnings of
Worldspan and a $2.5 million credit to reflect a litigation settlement.
Additionally, other charges and credits-net for 1995 included a $14.0 million
charge for restructuring expenses.
As a result of the above, the operating loss of $198.5 million for 1996
was $223.6 million unfavorable to the combined operating income of $10.5
million and $14.6 million for the four month and the eight month periods of
1995, respectively. The net loss of $284.8 million for 1996 was $57.4
million greater than the combined loss of $227.4 million for 1995. The 1996
net loss included $9.8 million in extraordinary losses related to the early
extinguishment of debt, while the 1995 net loss included $144.4 million in
extraordinary gains related to the discharge of indebtedness pursuant to the
'95 Reorganization and the cancellation of debt between TWE and an aircraft
lessor.
Liquidity and Capital Resources
The following is a discussion of the impact of significant factors
affecting TWA's liquidity position and capital resources. These comments
should be read in conjunction with, and are qualified in their entirety by,
the Consolidated Financial Statements and Notes thereto.
Liquidity
The Company's consolidated cash and cash equivalents balance at
December 31, 1997 was $237.8 million, a $56.2 million increase from the
December 31, 1996 balance of $181.6 million. This increase in the Company's
cash balances resulted primarily from the issuance of long-term debt and sale
of preferred stock as described below. Although the Company's operational
performance substantially improved during the second, third and fourth
quarters of 1997, the residual effects of difficulties experienced in 1996
continued throughout the first two quarters of 1997 and, to a lesser extent,
during the third quarter of 1997. However, the Company has taken various
initiatives designed to improve the Company's financial performance. As a
result, the Company's financial performance for the final six months of 1997
was better than its performance in the final six months of 1996.
In February 1997, in order to improve its liquidity, the Company
entered into an agreement with and received approximately $26 million from
certain St. Louis business enterprises, representing the
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advance payment for tickets for future travel by such enterprises. In March
1997, the Company raised approximately $47.2 million in net proceeds from the
issuance of 50,000 Units, with each Unit consisting of (i) one 12% Senior
Secured Note due 2002, in the principal amount of $1,000, and (ii) one
Redeemable Warrant to purchase 126.26 shares of Common Stock at an exercise
price of approximately $7.92 per share. In December 1997, the Company raised
net proceeds of $82.2 million from the sale of the 9 1/4% Preferred Stock,
net proceeds of $133.5 million from the sale of the 11 1/2% Notes, a portion
of the proceeds of which was used to repay the 12% Reset Notes, and net
proceeds of $97.0 million from the sale of the Receivables Securitization
Notes, a portion of the proceeds of which was used to repay the outstanding
balance of the Icahn Loans.
The net increase in cash and cash equivalents during 1997 was due, in
large part, to cash provided by financing activities of $112.2 million in
1997 versus cash used by financing activities of $9.7 million in 1996.
Sources of cash generated by financing activities related primarily to
proceeds from long-term debt, warrants and preferred stock sold of $359.9
million in 1997 versus $188.9 million in 1996. These proceeds were partially
offset by the repayment of long-term debt and capital lease obligations of
$257.8 million in 1997 versus $117.2 million in 1996, and the 1996 redemption
of 12% preferred stock in the amount of $81.7 million. Cash provided by
operating activities improved to $0.2 million in 1997 from cash used by
operating activities of $5.7 million in 1996. This favorable change
reflects a reduction in the net loss from $284.8 million in 1996 to $110.8
million in 1997. Additionally, as an offset, net discounted sales from
tickets sold under the Karabu Ticket Agreement are excluded from cash
provided by operating activities as the related amounts are applied as a
reduction of the Icahn Loans and PBGC Notes. During 1997, $53.8 million of
such proceeds had been applied as a reduction to the principal balance of the
Icahn Loans and $70.3 had been applied as a reduction to the PBGC Notes.
During 1996, the proceeds applied as reductions to the Icahn Loans and the
PBGC Notes were $62.9 million and $6.4 million, respectively. Additionally,
$42.5 million in cash was generated from an increase in accounts payable and
accrued expenses, primarily due to the timing of payments of certain
obligations, and $65.3 million in cash was generated from a decrease in
receivables, offset by a related reduction of $41.3 million in advanced
ticket sales. Cash used by investing activities decreased to $56.3 million
in 1997 from $107.4 million in 1996. Components of this decrease include a
decrease in capital expenditures (including aircraft pre-delivery payments)
to $74.0 million in 1997 from $121.5 million in 1996, an increase in proceeds
from the sale of assets to $22.8 million in 1997 versus $3.2 million in 1996
and the return of $5.6 million in pre-delivery deposits related to a new
B-757 aircraft which was purchased by a lessor and simultaneously leased back
to TWA. Gross proceeds from assets sold during 1997 included $10.0 million
for three gates at Newark International Airport and $12.8 million from the
sale of aircraft, engines and other surplus property and equipment.
The net decrease in cash and cash equivalents during 1996 as compared
to 1995 was due, in large part, to the fact that cash used in operating
activities in 1996 was $5.7 million as compared to 1995 when cash provided by
operating activities was $216.9 million. The adverse change was primarily
attributable to the decrease in 1996 operating income as compared with 1995.
Additionally, as discussed above, net discounted sales from tickets sold
under the Karabu Ticket Agreement are excluded from cash provided by
operating activities as the related amounts were applied as a $62.9 million
reduction of the Icahn Loans and a $6.4 million reduction of the PBGC Notes.
At December 31, 1995 approximately $2.0 million of such proceeds had been
applied to the principal balance of the Icahn Loans, while no proceeds had
been applied to the PBGC Notes. The increase of $79.5 million in trade
accounts payable during 1996 was primarily due to the Company utilizing a
safe harbor provision with regard to payment of U.S. transportation taxes of
$60 million for the period September through December 1996, a significant
portion of which was paid in February 1997. Cash used in investing
activities increased $84.1 million from $23.3 million in 1995 to $107.4
million in 1996. A large part of this increase was related to capital
expenditures ($121.5 million in 1996 versus $59.5 million in 1995) which had
been somewhat restricted by fiscal
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controls in place during most of 1995. Financing activities used $9.7
million of cash in 1996, compared with a net use of cash of $27.8 million in
1995. Proceeds from long-term debt issued and sale and leaseback
transactions decreased from $22.1 million in 1995 to $16.6 million in 1996.
Repayments of long-term debt and capital leases required $15.4 million more
cash in 1996 than in 1995. In 1996, net proceeds from the sale of 8%
Preferred Stock were $186.2 million while the early redemption of the
Mandatorily Redeemable 12% Preferred Stock and cash dividends required $81.7
million and $14.5 million, respectively. In 1995, the net proceeds from an
equity rights offering generated $51.9 million.
In March 1998, the Company completed the sale of $150.0 million in
11 3/8% Senior Notes due 2006 resulting in net proceeds to the Company of
$144.9 million. The Company intends to use the net proceeds for certain
capital expenditures, including pre-delivery deposits on new aircraft
acquisitions, and for working capital and other general corporate purposes.
In late 1996, the Company began implementing a series of new strategic
initiatives designed to improve the Company's financial and operating
results. The achievement of these improved operating results is subject to
significant uncertainties, including the Company's ability to achieve higher
revenue yields and load factors, the cost of aircraft fuel, the Company's
ability to finance or lease suitable replacement aircraft at reasonable rates
and the containment of operating costs. No assurance can be given that any
of the initiatives already implemented or any new initiatives, if
implemented, will be successful, or if successful, that such initiatives will
produce sufficient results for the Company to be successful in generating the
operating revenues and cash required for profitable operations or future
viability.
Pursuant to the '95 Reorganization, the Company issued 600,000 ticket
vouchers, each with a face value of $50.00, which may be used for up to a 50%
discount off the cost of a TWA airline ticket for transportation on TWA
("Ticket Vouchers"). Pursuant to certain agreements, the Company repurchased
approximately 236,000 of the Ticket Vouchers at an aggregate cost of $8.8
million. Payments in respect of these Ticket Vouchers were approximately
$0.7 million in 1995 and approximately $8.1 million in 1996. Concurrently,
the Company undertook aircraft lease payment deferrals to increase liquidity
and improve the Company's financial condition. Gross deferrals of lease and
conditional sale indebtedness payments aggregated approximately $91.0 million
with a weighted average repayment period of approximately two years. The
aircraft lease payment deferrals contemplated by the '95 Reorganization
generally anticipated six month deferrals with various payback periods,
extending in some instances over the remaining life of the lease, and in
other cases over a specified period. Cash repayments of lease deferrals,
including interest, were approximately $9.5 million in the fourth quarter of
1995, $23.8 million in 1996, $9.1 million in 1997 and are expected to
approximate $0.5 million in 1998.
On June 14, 1995, the Company signed an agreement (the "Extension and
Consent Agreement") with Karabu to extend the term of the Icahn Loans from
January 8, 1995 to January 8, 2001 and to obtain the consent of Karabu and
the Icahn Entities to certain modifications to the PBGC Notes. Collateral
for the Icahn Loans included a number of aircraft, engines and related
equipment, along with substantially all of the Company's receivables. On
December 30, 1997 the Company repaid the outstanding balance of the Icahn
Loans with a portion of the proceeds from the sale of the Receivables
Securitization Notes.
On June 14, 1995, in consideration of, among other things, the
extension of the Icahn Loans, TWA and Karabu entered into the Ticket
Agreement, which permitted Karabu to purchase two categories of discounted
tickets: (1) "Domestic Consolidator Tickets," which are subject to a cap of
$610 million, based on the full retail price of the tickets ($120 million in
the first 15 months and $70 million per year for seven consecutive years
through the term of the Ticket Agreement), and (2) "System Tickets," which
are not subject to any cap throughout the term of the Ticket Agreement.
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Tickets sold by the Company to Karabu pursuant to the Ticket Agreement
are priced at levels intended to approximate current competitive discount
fares available in the airline industry. The Ticket Agreement provides that
no ticket may be included with an origin or destination of St. Louis, nor may
any ticket include flights on other carriers. Tickets purchased by Karabu
pursuant to the Ticket Agreement are required to be at fares specified in the
Ticket Agreement, net to TWA, and exclusive of tax. No commissions will be
paid by TWA for tickets sold under the Ticket Agreement, and TWA believes
that under the applicable provisions of the Ticket Agreement, Karabu may not
market or sell System Tickets through travel agents or directly to the
general public. Karabu, however, has been marketing System Tickets through
travel agents and directly to the general public. TWA has demanded that
Karabu cease doing so and Karabu has stated that is disagrees with the
Company's interpretation concerning sales through travel agents or directly
to the general public. For a description of the litigation pending between
TWA and Karabu, Mr. Icahn and affiliated companies, see "Item 3. Legal
Proceedings-Icahn Litigation."
Domestic Consolidator Tickets sold under the Ticket Agreement are
limited to certain origin/destination city markets in which TWA has less than
a 5% market share limit except for New York where there is a 10% limit.
These restricted markets will be reviewed from time to time to determine any
change in TWA's market share, and other markets may be designated as
necessary.
The purchase price for the tickets purchased by Karabu had been
required to either, at Karabu's option, be retained by Karabu and the amount
so retained credited as prepayments against the outstanding balance of the
Icahn Loans, or be paid over by Karabu to a settlement trust established in
connection with the '93 Reorganization for TWA's account as prepayments on
the PBGC Notes. At December 31, 1997, approximately $118.6 million of such
proceeds had been applied to the principal balance of the Icahn Loans and
$76.7 million had been applied to the PBGC Notes. On December 30, 1997, the
Company repaid the outstanding balance of the Icahn Loans out of the proceeds
of the Receivables Securitization Offering. As a result, the purchase price
of tickets purchased by Karabu will be paid, at Karabu's election, either to
the settlement trust for prepayments on the PBCG Notes or to TWA directly.
The Company elected to pay interest, due August 1, 1995 and February 1,
1996, and half the interest due February 1, 1997, on the 12% Reset Notes, in
shares of Common Stock. The amount of such interest aggregated approximately
$10.4 million, $10.2 million and $3.7 million, respectively, and resulted in
the issuance of approximately 1.9 million, 1.1 million and 0.6 million shares
of Common Stock on the respective dates. The Company elected to pay
dividends due February 1, 1996 on its 12% Preferred Stock for the period from
November 1, 1995 to and including January 31, 1996, in the amount of
approximately $3.3 million, in shares of Common Stock.
Capital Resources
During 1997 the Company continued a series of privately negotiated
exchanges with a significant holder of 12% Reset Notes which resulted in the
return to the Company of $51.8 million in 12% Reset Notes and approximately
$1.4 million in accrued interest thereon in exchange for the issuance of
approximately 7.7 million shares of Common Stock leaving an outstanding
principal balance of approximately $72.5 million. The Company redeemed the
outstanding balance of its 12% Reset Notes on January 20, 1998.
TWA has no unused credit lines and must satisfy all of its working
capital and capital expenditure requirements from cash provided by operating
activities, from external capital sources or from the sale
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of assets. As a result of the financings consummated in the fourth quarter
of 1997 and the repayment of certain debt in connection therewith, assets
with an approximate appraised value of $165.0 million were released from
collateral liens and are currently unencumbered. Further pledging of these
unencumbered assets, however, may be limited by negative pledge restrictions in
outstanding indebtedness. Substantially all of TWA's other strategic assets
have been pledged to secure various issues of outstanding indebtedness of the
Company. To the extent that the pledged assets are sold, the applicable
financing agreements generally require the sale proceeds to be applied to
repay the corresponding indebtedness. 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 February 1, 1998, TWA had taken delivery of five
purchased aircraft and had five on firm order. Furthermore, to the extent
TWA exercises its options for additional aircraft, the Company will have the
right to an equal number of additional option aircraft. Four of the five
aircraft already delivered were manufacturer financed and one was leased.
TWA has obtained commitments for debt financing for approximately 80% of the
total costs associated with the acquisition of four of the remaining five
aircraft which have not been delivered and obtained commitments for 100%
lease financing of the total costs of the remaining fifth and final of such
aircraft. Such commitments are subject to, among other things, so-called
material adverse change clauses which make the availability of such debt and
lease financing dependent upon the financial condition of the Company.
In 1997, TWA reached agreements for the acquisition, by lease, of two
new Boeing 767-300ER aircraft, one of which has been delivered in March 1998
and the second is scheduled to be delivered in April 1998. The longer-range
300 series aircraft will be utilized on TWA's international routes and to
Hawaii.
TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce plc
relating to the purchase of ten A330-300 twin-engine wide body aircraft and
related engines, spare parts and equipment for an aggregate purchase price of
approximately $1.0 billion. The agreements, as amended, require the delivery
of the aircraft in 2001 and 2002 and provide for the purchase of up to ten
additional aircraft. TWA has not yet made arrangements for the permanent
financing of the purchases subject to the agreements. In the event of
cancellation, predelivery payments of approximately $18 million would be
subject to forfeiture.
The Company has entered into an agreement to acquire from the
manufacturer fifteen new MD-83s. The long-term leasing arrangement provides
for delivery of the aircraft between the second quarter of 1997 and the first
quarter of 1999. As of December 31, 1997, 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.
45
<PAGE> 47
On February 25, 1998, the Company's Board of Directors approved letters
of intent to acquire 24 new MD-83 aircraft from the manufacturer. The
proposed long-term leasing arrangement provides for delivery of the aircraft
in 1999. Although the Company anticipates that rental payments for such
aircraft would represent a substantial financial commitment, it is not
possible to accurately estimate the amount of such payments at this time.
There can be no assurances that such aircraft acquisition program will be
concluded or as to the final terms of any such program.
TWA elected to comply with the transition requirements of the Noise
Act by adopting the Stage 2 aircraft phase-out/retrofit option, which
requires that 50% of its base level (December 1990) Stage 2 fleet be
phased-out/retrofitted by December 31, 1996. To comply with the 1996
requirement, the Company retrofitted, by means of engine hush-kits, 30
of its DC-9 aircraft. As of December 31, 1997, hush-kits have been
installed on 71 DC-9 engines at an aggregate cost of approximately $55
million, most of which was financed by lessors with repayments being
facilitated through increased rental rates or lease term extensions.
TWA intends to comply with the transition requirements for December
31, 1998 by having 75% of its fleet meet Stage 3 requirements. By
December 31, 1999, 100% of the fleet must meet Stage 3 requirements.
The Company is currently negotiating the acquisition of three
Boeing 767-231 ETOPS airframes and six accompanying engines (collectively,
the "Aircraft") currently being leased by the Company in exchange for the
proposed issuance of (i) $43.2 million aggregate principal amount of the
Aircraft Secured Notes, and (ii) $31.8 million aggregate principal amount
of the Equity Notes, which would have a second priority security interest
in the Aircraft and be convertible into shares of Common Stock based upon
a formula to be set forth in the Aircraft Offering. The Aircraft Notes would
be issued in a private placement to the sellers of the Aircraft. The Aircraft
Notes would not be registered under the Securities Act and could not be
transferred or sold in the United States absent registration or an applicable
exemption from registration requirements. There can be no assurance that this
transaction will be consummated.
Certain Other Capital Requirements
Expenditures for facilities and equipment, other than aircraft,
generally are not committed prior to purchase and, therefore, no such
significant commitments exist at the present time. TWA's ability to finance
such expenditures will depend in part on TWA's financial condition at the
time of the commitment.
The Company utilizes software and related computer technologies
essential to its operations that use two digits rather than four to specify
the year, which will result in a date recognition problem in the year 2000
and thereafter unless modified. The Company has completed an assessment to
determine the changes needed to make its computer systems year 2000 compliant
and has developed a plan to implement such changes. The Company currently
expects that it will complete the necessary changes and testing in mid-1999.
As of December 31, 1997, the Company estimates that the total cost to
complete the remediation of its computer systems would be approximately $18.7
million.
The Company is also reviewing software which was purchased from outside
vendors and is evaluating its reliance on other third parties to determine
and minimize the extent to which its operations may be dependent on such
third parties to remediate the year 2000 issues in their systems. The costs
of the Company's year 2000 project and the date on which it will be completed
are based on management's best estimates and include assumptions regarding
third party modification plans. However, there can be no assurance that
these estimates will be achieved and actual results could differ materially
from those anticipated.
Availability of NOLs
The Company estimates that it had, for federal income tax purposes, net
operating loss carryforwards ("NOLs") amounting to approximately $855 million
at December 31, 1997. Such NOLs expire in 2008 through 2012 if not utilized
before then to offset taxable income. Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations issued thereunder
impose limitations on the ability of corporations to use NOLs, if the
corporation experiences a more than 50% change in ownership during certain
periods. Changes in ownership in future periods could substantially restrict
the Company's ability to utilize its tax net operating loss carryforwards.
The Company believes
46
<PAGE> 48
that no ownership change has occurred subsequent to the '95 Reorganization.
There can be no assurance, however, that an ownership change will not occur
in the future. In addition, the NOLs are subject to examination by the IRS
and, thus, are subject to adjustment or disallowance resulting from any such
IRS examination. For financial reporting purposes, the tax benefits from
substantially all of the tax net operating loss carryforwards will, to the
extent realized in future periods, have no impact on the Company's operating
results, but instead be applied to reduce reorganization value in excess of
amounts allocable to identifiable assets.
Forward-Looking Statements
Certain statements made above relating to plans, conditions,
objectives, and economic performance go beyond historical information and may
provide an indication of future results. To that extent, they are
forward-looking statements within the meaning of Section 21E of the Exchange
Act, and each is subject to factors that could cause actual results to differ
from those in the forward-looking statement. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated or projected. In any event, these forward-looking statements speak
only as of their dates, and the Company undertakes no obligation to update or
revise any of them whether as a result of new information, future events or
otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risks
The Company's market capitalization on January 28, 1997 did not exceed
$2.5 billion. Therefore, in accordance with the instructions to this item, the
Company is not obligated to disclose information under this item as part of
this report.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements, which appears on page F-1 hereof.
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
None
47
<PAGE> 49
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item regarding the identification of
the Company's directors and executive officers is incorporated by reference
to information contained under the caption "Directors and Executive Officers"
of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to
be held on May 19, 1998.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to
information contained under the caption "Executive Compensation" of the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 19, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 19, 1998.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 19, 1998.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements and Schedules. See Index to Financial Statements
and Schedules, which appears on page F-1 hereof.
Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter 1997.
Exhibits. The exhibits listed on the Exhibit Index following the
signature page hereof are filed herewith in response to this Item.
48
<PAGE> 50
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE NO.
--------
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditors' Report F-2
Statements of Consolidated Operations for the Years Ended December 31, 1997 and 1996,
the Four Months Ended December 31, 1995, and the Eight Months Ended
August 31, 1995 F-3
Consolidated Balance Sheets, December 31, 1997 and 1996 F-4
Statements of Consolidated Cash Flows for the Years Ended December 31, 1997 and 1996,
the Four Months Ended December 31, 1995, and the Eight Months Ended
August 31, 1995 F-6
Consolidated Statements of Shareholders' Equity (Deficiency) for the Years Ended
December 31, 1997 and 1996, the Four Months Ended December 31, 1995,
and the Eight Months Ended August 31, 1995 F-8
Notes to Consolidated Financial Statements F-10
SCHEDULE:
II Valuation and Qualifying Accounts S-1
</TABLE>
SCHEDULES OMITTED
Schedules not filed herewith are omitted because of the absence of
conditions under which they are required or because the information called
for is shown in the financial statements or notes thereto.
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Trans World Airlines, Inc.
We have audited the accompanying consolidated balance sheets of Trans
World Airlines, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related statements of consolidated operations, cash flows and
shareholders' equity (deficiency) for the years ended December 31, 1997 and
1996, the four months ended December 31, 1995 and the eight months ended
August 31, 1995. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule for the
years ended December 31, 1997 and 1996, the four months ended December 31,
1995 and the eight months ended August 31, 1995. These consolidated
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans
World Airlines, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years ended
December 31, 1997 and 1996, the four months ended December 31, 1995 and the
eight months ended August 31, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the
consolidated financial statements reflect the application of fresh start
reporting as of September 1, 1995 and, therefore, are not comparable in all
respects to the consolidated financial statements for periods prior to such
date.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
March 4, 1998
F-2
<PAGE> 52
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
For the Years Ended December 31, 1997 and 1996, the Four Months Ended December 31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands Except Per Share Amounts)
<CAPTION>
Predecessor
Reorganized Company Company
---------------------------------------- ----------
Year Year Four Months Eight Months
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $2,924,042 $3,077,905 $ 943,077 $1,929,166
Freight and mail 126,730 153,076 48,384 94,784
All other 277,180 323,426 107,013 194,405
---------- ---------- ---------- ----------
Total 3,327,952 3,554,407 1,098,474 2,218,355
---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 1,224,116 1,254,341 373,041 755,708
Earned stock compensation (Note 12) 4,199 9,056 2,192 55,767
Aircraft fuel and oil 480,853 585,163 161,799 296,833
Passenger sales commissions 242,135 268,131 80,045 185,981
Aircraft maintenance materials and repairs 138,353 208,183 51,998 95,657
Depreciation and amortization 150,381 161,822 55,168 106,474
Operating lease rentals 370,827 302,990 96,393 182,548
Passenger food and beverages 83,241 110,092 34,676 68,137
Special charges (Note 16) - 85,915 - 1,730
All other 663,107 767,241 232,716 454,878
---------- ---------- ---------- ----------
Total 3,357,212 3,752,934 1,088,028 2,203,713
---------- ---------- ---------- ----------
Operating income (loss) (29,260) (198,527) 10,446 14,642
---------- ---------- ---------- ----------
Other charges (credits):
Interest expense (contractual interest of
$141,967 for the eight months ended
August 31, 1995) 114,066 126,822 45,917 123,247
Interest and investment income (12,555) (21,309) (7,484) (10,366)
Disposition of assets, gains and losses - net
(Note 15) (16,004) 1,135 (3,330) 206
Reorganization items (Note 19) - - - 242,243
Other charges and credits - net (Note 17) (25,432) (30,598) 7,611 (2,379)
---------- ---------- ---------- ----------
Total 60,075 76,050 42,714 352,951
---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary items (89,335) (274,577) (32,268) (338,309)
Provision (credit) for income taxes (Note 5) 527 450 1,370 (96)
---------- ---------- ---------- ----------
Loss before extraordinary items (89,862) (275,027) (33,638) (338,213)
Extraordinary items, net of income taxes (Note 14) (20,973) (9,788) 3,500 140,898
---------- ---------- ---------- ----------
Net loss (110,835) (284,815) (30,138) (197,315)
Preferred stock dividend requirements 16,119 36,649 4,751 11,554
---------- ---------- ---------- ----------
Loss applicable to common shares $ (126,954) $ (321,464) $ (34,889) $ (208,869)
========== ========== ========== ==========
Per share amounts:
Loss before extraordinary item and special
dividend requirement $ (1.98) $ (6.60) $ (1.15)
Extraordinary item and special dividend
requirement (.39) (.67) .10
---------- ---------- ----------
Net loss $ (2.37) $ (7.27) $ (1.05)
========== ========== ==========
See notes to consolidated financial statements
</TABLE>
F-3
<PAGE> 53
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Amounts in Thousands)
<CAPTION>
ASSETS
1997 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 237,765 $ 181,586
Receivables, less allowance for doubtful accounts, $9,334 in
1997 and $12,939 in 1996 (Note 8) 176,333 239,496
Spare parts, materials and supplies, less allowance for
obsolescence, $19,176 in 1997 and $29,463 in 1996 (Note 8) 96,108 111,239
Prepaid expenses and other 122,751 93,424
---------- ----------
Total 632,957 625,745
---------- ----------
Property (Notes 8, 9 & 18):
Property owned:
Flight equipment 569,063 339,150
Prepayments on flight equipment 15,431 39,072
Land, buildings and improvements 62,854 59,879
Other property and equipment 64,131 60,750
---------- ----------
Total owned property 711,479 498,851
Less accumulated depreciation 114,921 71,810
---------- ----------
Property owned - net 596,558 427,041
---------- ----------
Property held under capital leases:
Flight equipment 166,358 172,812
Land, buildings and improvements 49,443 54,761
Other property and equipment 7,704 6,570
---------- ----------
Total property held under capital leases 223,505 234,143
Less accumulated amortization 78,298 46,977
---------- ----------
Property held under capital leases - net 145,207 187,166
---------- ----------
Total property - net 741,765 614,207
---------- ----------
Investments and other assets:
Investments in affiliated companies (Note 4) 117,293 108,173
Investments, receivables and other (Note 9) 162,969 149,028
Routes, gates and slots - net 377,691 401,659
Reorganization value in excess of amounts allocable to
identifiable assets - net 741,173 783,127
---------- ----------
Total 1,399,126 1,441,987
---------- ----------
$2,773,848 $2,681,939
========== ==========
See notes to consolidated financial statements
</TABLE>
F-4
<PAGE> 54
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Amounts in Thousands Except Per Share Amounts)
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
---------- ----------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 8) $ 51,392 $ 92,447
Current obligations under capital leases (Note 9) 37,068 42,501
Advance ticket sales 223,197 241,516
Accounts payable, principally trade 250,551 216,675
Accounts payable to affiliated companies (Note 4) 6,261 4,894
Accrued expenses:
Employee compensation and vacations earned 119,572 116,846
Contributions to retirement and pension trusts (Note 6) 13,469 14,091
Interest on debt and capital leases 32,018 39,420
Taxes 14,146 19,018
Other accrued expenses 189,271 174,753
---------- ----------
Total accrued expenses 368,476 364,128
---------- ----------
Total 936,945 962,161
---------- ----------
Long-term liabilities and deferred credits:
Long-term debt, less current maturities (Note 8) 736,540 608,485
Obligations under capital leases, less current obligations (Note 9) 182,922 220,790
Postretirement benefits other than pensions (Note 6) 485,787 471,171
Noncurrent pension liabilities (Note 6) 30,011 30,716
Other noncurrent liabilities and deferred credits 133,359 150,511
---------- ----------
Total 1,568,619 1,481,673
---------- ----------
Commitments and Contingent Liabilities
(Notes 1, 2, 3, 6, 7, 8, 9, 11, 12, 16, & 18)
Shareholders' equity:
8% cumulative convertible exchangeable preferred stock,
$50 liquidation preference; 3,869 shares issued and
outstanding 39 39
9 1/4% cumulative convertible exchangeable preferred stock,
$50 liquidation preference; 1,725 shares issued and
outstanding 17 -
Employee preferred stock, $0.01 liquidation preference;
special voting rights; shares issued and outstanding:
1997-6,472; 1996-5,681 65 57
Common stock, $0.01 par value; shares issued and outstanding:
1997-51,393; 1996-41,763 514 418
Additional paid-in capital 693,437 552,544
Accumulated deficit (425,788) (314,953)
---------- ----------
Total 268,284 238,105
---------- ----------
$2,773,848 $2,681,939
========== ==========
See notes to consolidated financial statements
</TABLE>
F-5
<PAGE> 55
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Years Ended December 31, 1997 and 1996, the Four Months Ended December 31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands)
<CAPTION>
Predecessor
Reorganized Company Company
---------------------------------------- ------------
Year Year Four Months Eight Months
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(110,835) $(284,815) $(30,138) $(197,315)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Employee earned stock compensation 4,199 9,056 2,192 55,767
Depreciation and amortization 150,381 161,822 55,168 106,474
Amortization of discount and expenses on debt 14,461 14,744 3,063 12,472
Extraordinary loss (gain) on extinguishment of debt 20,973 9,788 (3,500) (140,898)
Interest paid in common stock 4,125 11,332 11,587 -
Equity in undistributed earnings of affiliates not
consolidated (9,404) (10,017) 12,169 (2,339)
Revenue from Icahn ticket program (115,991) (71,534) (4,356) -
Net gains-losses on disposition of assets (16,004) 1,135 (3,330) 206
Non-cash special charges - 85,915 - -
Reorganization items - - - 242,243
Change in operating assets and liabilities:
Decrease (increase) in:
Receivables 65,336 3,927 69,121 (62,094)
Inventories 13,496 (4,897) 510 5,866
Prepaid expenses and other current assets (9,227) (28,288) 23,241 (8,894)
Other assets (10,910) 111 (3,088) (1,586)
Increase (decrease) in:
Accounts payable and accrued expenses 42,480 83,840 (41,989) 108,669
Advance ticket sales (41,301) 19,698 (39,350) 81,598
Benefits, other noncurrent liabilities and deferred
credits (1,541) (7,505) (6,387) (28,160)
--------- --------- -------- ---------
Net cash provided (used) 238 (5,688) 44,913 172,009
--------- --------- -------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of property 22,749 3,234 7,069 2,221
Capital expenditures (74,025) (121,547) (42,973) (16,554)
Return of pre-delivery deposits related to leased aircraft 5,565 - - -
Net decrease (increase) in investments, receivables and other (10,553) 10,941 842 26,064
--------- --------- -------- ---------
Net cash provided (used) (56,264) (107,372) (35,062) 11,731
--------- --------- -------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt issued 270,608 2,750 22,100 -
Proceeds from warrants issued 7,076 - - -
Proceeds from sale and leaseback of certain aircraft 17,600 13,800 - -
Repayments on long-term debt and capital lease obligations (257,838) (117,203) (39,654) (62,158)
Refund from retirement of 1967 bonds 5,318 - - -
Net proceeds from sale of preferred stock 82,231 186,163 - -
Net proceeds from exercise of equity rights,
warrants and options 2,686 1,034 51,930 -
Redemption of 12% Preferred Stock - (81,749) - -
Cash dividends paid on preferred stock (15,476) (14,489) - -
--------- --------- -------- ---------
Net cash provided (used) 112,205 (9,694) 34,376 (62,158)
--------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents 56,179 (122,754) 44,227 121,582
Cash and cash equivalents at beginning of period 181,586 304,340 260,113 138,531
--------- --------- -------- ---------
Cash and cash equivalents at end of period $ 237,765 $ 181,586 $304,340 $260,113
========= ========= ======== =========
See notes to consolidated financial statements
</TABLE>
F-6
<PAGE> 56
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Years Ended December 31, 1997 and 1996, the Four Months Ended December 31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands)
<CAPTION>
SUPPLEMENTAL CASH FLOW INFORMATION
Predecessor
Reorganized Company Company
------------------------------------------- ------------
Year Year Four Months Eight Months
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Paid During the Period for:
Interest $ 96,865 $102,311 $27,318 $55,878
======== ======== ======= =======
Income taxes $ 14 $ 159 $ 7 $ 39
======== ======== ======= =======
Information About Noncash Operating,
Investing and Financing Activities:
Promissory notes issued to finance
aircraft acquisition $177,469 $ 10,565 $ - $ -
======== ======== ======= =======
Promissory notes issued to finance
aircraft predelivery payments $ 6,237 $ 19,862 $ - $12,690
======== ======== ======= =======
Property acquired and obligations
recorded under new capital lease
transactions $ 1,138 $ 4,266 $ - $12,690
======== ======== ======= =======
Partial interest on debt paid in kind,
issued and valued at principal
amount $ - $ - $ 574 $18,496
======== ======== ======= =======
Common Stock issued in lieu of cash
dividends on mandatorily
redeemable 12% preferred stock $ - $ 3,255 $ - $ -
======== ======== ======= =======
Exchange of long-term debt for
common stock:
Debt cancelled including accrued
interest, net of unamortized
discount $ 48,835 $ 41,021 $ - $ -
Common stock issued, at fair
value 56,028 49,182 - -
-------- -------- ------- -------
Extraordinary loss $ 7,193 $ 8,161 $ - $ -
======== ======== ======= =======
</TABLE>
ACCOUNTING POLICY
For purposes of the Statements of Consolidated Cash Flows, TWA considers
all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
See notes to consolidated financial statements
F-7
<PAGE> 57
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 1997 and 1996, the Four Months Ended December 31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands)
<CAPTION>
12% 8% 9 1/4% EMPLOYEE ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- --------- --------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance, December 31, 1994 $ 125 $ - $ - $ - $ 200 $ 105,925 $(523,726) $(417,476)
Net loss for the eight months ended
August 31, 1995 - - - - - - (197,315) (197,315)
Eliminate Predecessor equity accounts
in connection with fresh start
reporting (125) - - - (200) (105,925) 35,817 (70,433)
Record additional excess of
reorganization value over
identifiable assets - - - - - - 685,224 685,224
Issuance of Common and Employee
Preferred Stock pursuant to Plan
of Reorganization - - - 53 172 269,775 - 270,000
----- --- --- --- ----- --------- --------- ---------
Balance, August 31, 1995 - - - 53 172 269,775 - 270,000
REORGANIZED COMPANY:
Equity rights exercised - - - - 132 51,727 - 51,859
Interest on 12% Notes paid in Common
Stock - - - - 19 11,568 - 11,587
Options and warrants exercised - - - - 28 43 - 71
Earned Stock Compensation - - - - - 2,046 - 2,046
Amortization of the excess of
redemption value over carrying
value of Mandatorily Redeemable
12% Preferred Stock - - - - - (2,570) - (2,570)
Net loss for the four months ended
December 31, 1995 - - - - - - (30,138) (30,138)
----- --- --- --- ----- --------- --------- ---------
Balance, December 31, 1995 - - - 53 351 332,589 (30,138) 302,855
Warrants exercised - - - - 4 68 - 72
Options exercised - - - - 2 1,248 - 1,250
Earned Stock Compensation - - - - - 6,875 - 6,875
Allocation of employee preferred stock
to ALPA ESOP - - - 6 - (6) - -
Conversion of employee preferred stock
to Common Stock - - - (2) 2 - - -
Net proceeds from issuance of 8%
preferred stock - 39 - - - 186,124 - 186,163
Dividends on 8% preferred stock
paid in cash - - - - - (11,349) - (11,349)
Dividends on mandatorily redeemable
12% preferred stock paid in Common
Stock - - - - 3 (3) - -
Dividends on mandatorily redeemable
12% preferred stock paid in cash - - - - - (3,140) - (3,140)
Amortization of the excess of
redemption value over carrying value
of mandatorily redeemable 12%
preferred stock - - - - - (328) - (328)
Excess of cash paid for early redemption
of mandatorily redeemable 12%
preferred stock over carrying value - - - - - (19,992) - (19,992)
Common Stock issued in exchange for
12% notes - - - - 45 49,137 - 49,182
Interest on 12% Notes paid in Common
Stock - - - - 11 11,321 - 11,332
Net loss for 1996 - - - - - - (284,815) (284,815)
--- --- --- --- ----- --------- --------- ---------
Balance, December 31, 1996 - 39 - 57 418 552,544 (314,953) 238,105
</TABLE>
F-8
<PAGE> 58
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 1997 and 1996, the Four Months Ended December 31, 1995
and the Eight Months Ended August 31, 1995
(Amounts in Thousands)
<CAPTION>
12% 8% 9 1/4% EMPLOYEE ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- --------- --------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - 39 - 57 418 552,544 (314,953) 238,105
Options exercised - - - - 6 3,098 - 3,104
Earned stock compensation - - - - - 2,941 - 2,941
Allocation of employee preferred
stock to ALPA ESOP - - - 6 - (6) - -
Conversion of employee preferred
stock to Common Stock - - - (6) 6 - - -
Common Stock issued in exchange for
12% Reset Notes - - - - 77 55,951 - 56,028
Net proceeds from issuance of 9 1/4%
preferred stock - - 17 - - 82,214 - 82,231
Dividends on 8% preferred stock paid
in cash - - - - - (15,476) - (15,476)
Interest on 12% Reset Notes paid in
Common Stock - - - - 6 4,119 - 4,125
Issuance of warrants with 12% Senior
Secured Notes Due 2002 - - - - - 7,076 - 7,076
Issuance of employee fill-up shares - - - 8 1 976 - 985
Net loss for 1997 - - - - - - (110,835) (110,835)
----- --- --- --- ----- --------- --------- ---------
Balance, December 31, 1997 $ - $39 $17 $65 $ 514 $ 693,437 $(425,788) $ 268,284
===== === === === ===== ========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE> 59
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL CONDITION AND LIQUIDITY:
Trans World Airlines, Inc. ("TWA" or the "Company") has undergone two
reorganizations under Chapter 11 of the Bankruptcy Code since 1992, as
further described in Note 3 - Chapter 11 Reorganizations. In August 1995 the
Company emerged from the most recent bankruptcy proceeding and thereafter,
through the second quarter of 1996, the Company had experienced improvements
in its operating performance. However, beginning in the third quarter of
1996, the Company's operating performance substantially deteriorated.
Management believes that certain strategic initiatives undertaken by the
Company beginning in late 1996 have contributed to the improved financial and
operating results. TWA's management began to implement such strategic
initiatives in response to a significant deterioration in the Company's
operating performance and financial condition during the second half of 1996.
This deterioration was primarily caused by (i) an overly aggressive expansion
of TWA's capacity and planned flight schedule, particularly during the 1996
summer season, which forced the Company to rely disproportionately on
lower-yield feed traffic and bulk ticket sales to fill the increased capacity of
its system; (ii) the delayed delivery of four older 747s intended to increase
capacity for incremental international operations during the summer of 1996;
and (iii) unexpected maintenance delays due to the capacity increase, higher
levels of scheduled narrow-body heavy maintenance and increased contract
maintenance performed for third parties. These factors caused excessive
levels of flight cancellations, poor on-time performance, increased pilot
training costs and higher maintenance expenditures and adversely affected the
Company's yields and unit costs. In addition, the crash of TWA Flight 800 on
July 17, 1996 distracted management's attention from core operating issues
and led to lost bookings and revenues.
Management believes that certain strategic initiatives undertaken by
the Company beginning in late 1996 and continuing throughout 1997 have
contributed to the Company's improved financial and operating results. The
primary focus of the Company's strategic initiatives was to reestablish TWA's
operational reliability and schedule integrity and overall product quality in
order to attract higher-yield passengers and enhance overall productivity,
which was intended to improve the Company's financial results. As the
initial steps in implementing this strategy, the Company temporarily reduced
its flight schedule during the first quarter of 1997 to more closely match
aircraft available for active service and worked to reduce the number of
aircraft in maintenance backlog by increasing overtime and maintenance
capacity made available by terminating an unprofitable aircraft maintenance
contract with the U.S. government. The other key initiatives which TWA began
implementing in late 1996 included: (i) acceleration of the Company's fleet
renewal plan; (ii) a restructuring of TWA's operations at JFK; (iii) a focus
on improving productivity; (iv) implementation of a series of
revenue-enhancing marketing initiatives; and (v) implementation of a number of
employee-related initiatives to reinforce the Company's focus on operational
performance.
TWA has significantly enhanced its operational reliability and schedule
integrity since the first quarter of 1997. According to statistics reported
to the DOT, TWA improved from tenth among the 10 largest U.S. scheduled
commercial airlines in domestic on-time performance in 1996 to second in
1997. TWA also canceled 5,413 fewer flights in 1997 than in 1996, improving
its percentage of scheduled flights completed to 98.0% compared to 96.2% for
1996. Primarily as a result of the Company's improved operational
performance during 1997, passenger load factors and passenger revenue per
available seat mile reflected improvement compared to 1996.
F-10
<PAGE> 60
For the full year ended December 31, 1997, the Company's financial
results reflected operating revenues of $3,328.0 million (a decrease of
$226.4 million from operating revenues of $3,554.4 million for the full year
1996), an operating loss of $29.3 million (an improvement of $169.2 million
over the full year 1996 operating loss of $198.5 million, which included
special charges of $85.9 million), and a net loss of $110.8 million
(including a non-cash extraordinary loss of $21.0 million related to the
early extinguishment of debt), an improvement of $174.0 million over a net
loss of $284.8 million (which included a non-cash extraordinary loss of $9.8
million and special charges of $85.9 million) for 1996. The reduction in
full-year operating revenues for 1997 resulted from the planned reduction in
capacity as the Company replaced older L-1011 and B-747 aircraft with new
B-757, B-767 and MD-80 aircraft on many routes. The Company's first quarter
operating results have historically been considerably less favorable than
other quarters and typically reflect substantial operating and net losses.
Notwithstanding actions taken to date and planned by management to improve
the Company's future operating results and performance, the Company
anticipates reporting operating and net losses in the first quarter of 1998,
which losses may be substantial.
On December 31, 1997, the Company's total cash and cash equivalents
balance was approximately $237.8 million. This balance represented an
increase of approximately $56.2 million from the Company's corresponding cash
balance at December 31, 1996. This increase in the Company's cash balance
resulted primarily from the proceeds of various capital market offerings
during 1997 and asset dispositions offset by capital expenditures and debt
repayments. In March 1997, the Company raised approximately $47.2 million in
net proceeds from the issuance of 50,000 Units, with each Unit consisting of
(i) one 12% Senior Secured Note due 2002, in the principal amount of $1,000,
and (ii) one Redeemable Warrant to purchase 126.26 shares of Common Stock at
an exercise price of approximately $7.92 per share. In December 1997, the
Company raised net proceeds of $82.2 million from the sale of the 9 1/4%
Preferred Stock, net proceeds of $133.5 million from the sale of the 11 1/2%
Notes, a portion of the proceeds of which was used to repay the 12% Reset
Notes, and net proceeds of $97.0 million from the sale of the Receivables
Securitization Notes, a portion of the proceeds of which was used to repay
the outstanding balance of the Icahn Loans. In March 1998, the Company
completed the sale of $150.0 million in 11 3/8% Senior Notes due 2006
resulting in net proceeds to the Company of $144.9 million. The Company
intends to use the net proceeds for certain capital expenditures including
pre-delivery deposits on new aircraft acquisitions, and for working capital
and other general corporate purposes.
Each of the Company's union contracts became amendable as of August 31,
1997, and negotiations have begun with respect to all three of the contracts.
While management believes that the negotiation process for the new contracts
will result in extended contracts mutually satisfactory to the parties, there
can be no assurances as to the ultimate timing or terms of any such new
contracts. As the Company's financial resources are not as great as those of
most of its competitors, any substantial increase in its labor costs as a
result of any new labor agreements or any cessation or disruption of
operations due to any strike or work action could be particularly damaging to
the Company. The Company believes that the status of its employees as
substantial stockholders and participants in corporate governance and the
Company's efforts to involve employees in developing and achieving the
Company's goals will result in continued dedication to the efforts to improve
the Company's financial and operational performance.
As a result of application of fresh start reporting in August of 1995,
substantial values were assigned to routes, gates and slots ($458.4 million)
and reorganization value in excess of amounts allocable to identifiable
assets ($839.1 million). The Company has evaluated its future cash flows
and, notwithstanding its substantial operating losses in recent periods,
expects that the carrying value of the intangibles at December 31, 1997 will
be recovered. However, the achievement of such improved future operating
results and cash flows are subject to considerable uncertainties. In future
periods
F-11
<PAGE> 61
these intangibles will be evaluated for recoverability based upon estimated
future cash flows. If expectations are not substantially achieved, charges
to future operations for impairment of those assets may be required and such
charges could be material.
The Company has no unused credit lines and must satisfy all of its
working capital and capital expenditure requirements from cash provided by
operating activities, from external capital sources or from the sale of
assets. As a result of the financings consummated in the fourth quarter of
1997 and the repayment of certain debt in connection therewith, certain
assets were released from collateral liens and are currently unencumbered.
Further pledging of these unencumbered assets, however, may be limited by
negative pledge restrictions in outstanding indebtedness. Substantially all of
TWA's other strategic assets have been pledged to secure various issues of
outstanding indebtedness of the Company. To the extent that the pledged assets
are sold, the applicable financing agreements generally require the sale
proceeds to be applied to repay the corresponding indebtedness. The Company's
ability to improve its financial position and meet its financial obligations
will depend upon a variety of factors including: significantly improved
operating results, favorable domestic and international airfare pricing
environments, absence of adverse general economic conditions, more effective
operating cost controls and efficiencies, and the Company's ability to attract
new capital and maintain adequate liquidity. No assurance can be given that
the Company will be successful in generating the operating results or
attracting new capital required for future viability.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows, and results of
operations are as follows:
(a) Description of Business: TWA is one of the major airlines in the
United States serving many of the principal domestic and transatlantic
destinations. TWA's principal domestic routes include service to and
from its St. Louis and New York-JFK hubs and between other cities in
the U.S., both nonstop and through St. Louis. TWA's domestic routes
also provide connections with its international service to and from
U.S. cities and certain major cities in Europe and the Middle East
(see Note 21).
The airline industry is highly competitive and the factors
affecting competition are subject to rapid change. Many of the
Company's competitors are larger and have significantly greater
financial resources. In addition, several carriers have introduced or
have announced plans to introduce low-cost, short-haul service, which
may result in increased competition to the Company. Internationally,
TWA competes in several "limited entry" markets in which, as a result
of governmental regulations and agreements with foreign governments,
TWA has traditionally competed with a limited number of carriers.
Additionally, certain of the Company's major competitors have
established or announced plans to establish alliances with one or more
foreign or domestic carriers to expand their international operations
and increase the domestic market presence. No assurance can be given
that TWA will continue to have the advantage of all of the "limited
entry" markets in which it currently operates or that it will not face
substantial additional competition.
Historically, the airline industry has experienced substantial
volatility in profitability as a result of, among other factors,
general economic conditions, competitive pricing initiatives, the
overall level of capacity operated in the industry and fuel prices.
TWA continues to be highly leveraged and has and will continue to have
significant debt service obligations. TWA presently has no unused
credit lines and most of TWA's strategic assets have been pledged to
secure indebtedness of the Company.
F-12
<PAGE> 62
(b) Fresh Start Reporting: Financial accounting during a Chapter 11
proceeding is prescribed in "Statement of Position 90-7 of the
American Institute of Certified Public Accountants", titled "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), which TWA adopted effective June 30, 1995. The
emergence from the 1995 Chapter 11 proceeding (the "'95
Reorganization") on August 23, 1995 (the "'95 Effective Date"),
resulted in the creation of new reporting entities without any
accumulated deficit and with the Company's assets and liabilities
restated to their estimated fair values (also see Note 19-Fresh Start
Reporting). Because of the application of fresh start reporting, the
financial statements for periods after reorganization are not
comparable in all respects to the financial statements for periods
prior to the '95 Reorganization.
For periods during the Chapter 11 proceedings, prepetition liabilities
which were unsecured or estimated to be undersecured were classified as
"Liabilities Subject to Compromise in the Chapter 11 Reorganization
Proceedings." The accrual of interest on such liabilities was
discontinued for the period from June 30, 1995 to the '95 Effective Date.
(c) Consolidation: The consolidated financial statements include the
accounts of TWA and its subsidiaries. All significant inter-company
transactions have been eliminated. The results of Worldspan, L.P.
("Worldspan"), a 25% owned affiliate are recorded under the equity
method and are included in the Statements of Consolidated Operations
in Other Charges (Credits). Certain amounts previously reported have
been reclassified to conform with revised classifications.
(d) Property and Depreciation: Property and equipment owned are depreciated
to residual values over their estimated useful service lives on the
straight-line method. Property held under capital leases is amortized
on the straight-line method over its estimated useful life, limited
generally by the lease period. Estimated remaining useful service
lives and residual values are reviewed periodically for reasonableness
and any necessary change is effected at the beginning of the
accounting period in which the revision is adopted. In connection
with the application of fresh start reporting, no significant changes
in the estimated useful lives of assets have been made.
Estimated useful service lives in effect for the purpose of
computing the provision for depreciation, were:
Flight equipment (aircraft and engines, including related spares)
-- 16 to 30 years, varying by aircraft fleet type
Buildings -- 20 to 50 years
Other equipment -- 3 to 20 years
Leasehold improvements -- Estimated useful life limited by the
lease period
Maintenance and repairs, including periodic aircraft overhauls, are
expensed in the year incurred; major renewals and betterments of
equipment and facilities are capitalized and depreciated over the
remaining life of the asset.
F-13
<PAGE> 63
(e) Intangible Assets: Route authorities are amortized on a straight line
basis over 30 years, gates over the term of the related leases and
slots over 20 years. Routes, gates and slots consist of the following
amounts at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Routes $248,100 $248,100
Gates 83,649 86,649
Slots 95,800 95,800
-------- --------
427,549 430,549
Accumulated Amortization 49,858 28,890
-------- --------
$377,691 $401,659
======== ========
</TABLE>
The reorganization value in excess of amounts allocable to identifiable
assets is being amortized over a twenty year period on the
straight-line method. Accumulated amortization at December 31, 1997
and 1996 was $97,891,000 and $55,937,000, respectively.
When facts and circumstances suggest that intangible and other long-
term assets may be impaired, the Company evaluates their
recoverability based upon estimated undiscounted future cash flows
over the remaining estimated useful lives. The amount of impairment,
if any, is measured based on projected discounted future operating
cash flows.
(f) Foreign Exchange: Foreign currency and amounts receivable and payable
in foreign currencies are translated into U.S. dollars at current
exchange rates on the date of the financial statements. Revenue and
expense transactions are translated at average rates of exchange in a
manner that produces approximately the same dollar amounts that would
have resulted had the underlying transactions been translated into
dollars on the dates they occurred. Exchange gains and losses are
included in net income for the period in which the exchange rate
changes.
(g) Inventories: Inventories, valued at standard cost, which approximates
actual average unit cost, consist primarily of expendable spare parts
used for the maintenance and repair of flight equipment, plus aircraft
fuel and other operating supplies. A provision for obsolescence of
spare parts is accrued at annual rates which will provide an allowance
such that the unused inventory, at the retirement date of the related
aircraft fleet, is reflected at the lower of cost or estimated net
realizable value.
(h) Passenger Revenue Recognition: Passenger ticket sales are recognized as
revenue when the transportation service is rendered. At the time of
sale a current liability for advance ticket sales is established and
subsequently is eliminated either through carriage of the passenger by
TWA, through billing from another carrier that renders the service, or
by refund to the passenger.
Under TWA's "Frequent Flight Bonus Program" ("FFB"), frequent travelers
may accumulate certain defined unit mileage credits which entitle them
to a choice of various awards, including certain free air
transportation on TWA at a future date. When the free travel award
level is achieved by a frequent traveler, a liability is accrued and
TWA's operating expense is charged for the estimated incremental cost
which will be incurred by TWA upon the future redemption of the free
travel awarded.
Pursuant to the 1995 Restructuring, TWA issued 600,000 ticket vouchers,
each having a face value of $50, which may be used for a discount of
up to 50% off the cost of a ticket for transportation on TWA.
Concurrently, TWA entered into an agreement, as amended, to
F-14
<PAGE> 64
purchase for cash from a third party any ticket vouchers acquired by
the stand-by purchaser. The ticket vouchers were initially recorded
as a liability at their estimated fair value, approximately $26.2
million. The liability will be relieved in future periods as vouchers
are redeemed for cash or will be reflected as revenue when the
transportation is provided for tickets purchased with vouchers.
Approximately 131,000 and 180,000 vouchers were outstanding at
December 31, 1997 and 1996, respectively.
(i) Interest Capitalized: Interest cost associated with funds expended for
the acquisition of qualifying assets is capitalized. Interest
capitalized was $4,784,000 in 1997 and $5,463,000 in 1996. There was
no interest capitalized during 1995.
(j) Income Taxes: TWA accounts for income taxes based on Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". This statement requires the use of the liability
method to record the deferred income tax consequences of differences
between the financial reporting and income tax bases of assets and
liabilities.
(k) Postretirement Benefits Other Than Pensions: TWA accounts for
postretirement benefits other than pensions based on SFAS No. 106
which requires that the expected cost of providing such benefits be
accrued over the years that the employee renders service, in a manner
similar to the accounting for pension benefits.
(l) Deferred Credit-Aircraft Operating Leases: The present value of the
excess of contractual rents due under aircraft operating leases over
the fair rentals for such aircraft were recorded as deferred credits
as part of the application of fresh start reporting. The deferred
credit will be increased through the accrual of interest expense and
reduced through a reduction in operating lease rentals over the terms
of the respective aircraft leases. At December 31, 1997 and 1996, the
unamortized balances of the deferred credits were $23,154,000 and
$31,408,000 respectively.
(m) Environmental Contingencies: TWA is subject to numerous environmental
laws and regulations and is subject to liabilities and compliance
costs arising from its past and current handling, processing,
recycling, storing and disposing of hazardous substances and hazardous
wastes. It is TWA's policy to accrue environmental remediation costs
when it is probable that a liability has been incurred and an amount
can be reasonably estimated. As potential environmental liabilities
are identified and assessments and remediation proceed, these accruals
are reviewed periodically and adjusted, if necessary, as additional
information becomes available. The accruals for these liabilities can
significantly change due to factors such as the availability of
additional information on the nature or extent of the contamination,
methods and costs of required remediation and other actions by
governmental agencies. Costs of future expenditures for environmental
remediation obligations are not discounted to their present value.
(n) Mandatorily Redeemable 12% Preferred Stock: The Mandatorily Redeemable
12% Preferred Stock issued in connection with the 1995 Reorganization
was initially recorded at its estimated fair value. Until its
redemption in April 1996, the carrying amount was being increased by
amortization of the difference between the redemption value and the
carrying amount, using the interest method. Such amounts were
recorded as additional preferred stock dividend requirements. A
special dividend requirement of approximately $20.0 million was
recorded in 1996 to reflect the excess of the early redemption price
over the carrying value of the Mandatorily Redeemable 12% Preferred
Stock.
F-15
<PAGE> 65
(o) Earnings (Loss) Per Share: In 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS No. 128"), which specifies the
computation, presentation, and disclosure requirements for earnings
per share ("EPS"). SFAS No. 128 replaces the presentation of primary
EPS with a presentation of basic EPS and fully diluted EPS with
diluted EPS. Basic EPS, unlike primary EPS, excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. As a result of
the losses reported in the periods presented, the adoption of SFAS No.
128 did not impact previously reported earnings per share data.
In computing the loss applicable to common shares for 1997 and 1996 and
the four months ended December 31, 1995, the net loss has been
increased by dividend requirements on the 9 1/4% Cumulative
Convertible Exchangeable Preferred Stock from the date of issuance in
December 1997, the Mandatorily Redeemable 12% Preferred Stock
(including amortization of the difference between the carrying amount
and the redemption value and the special dividend requirement related
to the early redemption in 1996) and on the 8% Cumulative Convertible
Exchangeable Preferred Stock from the date of issuance in March 1996.
In computing the related net loss per share, the loss applicable to
common shares has been divided by the aggregate average number of
outstanding shares of Common Stock (47.1 million in 1997, 38.5 million
in 1996 and 28.0 million in 1995) and Employee Preferred Stock (6.4
million in 1997, 5.7 million in 1996 and 5.3 million in 1995) which,
with the exception of certain special voting rights, is the functional
equivalent of Common Stock. Diluted EPS has not been presented as the
impact of stock options, warrants, conversion of preferred stock or
potential issuances of additional Employee Preferred Stock would have
been anti-dilutive. For a description of securities which represent
potential common shares and which could materially dilute basic EPS in
the future, see Notes 11, 12, & 13. Earnings per share of the
predecessor company are not presented as the amounts are not
meaningful.
(p) Concentration of Credit Risk: TWA does not believe it is subject to any
significant concentration of credit risk. At December 31, 1997 most
of the Company's receivables were related to tickets sold to
individual passengers through the use of major credit cards (40%) or
to tickets sold by other airlines (14%) and used by passengers on TWA.
These receivables are short-term, generally being settled shortly
after sale or in the month following usage. Bad debt losses, which
have been minimal in the past, have been considered in establishing
allowances for doubtful accounts.
(q) Use of Estimates: Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
(r) Stock-Based Compensation: TWA applies APB Opinion No. 25 and related
interpretations in accounting for its plans. This opinion allows for
stock-based employee compensation to be recognized based on the
intrinsic value.
(s) Presentation: Certain prior period amounts have been reclassified to
conform with current year presentation.
F-16
<PAGE> 66
(t) New Accounting Standards: The FASB recently issued SFAS No. 130,
Reporting Comprehensive Income, SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, and SFAS No. 132,
Employers' Disclosure about Pensions and Other Postretirement
Benefits. SFAS No. 130 provides for the reporting and presentation of
comprehensive income and its components. SFAS No. 131 establishes
standards for defining operating segments and reporting certain
information about such segments. SFAS No. 132 revised disclosure
requirements relative to pension and other postretirement benefits.
Since these statements only impact how financial information is
disclosed in interim and annual periods, the adoption of these
standards in 1998 will not impact the Company's financial condition or
results of operations.
3. CHAPTER 11 REORGANIZATIONS:
On January 31, 1992, TWA commenced a reorganization case (the "'93
Reorganization") by filing a voluntary petition for relief under Chapter 11,
Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the
U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
TWA's subsidiary companies did not file for Chapter 11 protection. On August
12, 1993 the Bankruptcy Court entered an order confirming the '93
Reorganization, which was jointly proposed by TWA and the Official Unsecured
Creditors' Committee. The '93 Reorganization became effective on November 3,
1993 (the "'93 Effective Date").
Pursuant to the '93 Reorganization Plan, on the '93 Effective Date: (i)
all prepetition interests in TWA (including TWA's previously existing
preferred stock, preference stock and common stock) were cancelled without
any consideration being distributed on account of those interests; (ii) nine
million shares of newly authorized TWA common stock, representing 45% of
TWA's then authorized common stock, were issued to trusts established for the
benefit of TWA's domestic unionized and domestic non-unionized and management
employees (the "Employee Stock Trusts") in exchange for certain wage, benefit
and claim concessions granted pursuant to certain agreements entered into by
TWA with its domestic unionized and domestic non-unionized and management
employees (the "'92 Labor Agreements"); (iii) 11 million shares of newly
authorized common stock, representing 55% of TWA's authorized common stock,
were issued to a voting trust established on the '93 Effective Date for the
benefit of certain creditors of TWA in partial satisfaction and discharge of
their claims, which trust issued 11 million Voting Trust Certificates
("VTCs") evidencing the rights of the VTC holders in the Voting Trust; (iv)
12.5 million shares of newly authorized preferred stock were issued for the
benefit of certain creditors of TWA in partial satisfaction and discharge of
their claims; (v) new five year notes (the "10% Senior Secured Notes"), new
seven year notes (the "8% Senior Secured Notes"), new eight year, 8% secured
notes (the "IAM Back Pay Notes"), new equipment trust certificate notes (the
"11% ETC Notes") and Aircraft Financing Secured Notes with varying interest
rates and maturity dates (the "Aircraft Financing Notes"), the aggregate
principal amount of which was approximately $730.6 million, were issued to
certain creditors of TWA in full satisfaction and discharge of their claims;
(vi) all claims except for certain claims to be reinstated under the '93
Reorganization Plan were discharged; (vii) certain contingent and/or
unliquidated claims were settled and (viii) executory contracts and unexpired
leases to which TWA was a party were assumed or rejected, in each case on the
terms and subject to the conditions set forth in the '93 Reorganization.
Notwithstanding the reductions in levels of debt and obligations
achieved through the '93 Reorganization, TWA's operating results and cash
flows did not meet the projected levels upon which the '93 Reorganization
Plan was formulated, and in 1994 it was determined that a recapitalization of
the Company was needed.
F-17
<PAGE> 67
In the second quarter of 1995, the Company solicited and received
sufficient acceptances to effect the proposed "prepackaged" plan of
bankruptcy. Therefore, on June 30, 1995, the Company filed a prepackaged
Chapter 11 plan of reorganization, which with certain modifications was
confirmed by the United States Bankruptcy Court for the Eastern District of
Missouri (the "Bankruptcy Court") on August 4, 1995. On August 23, 1995,
approximately eight weeks after filing the prepackaged Chapter 11 plan, the
'95 Reorganization became effective and the Company emerged from the
protection of this second Chapter 11 proceeding. In connection with the '95
Reorganization, the Company (i) exchanged certain of its then outstanding
debt securities for a combination of newly issued Mandatorily Redeemable 12%
Preferred Stock, Common Stock, warrants to purchase Common Stock and debt
securities, (ii) converted the then outstanding preferred stock of the
Company to shares of Common Stock, warrants and equity rights, (iii) obtained
certain short-term lease payment and conditional sale indebtedness deferrals
amounting to approximately $91 million and other modifications to certain
aircraft leases and (iv) obtained an extension of the Company's approximately
$190 million principal amount of indebtedness to certain entities controlled
by Mr. Carl C. Icahn (the "Icahn Loans"). The Company also (i) effected a
reverse stock split of its then outstanding common stock for Common Stock,
(ii) completed an equity rights offering, (iii) distributed certain warrants
to its then current equity holders and (iv) implemented certain amendments to
the Company's Certificate of Incorporation.
In connection with and as a precondition to the '95 Reorganization, in
August and September of 1994, the Company entered into new three-year labor
agreements (the "'94 Labor Agreements"), amending existing collective
bargaining agreements with the three labor unions representing approximately
84% of the Company's employees, the IAM, ALPA and IFFA. The '94 Labor
Agreements provided for waiver of certain contractually agreed wage
concessions, modifications to work rules and the deletion of certain
provisions of the then existing labor agreements, including eliminating so
called snapbacks, i.e., the automatic restoration of the wage reductions
granted in such agreements upon their expiration. During 1994 and 1995, the
Company also implemented a number of similar saving initiatives with respect
to domestic non-union and management employees, primarily through reducing
head count, altering benefit packages, and eliminating certain planned
restorations of wage reductions.
On June 14, 1995, as one of the transactions contemplated by the
extension of the Icahn Loans, TWA and an entity affiliated with Mr. Icahn,
Karabu Corporation ("Karabu"), entered into an agreement for the sale of
tickets (the "Ticket Agreement"). There are two categories of tickets under
the Karabu Ticket Program: (1) "Domestic Consolidator Tickets," which are
subject to a cap of $610 million, based on the full retail price of the
tickets ($120 million in the first fifteen months and $70 million per year
for seven consecutive years through the term of the Ticket Agreement) and (2)
"System Tickets," which are not subject to any cap throughout the term of the
Ticket Agreement. The Ticket Agreement provides for the sale of tickets to
Karabu at prices significantly lower than the full retail price.
Ticket sales under the Ticket Program, which commenced in September
1995, were $236.1 million in 1997, $139.7 million in 1996 and $16.0 million
in 1995 at full published fares. The aggregate net sales, after applicable
discounts under the Ticket Agreement, were $129.9 million in 1997, $76.9
million in 1996 and $8.8 million in 1995. Of these amounts, $116.0 million,
$71.5 million and $4.4 million is included as passenger revenues for 1997,
1996 and the four months ended December 31, 1995, respectively, as the
related transportation had been provided. Substantially all ticket sales
under the Ticket Program to date have been "System Tickets".
The purchase price for the tickets purchased by Karabu are required to
either, at Karabu's option and with certain restrictions, be retained by
Karabu and the amount so retained shall be credited
F-18
<PAGE> 68
as prepayments against the outstanding balance of the Icahn Loans, or be paid
over to the settlement trust established in connection with the '93
Reorganization for TWA's account as prepayments on the PBGC Notes. Through
December 31, 1997, approximately $118.6 million of such proceeds had been
applied to the principal balance of the Icahn Loans, and $76.7 million had
been applied to the PBGC Notes, which resulted in an $11.5 million
extraordinary charge related to the early extinguishment of PBGC Notes ($9.9
million in 1997 and $1.6 million in 1996) (See Note 14). On December 30,
1997, TWA completed a $100 million private placement of 9.8% Airline
Receivable Asset Backed Notes due 2001. Proceeds from this financing were
used, in part, to retire the remaining balance of Icahn Loans, including
approximately $71.4 million of principal and $2.7 million in accrued
interest.
Tickets sold by the Company to Karabu pursuant to the Ticket Agreement
are priced at levels intended to approximate current competitive discount
fares available in the airline industry. The Ticket Agreement provides that
no ticket may be included with an origin or destination of St. Louis, nor may
any ticket include flights on other carriers. Tickets purchased by Karabu
pursuant to the Ticket Agreement are required to be at fares specified in the
Ticket Agreement, net to TWA, and exclusive of tax. No commissions will be
paid by TWA for tickets sold under the Ticket Agreement, and TWA believes
that under the applicable provisions of the Ticket Agreement, Karabu may not
market or sell System Tickets through travel agents or directly to the
general public. Karabu, however, has been marketing System Tickets through
travel agents and directly to the general public. TWA has demanded that
Karabu cease doing so and Karabu has stated that is disagrees with the
Company's interpretation concerning sales through travel agents or directly
to the general public. In December 1995, the Company filed a lawsuit against
Karabu, Mr. Icahn and affiliated companies seeking damages and to enjoin
further violations of the Ticket Agreement. Mr. Icahn countered by
threatening to file his own lawsuit and declare a default on the Icahn Loans,
which financing was secured by receivables and certain flight equipment
pledged under one or more security agreements (the "Karabu Security
Agreements"). Mr. Icahn's position was based on a variety of claims related
to his various interpretations of the Karabu Security Agreements as well as
with respect to certain alleged violations of the Ticket Agreement by the
Company. The parties negotiated a series of standstill agreements pursuant
to which TWA's original lawsuit was withdrawn, while the Company and Mr.
Icahn endeavored to negotiate a settlement of their differences and
respective claims. Those negotiations reached an impasse and the Company
re-filed its suit on March 20, 1996 in the St. Louis County Circuit Court.
In response to such lawsuit, Karabu and another Icahn-affiliated company
asserted counterclaims alleging that the Company had breached its obligations
under the Ticket Agreement by, among other things, seeking to restrict Karabu
and Icahn-affiliated companies from selling System Tickets through travel
agents or directly to the general public. If Karabu's interpretation as to
sales of System Tickets through travel agents or directly to the general
public was determined by a court or otherwise to be correct and the Company
did not otherwise take appropriate action to mitigate the effect of such
sales, the Company could suffer significant loss of revenue collected that
could reduce overall passenger yields on a continuing basis during the term
of the Ticket Agreement. The trial of this case was completed on January 7,
1998. A decision regarding this matter is pending.
4. INVESTMENTS:
TWA, through a wholly-owned subsidiary, has a 25% partnership interest
in Worldspan, a joint venture among TWA, Delta Airlines, Inc., Northwest
Airlines, Inc. and ABACUS Distribution Systems PTE Ltd. Worldspan owns,
markets and operates a global computer airline passenger reservation system
on behalf of subscriber travel agents and contracting airlines who pay
booking fees to Worldspan for such reservation service. TWA accounts for its
investment in the partnership on the equity basis. TWA's share of the
combined net earnings (loss) of the partnership was approximately $11,305,000
for the year ended December 31, 1997, $11,919,000 for the year ended December
31, 1996,
F-19
<PAGE> 69
$(11,535,000) for the four months ended December 31, 1995 and $3,607,000 for
the eight months ended August 31, 1995, which is included in Other Charges
(Credits) in TWA's Statements of Consolidated Operations. The excess of
TWA's carrying value for its investment in Worldspan over its share of the
underlying net assets of Worldspan is being amortized over a period of 20
years. At December 31, 1997 and 1996, the unamortized balance of this excess
amounted to approximately $30.1 million and $32.0 million, respectively.
The partnership provides passenger reservations services, communication
facilities and other computer services which are purchased by TWA on a
recurring basis. The aggregate cost of the services purchased from the
partnership, which is included in all other operating expenses in TWA's
Statements of Consolidated Operations, is approximately as follows (amounts
in thousands):
Year Ended December 31, 1997 $48,902
Year Ended December 31, 1996 $54,611
Four Months Ended December 31, 1995 $16,566
Eight Months Ended August 31, 1995 $29,604
Summary financial data for Worldspan is as follows (amounts in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets $220,602 $172,368
Non-current assets 360,728 384,653
-------- --------
Total assets $581,330 $557,021
======== ========
Current liabilities $128,159 $126,774
Non-current liabilities 102,957 125,255
Partners' equity 350,214 304,992
-------- --------
Total liabilities and equity $581,330 $557,021
======== ========
<CAPTION>
Year Ended
December 31,
--------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues $578,340 $548,419 $498,138
Costs and expenses 533,119 500,743 529,852
-------- -------- --------
Net income $ 45,221 $ 47,676 $(31,714)
======== ======== ========
</TABLE>
F-20
<PAGE> 70
5. INCOME TAXES:
Income tax liabilities at December 31, 1997 and 1996, included in other
noncurrent liabilities, consist of the following (in millions):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current taxes $ - $ -
Deferred taxes:
Federal 10.7 10.7
Other income and franchise taxes .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, 1997 and 1996 are as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits, other than pensions $ 199.8 $ 198.5
Pension obligations 51.0 82.3
Employee compensation and other benefits 40.0 36.5
Capital leases, net 58.8 54.3
Net operating loss carryforwards 337.7 247.1
Other, net 77.9 84.0
------- -------
Total deferred tax assets 765.2 702.7
------- -------
Deferred tax liabilities:
Property and spare parts, net (45.0) (34.6)
Routes, gates, and slots, net (149.2) (158.7)
Investment in affiliate (46.1) (42.7)
------- -------
Total deferred tax liabilities (240.3) (236.0)
------- -------
Net deferred tax asset before valuation allowance 524.9 466.7
Deferred tax asset valuation allowance (535.9) (477.7)
------- -------
Net deferred tax liability $ (11.0) $ (11.0)
======= =======
</TABLE>
The valuation allowance arises primarily from the amortization of
intangibles, representing taxable temporary differences, the reversal of
which extends beyond the period in which deductible temporary differences are
expected to reverse.
A summary of the provision (credit) for income taxes is as follows (amounts
in thousands):
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------ ------------
Year Ended Four Months Eight Months
------------------------------ Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current, primarily foreign $527 $450 $1,370 $(96)
Deferred - - - -
---- ---- ------ ----
Total provision (benefit) for
income taxes, net $527 $450 $1,370 $(96)
==== ==== ====== ====
</TABLE>
F-21
<PAGE> 71
Income tax expense for the periods presented below differs from the
amounts which would result from applying the federal statutory tax rate to
pretax income, as follows (amounts in thousands):
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------ ------------
Year Ended Four Months Eight Months
------------------------------ Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income tax benefit at United States
statutory rates $(31,268) $(93,652) $(11,294) $(118,408)
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets 14,684 14,683 4,894 1,976
Meals and entertainment disallowance 4,124 4,257 1,419 2,838
Foreign and state taxes 527 450 1,370 (96)
Net operating loss not benefited
and other items 12,460 74,712 4,981 113,594
-------- -------- -------- ---------
Income tax expense (benefit) $ 527 $ 450 $ 1,370 $ (96)
======== ======== ======== =========
</TABLE>
A provision for income tax on the extraordinary gain from the
extinguishment of debt in the eight months ended August 31, 1995 was not
required as such income is excluded from taxation under the Internal Revenue
Code of 1986, as amended.
In May 1993, TWA and the Internal Revenue Service reached an agreement
(the "IRS Settlement") to settle both: (i) the IRS' proof of claim in the '93
Reorganization in the amount of approximately $1.4 billion covering
prepetition employment and income taxes of TWA, and (ii) the audit of TWA's
federal income tax returns through 1992. Pursuant to the IRS Settlement, TWA
paid $6 million to the IRS through the application of funds owed to TWA by
certain governmental agencies and issued a note in the amount of $19 million
payable in quarterly installments over a six year period (also see Note
8-Debt). As a result of the IRS Settlement, TWA increased its tax basis in
certain of its assets and will be allowed no benefit of any federal net
operating loss or credit carryforward from 1992 or any prior year. Federal
income tax losses incurred by TWA subsequent to 1992 may not be carried back
to pre-1993 years.
The Company estimates that it has tax net operating loss carryforwards
("NOLs") amounting to approximately $855 million at December 31, 1997 expiring
in 2008 through 2012 if not utilized before then to offset taxable income.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and
regulations issued thereunder, imposed limitations on the ability of
corporations to use NOLs if the corporation experiences a more than 50%
change in ownership during certain periods. Changes in ownership in future
periods could substantially restrict the Company's ability to utilize its tax
net operating loss carryforwards. In addition, the tax net operating loss
carryforwards are subject to examination by the IRS and thus are subject to
adjustment or disallowance resulting from any such IRS examination. For
financial reporting purposes, the tax benefits from substantially all of the
tax net operating loss carryforwards will, to the extent realized in future
periods, have no impact on the Company's operating results, but instead be
applied to reduce reorganization value in excessive amounts allocable to
identifiable assets.
6. EMPLOYEE BENEFIT PLANS:
Substantially all of TWA's employees are covered by noncontributory
defined benefit retirement plans that were frozen on January 1, 1993. While
many of TWA's employees continue participation in these plans, they have not
accrued any additional benefits since the date the plans were frozen.
Employees hired after the freeze are not entitled to participate in these
defined benefit retirement plans. TWA's policy has been to fund the defined
benefit plans in amounts necessary for compliance with the funding standards
established by the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
F-22
<PAGE> 72
The retirement plans for Pilots, Flight Attendants and Dispatchers
provide benefits determined from career average earnings, with Pilots having
minimum benefits after ten years of service. Employees (other than Passenger
Service Employees) represented by the IAM earn retirement plan benefits of
stated amounts for each year of service. The Retirement Plan for U.S.
Noncontract Employees (including Passenger Service Employees) provides
pension benefits that are based on the employee's compensation during the
last five years prior to retirement, with compensation subsequent to 1988
frozen at the 1988 pay level. Foreign plans provide benefits that meet or
exceed local requirements.
Normal retirement is age 60 for Pilots and Flight Attendants, and age
65 for nonflight personnel. The age at which employees can receive
supplemental benefits for early retirement varies by labor group, but ranges
from age 45 to age 64.
As noted above, in January 1993, TWA's defined benefit plans covering
domestic employees (the "Pension Plans") were frozen and Pichin Corporation,
a Delaware corporation formed by the Icahn Entities, assumed sponsorship of
the Pension Plans and is now responsible for management and control of the
Pension Plans. Pursuant to an agreement (the "Comprehensive Settlement
Agreement") among the Company, the Icahn Entities, the Pension Benefit
Guarantee Corporation (the "PBGC") and unions representing TWA employees, TWA
retains only specified obligations and liabilities in respect of the Pension
Plans, which include (i) payment obligations under the PBGC Notes, and (ii)
the obligation to continue to act as the benefits administrator responsible
for, among other things, determining and administering the payment of Pension
Plan benefits (also see Note 8-Debt).
Pichin Corporation is obligated to make the required minimum funding
payments to each of the Pension Plans, subject to reduction for any payments
made under the PBGC Notes. The PBGC may not terminate the Pension Plans,
except under section 4042(a)(2) of ERISA or at the request of Pichin
Corporation, so long as the Icahn Entities and Pichin Corporation have
complied with all terms of the Comprehensive Settlement Agreement relating to
the PBGC. Upon the occurrence of certain significant events (as defined)
including, but not limited to, a sale of substantially all of TWA's assets, a
merger involving TWA or a liquidation under Chapter 7 under the Bankruptcy
Code, and at the request of Pichin Corporation, the Pension Plans will be
terminated. After such a termination, the liability of Pichin Corporation
and all members of its controlled group will be limited to an obligation to
make annual payments of $30 million to the PBGC for a period of eight years.
Mr. Icahn has advised TWA that Pichin Corporation is entitled to terminate
the Pension Plans in a non-standard termination at any time after January 1,
1995.
In connection with the Comprehensive Settlement Agreement, Mr. Icahn
and each of the Icahn Entities surrendered all of the equity and debt
securities of TWA and its affiliates owned beneficially or of record by them.
Pursuant to the Comprehensive Settlement Agreement, each of the parties to
the agreement mutually released the various claims of the other parties to
the agreement.
The net periodic pension expense recorded for TWA's foreign defined
benefit retirement plans is presented below (amounts in thousands).
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------ ------------
Year Ended Four Months Eight Months
------------------------------- Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost $ 875 $ 577 $ 274 $ 493
Interest cost 4,652 992 583 1,040
Actual return on assets (4,592) (505) (100) (200)
Net amortization and deferral (289) (355) - -
------- ----- ----- ------
Net pension expense $ 646 $ 709 $ 757 $1,333
======= ===== ===== ======
</TABLE>
F-23
<PAGE> 73
Actuarial assumptions used for determining pension costs were:
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------ ------------
Year Ended Four Months Eight Months
------------------------------- Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Discount rate for interest cost 7.50% 7.50% 7.00% 8.50%
Rate of increase in future
compensation levels 5.50% 5.50% 5.50% 5.50%
Expected long-term rate of
return on plan assets 9.00% 9.00% 11.00% 11.00%
</TABLE>
The funded status (with benefit obligations determined using the
current estimated discount rate of 7.25% and 7.50% at December 31, 1997 and
1996, respectively) and amounts recognized in the Consolidated Balance Sheets
at December 31, 1997 and 1996, for defined benefit plans covering foreign
employees, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996
------------------------------ -------------------------------
Plans in Which Plans in Which
------------------------------ -------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $47,979 $12,108 $44,200 $ 7,153
Nonvested benefit obligation - 431 - 1,198
------- ------- ------- -------
Accumulated benefit obligation 47,979 12,539 44,200 8,351
Projected benefit obligation more
than accumulated benefit obligation 4,273 8,832 3,983 5,882
------- ------- ------- -------
Projected benefit obligation 52,252 21,371 48,183 14,233
Plan assets at fair value<Fa> 54,366 - 50,703 -
------- ------- ------- -------
Projected benefit obligation more (less)
than plan assets at fair value (2,114) 21,371 (2,520) 14,233
Unrecognized net gain (loss) 6,578 4,176 7,307 11,696
------- ------- ------- -------
Pension liability (asset) recognized in
Consolidated Balance Sheets $ 4,464 $25,547 $ 4,787 $25,929
======= ======= ======= =======
<FN>
<Fa> Plan assets are invested in cash equivalents, international stocks,
fixed income securities and real estate.
<Fb> 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.
</TABLE>
TWA has several defined contribution plans covering most of its
employees. Total pension expense for these plans was $53.4 million, $58.0
million, $14.1 million and $26.8 million for the years ended December 31,
1997, December 31, 1996, the four months ended December 31, 1995 and the
eight months ended August 31, 1995, respectively. Such defined contribution
plans include: (a) trust plans established pursuant to collective bargaining
agreements with certain employee groups providing for defined Company
contributions generally determined as a percentage, ranging from 2% to 11%,
of pay; and (b) retirement savings plan for Noncontract Employees to which
the Company contributes amounts
F-24
<PAGE> 74
equal to 25% of voluntary employee after-tax contributions up to a maximum of
10% of the employee's pay. Pursuant to the '92 Labor Agreements, Company
contributions were suspended for certain defined contribution plans for the
period September 1, 1992 through August 31, 1995. Such suspension has been
extended through August 31, 1997. In connection with the Comprehensive
Settlement Agreement, TWA agreed to make contributions to defined
contribution plans aggregating 2% of eligible wages for 1993 through 1995,
and 3.3% thereafter. The Company made the 1994 contribution payment on June
20, 1995. Commencing on July 1, 1995, TWA is required to make such
contributions on a monthly basis.
In addition to providing retirement benefits, TWA provides certain
health care and life insurance benefits for retired employees, their spouses
and qualified dependents. Substantially all employees may become eligible for
these benefits if they reach specific retirement age criteria while still
actively employed by TWA. SFAS No. 106 requires that the expected cost of
providing postretirement benefits other than pensions be accrued over the
years that the employee renders service, in a manner similar to the
accounting for pension benefits.
The following table sets forth a reconciliation of the accrued
postretirement benefit cost as of December 31, 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Actives fully eligible $184 $163
Other actives 130 144
Retirees 215 225
---- ----
Total APBO 529 532
Unrecognized cumulative loss (12) (29)
---- ----
Accrued postretirement benefit cost $517 $503
==== ====
</TABLE>
The components of net periodic postretirement benefit cost are as
follows (in millions):
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------------------- ----------
Year Ended Four Months Eight Months
------------------------------- Ended Ended
December 31, December 31, December 31, August 31,
1997 1996 1995 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Service cost $ 9.9 $10.0 $ 3.0 $ 5.4
Interest cost 39.0 34.5 11.0 25.5
----- ----- ----- -----
Total $48.9 $45.4 $14.0 $30.9
===== ===== ===== =====
</TABLE>
The discount rate used to determine the APBO was 7.25% at December 31,
1997 and 7.50% at December 31, 1996. The discount rate used to determine net
periodic postretirement benefit costs was 7.50% for the year ended December
31, 1997, 7.0% for the year ended December 31, 1996, 7.0% for the four months
ended December 31, 1995 and 8.5% for the eight months ended August 31, 1995.
The assumed health care cost trend rate used in measuring the APBO was 8.0%
in 1997 declining by 1% per year to an ultimate rate of 5%. If the assumed
health care cost trend rate was increased by 1 percentage point, the APBO at
December 31, 1997 would be increased by approximately 6.5% and 1997 periodic
postretirement benefit cost would increase approximately 4.0%.
F-25
<PAGE> 75
7. CONTINGENCIES:
On July 17, 1996, TWA Flight 800 crashed shortly after departure from
JFK en route to Paris, France. There were no survivors among the 230
passengers and crew members aboard the Boeing 747 aircraft. The Company is
cooperating fully with all federal, state and local regulatory and
investigatory agencies to ascertain the cause of the crash, which to date has
not been determined. The National Transportation Safety Board held hearings
relating to the crash in December 1997 and is continuing its investigation.
While TWA is currently a defendant in a number of lawsuits relating to the
crash, it is unable to predict the amount of claims which may ultimately be
made against the Company or how those claims might be resolved. TWA
maintains substantial insurance coverage, and at this time management has no
reason to believe that such insurance coverage will not be sufficient to
cover the claims arising from the crash. Therefore, TWA believes that the
resolution of such claims will not have a material adverse effect on its
financial condition or results of operations. The Company is unable to
identify or predict the extent of any adverse effect on its revenues, yields,
or results of operations which has resulted, or may result, from the public
perception of the crash.
On October 22, 1991, a judgment in the amount of $12,336,127 was
entered against TWA in an action in the United States District Court for the
Southern District of New York by Travellers International A.G. and its parent
company, Windsor, Inc. (collectively, "Travellers"). The action commenced in
1987, as subsequently amended, sought damages from TWA in excess of $60
million as a result of TWA's alleged breach of its contract with Travellers
for the planning and operation of Getaway Vacations. In order to obtain a
stay of judgment pending appeal, TWA posted a cash undertaking of
$13,693,101. In connection with the '93 Reorganization, TWA sought to have
the matter ultimately determined by the Bankruptcy Court and claimed that the
cash undertaking constituted a preference payment. Following prolonged
litigation with respect to jurisdiction, the United States Supreme Court
determined that the entire matter should be addressed by the bankruptcy
court, and in February 1994, the bankruptcy court determined the matter in a
manner favorable to TWA. Upon appeal, the District Court affirmed in part
and reversed in part the bankruptcy court's decision. On January 20, 1998,
the Court of Appeals for the Third Circuit reversed the District Court and
affirmed the findings of the Bankruptcy Court. Travellers sought
reconsideration by the Third Circuit which reconsideration was denied.
Travellers has advised they will appeal this decision. TWA has agreed that
amounts received pursuant to this proceeding will be applied to reduce the
PBGC Notes or contributed to the settlement trust established for defined
benefit pension plans covering certain TWA employees.
TWA is subject to numerous environmental laws and regulations
administered by various state and federal agencies. Although the Company
believes adequate reserves have been provided for all known environmental
contingencies, it is possible that additional reserves might be required in
the future which could have a material effect on the results of operations or
financial condition of the Company. However, the Company believes that the
ultimate resolution of known environmental contingencies should not have a
material adverse effect on its financial position or results of operations
based on the Company's knowledge of similar environmental sites.
Since May 1991, TWA's employees in Israel have claimed that the Company
should be required to collateralize its contingent payment of termination
indemnities. This matter deals only with collateralization of a contingent
payment obligation. The employees have asserted that the amount necessary to
collateralize the contingent payment of termination indemnities could be as
much as $25 million. The Company denies any obligation to collateralize and
asserts that any obligation to collateralize any termination indemnity is not
a current obligation.
In February 1995, a number of actions were commenced in various federal
district courts against TWA and six other major airlines, alleging that such
companies conspired and agreed to fix, lower and maintain travel agent
commissions on the sale of tickets for domestic air travel in violation of
the United States and, in certain instances, state, antitrust laws. On May
9, 1995, TWA announced
F-26
<PAGE> 76
settlement, subject to court approval, of the referenced actions. A final
order has not yet been entered; however, an interim order approving the
settlement has been entered.
On November 9, 1995, ValuJet Air Lines, Inc., now known as AirTran
Airlines, Inc. ("ValuJet") instituted a lawsuit against TWA and Delta in the
United States District Court for the Northern District of Georgia, alleging
breach of contract and violations of certain antitrust laws with respect to
the Company's lease of certain takeoff and landing slots at LaGuardia
International Airport in New York. On November 17, 1995, the court denied
ValuJet's motion to temporarily enjoin the lease transaction and the Company
and Delta consummated the lease of the slots. On July 12, 1996, the Federal
Court in Atlanta granted summary judgment in TWA's favor in the ValuJet
litigation on the claims and counts raised in the ValuJet amended complaint.
The order granting summary judgment to TWA was not a final order and was not
directly appealable due to an outstanding claim against Delta. ValuJet has
settled its claim with Delta and appealed the grant of summary judgment to
the 11th Circuit Court of Appeals. Settlement discussions are ongoing. The
Company does not expect that the resolution of this matter will have a
material adverse effect on its results of operations or financial position.
In addition, based on certain written grievances or complaints filed by
ValuJet, the Company was informed that the United States Department of
Justice ("DOJ"), Antitrust Division, was investigating the circumstances of
the slot lease of certain takeoff and landing slots to Delta at LaGuardia to
determine whether an antitrust violation has occurred. During the course of
its investigation, the DOJ was informed of the summary judgment described
above. Since the date of the judgment, TWA is unaware of whether the DOJ has
undertaken further investigative efforts, the status of the investigation or
any future plans of the DOJ or other regulatory bodies with respect to the
ValuJet allegations. While TWA believes the summary judgment should be
persuasive to the various regulatory bodies petitioned by ValuJet, it will
cooperate with any further investigations.
On September 6, 1995 TWA announced that the operations of its wholly
owned subsidiary, Trans World Express, Inc. ("TWE"), would be discontinued on
November 6, 1995. TWA entered into an agreement with an unaffiliated entity,
Trans States Airlines, Inc., to provide feeder service into TWA's JFK hub,
which commenced on November 7, 1995. TWA does not believe that the
liquidation of TWE has had or will have a material adverse impact on the
financial position or results of operations of TWA.
Pursuant to the '92 Labor Agreements, the Company agreed to pay to
employees represented by the IAM a cash bonus for the amount by which
overtime incurred by the IAM from September 1992 through August 1995 was
reduced below specified thresholds. This amount was to be offset by the
amount by which medical savings during the period for the same employees did
not meet certain specified levels of savings. The obligation is payable in
three equal annual installments beginning in 1998. The Company has estimated
the net overtime bonus owed to the IAM to be approximately $26.3 million and
has reflected this amount as a noncurrent liability in the accompanying
balance sheets. Such amount reflects a reduction of approximately $10.0
million pursuant to an agreement to reduce proportionately the obligation
based upon the size of the reduction of indebtedness achieved by the '95
Reorganization. The IAM, while not providing a calculation of its own, has
disputed the method by which management has computed the net overtime bonus
and has indicated that it believes the amount due to the IAM is much greater
than the amount which has been estimated by management.
In addition, in connection with certain wage scale adjustments afforded
to non-contract employees, employees previously represented by the IFFA have
asserted and won an arbitration ruling with respect to the comparability of
wage concessions made in 1994 that, if sustained, would require that the
Company provide additional compensation to such employees. The Company
estimates that at December 31, 1997 such additional compensation that would
be payable pursuant to the arbitration ruling would be approximately $12.0
million. The Company denies any such obligation and is pursuing an appeal of
the arbitration ruling and a court award affirming the ruling. Effective
September 1, 1997, the Company also reduced the overall compensation and
benefits package for non-contract employees so as to offset, in the Company's
view, any claims by such employees previously represented by IFFA
F-27
<PAGE> 77
for any retroactive or prospective wage increases. As such, no liability has
been recorded by the Company.
In connection with the '95 Reorganization, the Company entered into a
letter agreement with employees represented by ALPA whereby if the Company's
flight schedule, as measured by block hours, does not exceed certain
thresholds, a defined cash payment would be made to ALPA. The defined
thresholds were exceeded during the measurements periods through December 31,
1996 and no amount was therefore owed to ALPA as of that date. A payment of
approximately $2.6 million was due under the agreement on August 14, 1997 for
the period January through June 1997. The Company made this payment in
January 1998. Management estimates that its aggregate obligation for 1997
will be approximately $9.1 million.
The Company is also defending a number of other actions which have
arisen in the ordinary course of business, and are insured or the likely
outcome of which the management of the Company does not believe may be
reasonably be expected to be materially adverse to the Company's financial
condition or results of operations.
8. DEBT:
Substantially all of TWA's assets are subject to liens and security
interests relating to long-term debt and other agreements.
Long-term debt (net of unamortized discounts) outstanding at each
balance sheet date was:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
-------- --------
(Amounts in Thousands)
<S> <C> <C>
9.80% Airline Receivable Asset Backed Notes, Series 1997-1<Fa> $100,000 $ -
12% Senior Secured Notes due 2002<Fb> 43,254 -
11 1/2% Senior Secured Notes due 2004<Fc> 138,360 -
12% Senior Secured Reset Notes due 1998<Fd> - 111,799
8% IAM Backpay Notes<Fe> 13,354 12,090
PBGC Notes<Ff> 141,243 198,672
Icahn Financing Facilities<Fg> - 125,102
Equipment Trust Certificates<Fh> - 8,963
Various Secured Notes, 4.0% to 12.4%, due 1998-2001<Fi> 43,799 75,478
Installment Purchase Agreements, 10.0% to 10.53%, due
1998 - 2003<Fj> 267,199 109,034
Predelivery Financing Agreements<Fk> 3,166 19,862
IRS Deferral Note<Fl> 6,333 8,708
WORLDSPAN Note<Fm> 31,224 31,224
-------- --------
Total long-term debt 787,932 700,932
Less current maturities 51,392 92,447
-------- --------
Long-term debt, less current maturities $736,540 $608,485
======== ========
<FN>
<Fa> In December 1997, TWA agreed to sell certain receivables on an ongoing
basis to Constellation Finance LLC ("Constellation"), a special purpose
limited liability company wholly owned by TWA, and TWA agreed to
service the related receivables. Concurrently, the 9.80% Airline
Receivable Asset Backed Notes, Series 1997-1 were issued in December
1997 by Constellation in the principal amount of $100.0 million.
Interest on the 1997-1 Notes is payable monthly on the 15th day of
each month at the rate of 9.80% per annum. No principal payments are
due under the 1997-1 Notes until January 2001, except under certain
circumstances. The terms of the 1997-1 Notes provide for the
maintenance of certain minimum levels of receivables as defined, or in
the
F-28
<PAGE> 78
event of a deficiency, the deposit of funds with the trustee in the
amount of such deficiency. At December 31, 1997, $9.7 million was
held by the Company Trustee and is included in the accompanying
balance sheet as prepaid expenses and other current assets. This
amount was returned by the Company Trustee to the Company by January
9, 1998 at which time the deficiency was eliminated.
<Fb> The 12% Senior Secured Notes due 2002 were issued in March 1997 in the
principal amount of $50.0 million. The notes are reflected net of the
unamortized discount of $6.7 million at December 31, 1997, to reflect
an effective interest rate of approximately 16.4%. Interest is
payable semi-annually on April 1 and October 1. The notes are not
redeemable prior to their maturity on April 1, 2002. The notes are
secured by (i) TWA's beneficial interest in certain take-off and
landing slots at three high-density, capacity-controlled airports,
(ii) certain ground equipment at certain domestic airports and (iii)
all stock of (a) a subsidiary holding the leasehold interest in a
hangar at Los Angeles International Airport and (b) three subsidiaries
holding leasehold interests in gates and related support space at
certain domestic airports.
<Fc> The 11 1/2% Senior Secured Notes due 2004 were issued in December 1997
in the principal amount of $140.0 million. The notes are reflected
net of the unamortized discount of $1.6 million at December 31, 1997,
to reflect an effective interest rate of approximately 11.7%.
Interest is payable semi-annually in arrears on each June 15 and
December 15, commencing June 15, 1998. The Company purchased $23.1
million of U.S. Government Obligations with a portion of the net
proceeds from the sale of the notes which was deposited in an escrow
account to fund interest payments through June 15, 1999. The notes
are secured by a lien on (i) a pool of aircraft spare parts, (ii)
TWA's beneficial interest in 30 take-off and landing slots at Ronald
Reagan Washington National Airport and (iii) securities pledged to
provide for the first three scheduled interest payments.
<Fd> The 12% Senior Secured Reset Notes due 1998 were scheduled to pay
interest semi-annually, payable either in cash or, as to the first
four interest payments, at the Company's option, in whole or in part,
in Common Stock, beginning August 1, 1995, subject to certain
conditions. The Company elected to pay interest due and payable for
the first two periods and one-half of the interest due and payable
February 1, 1997 (fourth period) in common stock.
During 1996 and continuing through August 1997, the Company consummated
a series of privately negotiated exchanges with a significant holder
of the 12% Senior Secured Reset Notes which resulted in the return to
the Company of approximately $97.1 million principal amount of 12%
Senior Secured Reset Notes and $2.9 million in accrued interest
thereon in exchange for the issuance of approximately 12.2 million
shares of Company Common Stock.
The remaining outstanding notes were retired in December 1997 with a
portion of the proceeds related to the issuance of 11 1/2% Senior
Secured Notes. The principal balance remaining at retirement was
$72.5 million. As a result of the privately negotiated exchanges and
the retirement of the balance of the 12% Senior Secured Reset Notes,
certain slots, equipment, subsidiary stock and spare parts were released
and used to secure the 12% Senior Secured Notes and the 11 1/2% Senior
Secured Notes. A number of aircraft and engines were also released
and remain free and clear.
<Fe> The 8% IAM Backpay Notes have a stated principal amount of $22.0
million at December 31, 1997 and 1996. The notes are reflected net of
the unamortized discount of $8.7 million and $9.9 million at December
31, 1997 and 1996, respectively, which reflects an effective interest
rate of approximately 24.4% at December 31, 1997. The notes mature in
2001 and pay interest semi-annually. The notes are secured by a
subordinate lien on TWA's interest in Worldspan and liens on one JT8D
engine and one JT9D engine. During December 1996, ownership of the
notes was transferred from the Indenture Trustee to current and former
IAM union members who participated in the 1992 labor agreement.
F-29
<PAGE> 79
<Ff> The PBGC Notes have a stated unpaid principal balance of $158.7 million
and $232.9 million at December 31, 1997 and 1996, respectively. The
notes are reflected net of unamortized discounts of $17.4 million and
$34.3 million at December 31, 1997 and 1996, respectively, to reflect
an effective interest rate of approximately 13.0%. Interest on the
PBGC Notes is payable semi-annually at an average stated rate of 8.19%
per annum. Principal payments are due in semi-annual installments
beginning in 1999 through 2003, however, due to certain note
provisions mandatory prepayments are required. Additional prepayments
could arise from the election of Karabu to apply the purchase price
for tickets purchased under the Ticket Agreement to a reduction of the
PBGC Notes (see Note 3). Such prepayments would result in
extraordinary charges related to the early extinguishment of debt.
The Notes are non-recourse notes secured by first liens on TWA's
international routes and TWA's leasehold interest in the Kansas City
maintenance facility and certain fixtures and equipment.
<Fg> The Icahn Financing Facilities include a $75 million Asset Based
Facility and a $125 million Receivables Facility, the remaining
outstanding balance of which was retired in December 1997 in
conjunction with the issuance of the 9.8% Airline Receivable Asset
Backed Notes due 2001. The principal balance of the Icahn Financing
Facilities had been reduced to $71.4 million by the election of Karabu
to apply the purchase price for tickets purchased under the Ticket
Agreement to a reduction of the Icahn Loans. Collateral for the Icahn
Loans included a number of aircraft, engines, and related equipment,
along with substantially all of the Company's receivables, which were
released on retirement of the Facilities on December 30, 1997.
<Fh> The Equipment Trust Certificates paid interest semi-annually at a rate
of 11% per annum and were subject to mandatory redemptions beginning
in April 1994 and continuing until September 1997. The certificates
were retired on March 31, 1997. The certificates were secured by
certain aircraft, engines and other equipment which also secured the
12% Senior Secured Reset Notes.
<Fi> Various Secured Notes represent borrowings to finance the purchase or
lease of certain flight equipment and other property.
<Fj> 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.
<Fk> The Predelivery Financing Agreements represent borrowings from the
engine manufacturer to finance prepayments on the purchase of five
Boeing 757 aircraft. The borrowings mature upon delivery of the
aircraft beginning in July 1998 and continuing through September 1999.
Interest is payable quarterly at a rate of LIBOR plus 3.5%.
<Fl> 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.
<Fm> 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.
F-30
<PAGE> 80
<FN> At December 31, 1997, aggregate principal payments due for long-term
debt for the succeeding five years were as follows:
<CAPTION>
(AMOUNTS IN
YEAR THOUSANDS)
---- -----------
<S> <C>
1998 $ 51,392
1999 126,851
2000 80,973
2001 184,848
2002 88,829
</TABLE>
TWA discontinued, effective June 30, 1995, the accrual of interest on
prepetition debt that was unsecured or estimated to be undersecured through
the '95 Effective Date. Contractual interest expense for the eight months
ended August 31, 1995 was approximately $18.7 million in excess of reported
interest expense.
Certain of the Company's long-term debt agreements contain various
covenants which limit, among other things, the incurrence of additional
indebtedness, the payment of dividends on capital stock, certain investments,
transactions with affiliates, incurrence of liens and sale and leaseback
transactions, and sale of assets. The Company was in compliance with these
covenants as of December 31, 1997.
9. LEASES AND RELATED GUARANTEES:
Sixteen of the aircraft in the Company's fleet at December 31, 1997
were leased under capital leases. The remaining lease periods for these
aircraft range from zero to nine years. The Company has options and/or rights
of first refusal to purchase or re-lease most of such aircraft at market
terms upon termination of the lease. The Company has guaranteed repayment of
certain of the debt issued by the owner/lessor to finance some of the
aircraft under capital lease to the Company; however, the scheduled rental
payments will exceed the principal and interest payments required of the
owner/lessor. Aggregate annual rentals in 1998 will be approximately $36.3
million for the 15 aircraft held under capital leases (one lease expired on
December 31, 1997).
One hundred forty-four of the aircraft in TWA's fleet at December 31,
1997 were leased under operating leases. Other than four leases on a
month-to-month basis, the remaining lease periods range from two months to
eighteen years. Upon expiration of the current leases, TWA has the option to
re-lease most of such aircraft for specific terms and/or rentals with some of
the renewal options being subject to fair market rental rates.
Buildings and facilities leased under capital and operating leases are
primarily for airport terminals and air transportation support facilities.
Leases of equipment, other than flight equipment, include some of the
equipment at airports and maintenance facilities, flight simulators,
computers and other properties.
Pursuant to an agreement between the City of St. Louis and TWA in
November 1993 (the "Asset Purchase Agreement"), the City of St. Louis waived
a $5.3 million pre-petition claim and provided TWA with two installments of
$24.7 million and $40 million pursuant to sale/leaseback transactions
involving certain of TWA's assets located at Lambert-St. Louis Airport and
other property and assets located in St. Louis including gates, terminal
support facilities at the airport, hangar/St. Louis Ground Operations Center
complex, Flight Training Center and equipment and tenant improvements at
these various St. Louis facilities.
F-31
<PAGE> 81
Under the Asset Purchase Agreement, TWA leased back the properties
involved under a month-to-month agreement subject to automatic renewal so
long as TWA is not in default thereunder, such agreement having a term
otherwise expiring December 31, 2005. Such term is subject to early
termination in the event of certain events of default, including non-payment
of rents, cessation of service, or failure to relocate and maintain its
corporate headquarters within the City or County of St. Louis, or relocate
and maintain a reservations office within the City of St. Louis. Under the
Asset Purchase Agreement, TWA has the right to use 57 gates and terminal
support facilities at Lambert-St. Louis Airport. The City has certain rights
of redesignation of TWA's gates in the event TWA's flight activity at St.
Louis is reduced below a threshold level of 190 daily flight departures
during any given monthly period. The related leases are classified as capital
leases for financial reporting purposes.
The Company's acquisition of 11 new aircraft during 1982 and 1983, one
Lockheed L-1011 and ten Boeing 767s, created certain tax benefits that were
not of immediate value in the Company's federal income tax returns and,
therefore, such tax benefits were sold to outside parties under so-called
"Safe Harbor Leases" as permitted by IRS regulations. Pursuant to the sales
agreements, the Company is required to indemnify the several purchasers if
the tax benefits cannot be used because of circumstances within the control
of the Company. As of December 31, 1997, the Company's contingent
indemnification obligations in connection with the tax benefit transfers were
collateralized by bank letters of credit aggregating $9,803,000 for which the
Company has posted $9,803,000 in cash collateral to secure its reimbursement
obligations and the bank letters of credit. In addition, the Company has
pledged $4,398,000 in cash collateral to secure its obligation with respect
to four of the tax benefit transfers and has pledged flight equipment having
a net book value of $23,147,000 to secure its obligation with respect to two
of the tax benefit transfers.
At December 31, 1997 future minimum lease payments for capital leases
and future minimum lease payments, net of sublease rentals of immaterial
amounts, for long-term leases, were as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE PAYMENTS
-------------------------
CAPITAL OPERATING
LEASES LEASES
-------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
YEAR
----
1998 $ 54,660 $ 393,686
1999 52,360 378,166
2000 49,314 356,681
2001 45,008 334,295
2002 27,109 292,216
Subsequent 60,064 1,782,677
-------- ----------
Total 288,515 $3,537,721
==========
Less imputed interest 68,525
--------
Present value of capital leases 219,990
Less current portion 37,068
--------
Obligations under capital leases, less current portion $182,922
========
</TABLE>
Included in the Minimum Lease Payments for Operating Leases are
increased rental rates related to lessor financing of engine hush-kits for 25
aircraft. Also included in the Minimum Lease Payments for Operating Leases
are rentals related to an agreement entered into in 1996 providing for the
lease of ten Boeing 757 aircraft, with delivery of the first aircraft in July
1996 and the final aircraft in July 1997, as well as estimated rentals
related to an agreement entered into in 1996 for the lease of fifteen new and
three used McDonnell Douglas MD-83 aircraft, with delivery of the aircraft
between February 1997 and April 1999.
F-32
<PAGE> 82
10. MANDATORILY REDEEMABLE 12% PREFERRED STOCK:
Pursuant to the '95 Reorganization the Company issued 1,089,991 shares
of the 1,510,000 authorized shares of Mandatorily Redeemable 12% Preferred
Stock to the holders of the 8% Senior Secured Notes. The Mandatorily
Redeemable 12% Preferred Stock had an aggregate redemption value of
approximately $109.0 million, was cumulative, and had an initial liquidation
preference of $100 per share. Commencing November 1995, dividends accrued at
the rate of 12% of the liquidation preference per share per annum, payable
quarterly in arrears on the first day of each February, May, August and
November. Subject to certain limitations, the dividends could be paid in
Common Stock at the option of the Company, and, accordingly, the Company
elected to pay the February 1, 1996 dividend in Common Stock and subsequently
issued 317,145 shares. For purposes of determining the number of shares of
Common Stock to distribute, such Common Stock was valued at 90% of the fair
market value, based upon trading prices for the twenty days prior to the
record date for the dividend payment.
On March 22, 1996, the Company announced a call for redemption on
April 26, 1996 (the "Redemption Date") of all of its issued and outstanding
12% Preferred Stock at a redemption price per share equal to $75.00, plus
accrued dividends to and including the Redemption Date of $2.8667 per share.
On April 26, 1996, the Company paid an aggregate of $84.9 million in
redemption of the 12% Preferred Stock and payment of accrued dividends.
11. CAPITAL STOCK:
The Company has the authority to issue 287.5 million shares of capital
stock, consisting of 150 million shares of Common Stock and 137.5 million
additional shares of preferred stock. On the '95 Effective Date of the '95
Reorganization, TWA issued approximately 17.2 million shares of Common Stock,
6.4 million shares of Employee Preferred Stock (including approximately 1.7
million shares which are attributable to ALPA represented employees, see Note
12), Equity Rights for the purchase of approximately 13.2 million shares of
Common Stock, warrants for the purchase of approximately 1.7 million shares
of Common Stock exercisable over a seven year period at $14.40 per share (the
"Seven Year Warrants"), warrants for the purchase of up to 1.15 million
shares of Common Stock (for nominal consideration), and $109.0 million
aggregate liquidation value of Mandatorily Redeemable 12% Preferred Stock
(the "12% Preferred Stock"). In addition, each of the 12.5 million shares of
the then existing preferred stock were converted into, and holders received,
0.1024 shares of Common Stock, 0.0512 Equity Rights and 0.1180 Seven Year
Warrants. Holders of then existing common stock, other than shares held by
trusts for employees, received 0.0213 shares of Common Stock, 0.0107 Equity
Rights and 0.0246 Seven Year Warrants.
In October 1995, TWA received approximately $55.3 million in gross
proceeds from the exercise of 13,206,247 Equity Rights and issued 13,206,247
shares of Common Stock. The Company paid a fee of approximately $3.4 million
in September to certain standby purchasers of shares covered by the Equity
Rights.
TWA subsequently issued 2.07 million additional shares of Common Stock
to previous holders of TWA's 10% Senior Secured Notes based upon the trading
prices of securities distributed pursuant to the '95 Reorganization.
The Employee Preferred Stock is the functional equivalent of Common
Stock except for an exclusive right to elect a certain number of directors to
the Board of Directors and its liquidation preference of $0.01 per share.
Employee Preferred Stock does not have redemption rights. Each share will
automatically convert into one share of Common Stock upon the withdrawal of
such share from the employee stock trust in which such share is held.
F-33
<PAGE> 83
There were 1,742,920 and 1,742,922 Seven Year Warrants outstanding at
December 31, 1997 and 1996, respectively. All warrants to purchase shares of
Common Stock for nominal consideration had been exercised at December 31,
1997.
In March 1997, the Company issued 50,000 Redeemable Warrants in
conjunction with the sale of $50.0 million 12% Senior Secured Notes Due 2002.
The Warrants are exercisable commencing on the first anniversary of the date
of original issuance through their expiration on April 1, 2002 and entitles
the holders thereof to purchase 126.26 shares of Common Stock per Warrant at
an exercise price of approximately $7.92 per share.
In December 1997, the Company completed an offering, pursuant to Rule
144A of the Securities Act of 1933, of 1,725,000 shares of its 9 1/4%
Cumulative Convertible Exchangeable Preferred Stock, with a liquidation
preference of $50 per share. Each share of the 9 1/4% Preferred Stock may be
converted at any time at the option of the holder, unless previously redeemed
or exchanged, into shares of the Company's Common Stock at a conversion price
of $7.90 per share (equivalent to a conversion rate of approximately 6.329
shares of Common Stock for each share of 9 1/4% Preferred Stock), subject to
adjustment.
The 9 1/4% Preferred Stock may not be redeemed prior to December 15,
2000. On or after December 15, 2000, the 9 1/4% Preferred Stock may be
redeemed in whole or in part, at the option of the Company, at specified
redemption prices. The 9 1/4% Preferred Stock may be exchanged, in whole but
not in part, at the option of the Company, for the Company's 9 1/4%
Convertible Subordinated Debentures due 2007 on any dividend payment date
beginning on December 15, 1999 at the rate of $50 principal amount of
Debentures for each share of 9 1/4% Preferred Stock outstanding at the time
of exchange; provided that all accrued and unpaid dividends on the 9 1/4%
Preferred Stock to the date of exchange have been paid or set aside for
payment and certain other conditions are met.
The Company was required to file a registration statement (the "Shelf
Registration Statement") with the Securities and Exchange Commission to
register resales of 9 1/4% Preferred Stock, the Debentures and the underlying
shares of Common Stock issuable upon conversion thereof. In addition the
Company must use its reasonable best efforts to cause the Shelf Registration
Statement to be effective until the earlier of (i) the sale of all
securities covered by the registration or (ii) two years after the date of
original issuance.
In March 1996, the Company completed an offering, pursuant to Rule
144A of the Securities Act, of 3,869,000 shares of its 8% Preferred Stock,
with a liquidation preference of $50 per share. Each share of the 8%
Preferred Stock may be converted at any time, at the option of the holder,
unless previously redeemed or exchanged, into shares of Common Stock at a
conversion price of $20.269 per share (equivalent to a conversion rate of
approximately 2.467 shares of Common Stock for each share of 8% Preferred
Stock), subject to adjustment. Pursuant to the registration rights agreement
between the Company and the initial purchasers of the 8% Preferred Stock, the
Company filed a shelf registration statement effective August 16, 1996 to
register resales of the 8% Preferred Stock, the Debentures (as defined below)
and the underlying shares of Common Stock issuable upon conversion thereof.
The 8% Preferred Stock may not be redeemed prior to March 15, 1999.
On or after March 15, 1999, the 8% Preferred Stock may be redeemed, in whole
or in part, at the option of the Company, at specified redemption prices.
The 8% Preferred Stock may be exchanged at the option of the Company, in
whole but not in part, for the Company's 8% Convertible Subordinated
Debentures Due 2006 (the "Debentures") on any dividend payment date beginning
March 15, 1998 at the rate of $50 principal amount of Debentures for each
share of 8% Preferred Stock outstanding at the time of exchange; provided
that all accrued and unpaid dividends on the 8% Preferred Stock to the date
of exchange, whether or not earned or declared, have been paid or set aside
for payment and certain other conditions are met.
F-34
<PAGE> 84
In December 1995, the Company adopted a Shareholders Rights Plan.
Each holder of Common Stock or Employee Preferred Stock received a dividend
of one right for each share, entitling the holder to buy one one-hundredth of
a share of a new series of preferred stock at a purchase price of $47.50.
The rights may become exercisable only under certain conditions whereby
certain persons (as defined) become the owner of or commence a tender offer
for certain specified percentages of TWA's voting stock and may be redeemed
by TWA at $0.01 per right prior to such time. In the event the rights become
exercisable, holders would be entitled to receive, without payment of a
purchase price, additional shares of Common Stock or be entitled to purchase
Common Stock having a market value of twice the purchase price.
12. EARNED STOCK COMPENSATION:
Pursuant to the '94 Labor Agreements and '95 Reorganization, on the
'95 Effective Date, approximately 4.7 million shares of Employee Preferred
Stock and 1.0 million shares of Common Stock were distributed and allocated
to employees through employee stock ownership plans for the benefit of union
(other than the ALPA represented employees) and noncontract employees,
respectively. The distribution of these shares resulted in a charge to
operations in the eight months ended August 31, 1995 of $43.2 million, based
upon the market price of TWA's Common Stock at that time.
Additionally, a "Rabbi Trust" was established to receive the
distribution of approximately 1.7 million shares of Employee Preferred Stock
attributable to ALPA represented employees. The Rabbi Trust distributed to
an employee benefit plan (the "ESOP") one-third of the shares annually
beginning August 1995. Accordingly, operating results for 1997, 1996, the
four months ended December 31, 1995 and the eight months ended August 31,
1995 include charges of approximately $3.9 million, $6.9 million, $2.0
million and $5.1 million, respectively, representing the value of shares
allocated and shares earned, but unallocated, for such periods, based upon
the market price of TWA's Common Stock.
Operating results for the eight months ended August 31, 1995 include a
non-cash charge of approximately $8.0 million, representing the excess of the
fair market value of the shares distributed to employees over the purchase
price paid for shares which were sold to employees pursuant to the Equity
Rights offering.
Also pursuant to the '94 Labor Agreements and the '95 Reorganization,
the Company has adopted a seven year employee stock incentive program (the
"ESIP") pursuant to which TWA will grant its union and non-union employees
additional shares of Employee Preferred Stock and Common Stock (the
"Incentive Shares"), respectively, and such employees will be entitled to
purchase additional shares of such stock under certain circumstances through
an employee stock purchase arrangement. The ESIP has been designed to enable
TWA's employees to increase their level of ownership from 30% to 40% of the
combined total number of outstanding Common Stock and Employee Preferred
Stock over the seven year period.
In recognition of the fact that as a result of the '95 Reorganization,
the percentage of the Company's stock owned by the Company's employees was
substantially reduced, the Company adopted as of the '95 Effective Date an
ESIP pursuant to which the Company would grant, commencing in 1997, to
certain trusts established for the benefit of its union and non-union
employees certain additional shares of Common Stock and Employee Preferred
Stock. The ESIP provides that the first stock grant under the plan would be
made on July 15, 1997 in an amount sufficient to increase the employee
ownership of the combined total number of then outstanding shares of Common
Stock and Employee Preferred Stock by 2.0% if the average closing price of
the Common Stock exceeded a target price of $11.00 per share during the
period from January 1, 1997 to July 14, 1997. If the target price of $11.00
per share is not exceeded, the grant would instead be made, if at all, on
July 15 of the next year (up to and including July 15, 2002) in which the
market price of the Common Stock exceeds such target price prior to July 14
of that year. In each of 1998 through 2002, additional shares of Employee
Preferred Stock and Common Stock will become subject to grant under this
program in an amount sufficient to increase the employee ownership by 1.5% in
1998, 1.5% in 1999, 1.0% in 2000, 1.0% in
F-35
<PAGE> 85
2001 and 1.0% in 2002 (subject to adjustment as described below) based on the
combined total number of shares of Common Stock and Employee Preferred Stock
outstanding as of the applicable July 15 grant date, with the target price
applicable to the additional shares to be issued in such year equal to $12.10
in 1998, $13.31 in 1999, $14.64 in 2000, $16.11 in 2001 and $17.72 in 2002.
Each such grant is cumulative and, where the applicable target price is not
met in the initial grant year, the applicable grant is carried forward and is
subject to grant in future years up to and including July 15, 2002 in the
manner described above. To prevent against the dilutive effect of certain
stock issuances, the ESIP provides for an adjustment (the "Adjustment") to
the grants described above in the event the Company issues additional Common
Stock to third parties for cash or property or in lieu of cash payments on
the 12% Reset Notes or the Mandatorily Redeemable 12% Preferred Stock. To
the extent that a sale of additional capital stock for cash results in a
decline in the percentage of employee ownership of the combined total number
of shares of Common Stock and Employee Preferred Stock below a level equal to
the Adjusted Base Ownership Percentage (as defined in the ESIP), one-quarter
of the difference between the new percentage of employee ownership and the
level just determined (but in no event greater than 1.0% in each year) would
be added to the amount of Employee Preferred Stock to be granted to union
employees and Common Stock to be granted to non-union employees to be issued
under the ESIP in each of the years 1999 through 2002, assuming the target
prices are met in each of such years. Furthermore, if TWA issues additional
shares of Common Stock with an aggregate value of more than $20 million to
third parties for cash or a reduction in debt at a price equal to or greater
than $11.00 per share (the "Equity Issuance Acceleration Trigger"), the last
two scheduled grants under the ESIP are to be aggregated and these shares
allocated equally to the remaining installments in the program. In addition,
pursuant to the ESIP, employees have the right commencing as of July 15,
1997, to purchase over the seven year term of the ESIP additional shares of
Employee Preferred Stock in amounts up to an aggregate of 2% of the combined
total number of outstanding Common Stock and Employee Preferred Stock at a
discount of 20% from the then current market price. Should all of the target
prices be met or exceeded within the time periods specified and should the
entire discount stock purchase option be exercised, the various employee
stock trusts would receive a total of 10.0% (as adjusted as described below)
of the outstanding stock, with the exact amount issued dependent upon the
outstanding shares as of the date of each grant and option exercise.
The ESIP separately provides that if additional shares are distributed
following the '95 Effective Date in respect of the '95 Reorganization,
employees will be entitled to receive an additional number of shares of
Employee Preferred Stock and Common Stock such that the employees will retain
the same level of ownership. Union representatives and the Company agreed to
a one-time distribution pursuant to this provision of the ESIP in an
aggregate amount of 525,856 shares of Employee Preferred Stock and Common
Stock. As part of that agreement, since additional ESIP shares were not
issued to the employees in July 1997, an additional 405,750 shares of
Employee Preferred Stock and Common Stock were issued to the employee trusts
and, to the extent that additional shares are granted under the ESIP, the
Company will receive a credit towards the new grant for these previously
issued shares, in that amount.
While the $11.00 target price was not exceeded as of July 15, 1997 and
no target price grant was made on that date, on February 17, 1998, the Average
Closing Price for the Company's Common Stock did exceed the $11.00 target price
with respect to the first scheduled grant. As a result, the initial grant in
an amount sufficient to increase the employee ownership by 2.0% based on the
then outstanding Common Stock and Employee Preferred Stock will be made on July
15, 1998. Based on the current outstanding Voting Equity (as defined in the
ESIP) of 57,890,907 shares, the number of shares of Employee Preferred Stock
and Common Stock to be issued to the employees under the ESIP on that date is
1,515,472. TWA is entitled to a credit against this number in the amount of
405,750 shares due to the prior grant to employees as described above.
On March 4, 1998, the Average Closing Price for the Company's Common Stock
did exceed the $12.10 target price with respect to the 1998 grant of 1.5%. As
a result, the 1998 grant in an amount sufficient to increase the employee
ownership by 1.5% based on the then outstanding Common Stock and Employee
Preferred Stock will also be made on July 15, 1998. Based on the current
outstanding Voting Equity, the number of additional shares of Employee
Preferred Stock and Common Stock to be issued to the employees under the ESIP
on that date for the 1998 grant is 1,172,354 shares. The number of shares to
be granted could be increased if the last two grants are accelerated pursuant
to the Equity Issuance Acceleration Trigger. Furthermore, based on issuances of
Common Stock to date, the Adjustment has resulted in a revised grant schedule
of 1.5% in 1998, 1.84% in 1999, 1.34% in 2000, 1.34% in 2001 and 1.34% in 2002.
Assuming the consummation of a planned transaction involving the issuance of
Common Stock, the grants for the years 1999-2002 would further increase
pursuant to the Adjustment
F-36
<PAGE> 86
to: 1.91% in 1999, 1.41% in 2000, 1.41% in 2001 and 1.41% in 2002. Finally,
in the event that the planned transaction is consummated and that the price
per share is in excess of $11.00, the Equity Issuance Acceleration Trigger
will be met and the final two scheduled installments will be aggregated and
these shares will be allocated equally to the remaining installments in the
program. As a result, the remaining grants would be as follows: 2.705% in
1997 (already vested and payable on July 15, 1998); 2.205% on July 15, 1998
(already vested and payable on July 15, 1998); 2.615% on July 15, 1999 if the
target price exceeds $13.31 and 2.115% on July 15, 2000 if the target price
exceeds $14.64. Shares granted or purchased at a discount under the ESIP will
generally result in a charge to earnings in an amount equal to the fair value
of shares granted and the discount for shares purchased at the time when such
shares are earned.
13. STOCK OPTION PLANS:
The Company's 1994 Key Employee Stock Incentive Plan (the "KESIP"), as
amended, provides for the award of incentive and nonqualified stock options
for up to 14% of the Common Stock and Employee Preferred Stock outstanding as
of the start of each fiscal year (approximately 7.0 million shares at January
1, 1998). Generally, options granted under the KESIP have a five year life
after the final vesting period and vest at the rate of 34% upon the first
anniversary of the award date, 33% upon the second and 33% upon the third
anniversary of the award date. Unvested shares are subject to forfeiture
under certain circumstances.
A summary of the Company's outstanding stock options as of December
31, 1997 and 1996, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,026,384 $5.61 2,228,000 $ 4.68 1,398,576 $4.64
Granted 2,027,155 6.80 453,000 11.65 829,424 4.74
Exercised (565,545) 4.66 (191,316) 4.64 - -
Forfeited (145,814) 7.88 (463,300) 7.43 - -
--------- --------- ---------
Outstanding at end of year 3,342,180 6.39 2,026,384 5.61 2,228,000 4.68
========= ========= =========
Options exercisable at year-end 1,812,020 1,302,700 475,516
Weighted average fair value of options
granted during the year $3.32 $6.79 $3.03
</TABLE>
The per share weighted average fair value of options granted during
1997, 1996, and 1995 were estimated using the Black Scholes option pricing
model assuming risk-free interest rates of 5.97%, 6.6%, and 6.0% in 1997,
1996 and 1995 respectively, an expected volatility factor of 67.14% in 1997
and 85.00% in 1996 and 1995 and an expected life of three years.
F-37
<PAGE> 87
The following table summarizes information about fixed stock options at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ----------------------------------
RANGE NUMBER WEIGHTED-AVERAGE NUMBER
OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
$ 4.64 to 6.78 2,158,350 3.12 years $ 5.31 1,625,485 $ 5.11
7.06 to 8.12 833,350 5.19 years 7.47 12,575 8.01
8.47 to 15.81 339,380 5.42 years 10.24 166,820 11.88
16.25 to 18.37 11,100 3.05 years 17.85 7,140 18.10
--------- ---------
$ 4.64 to 18.37 3,342,180 1,812,020
========= =========
</TABLE>
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company applies
APB Opinion No. 25 and related interpretations in accounting for its plans.
However, pro forma disclosures as if the Company adopted the fair value based
method of measurement for stock-based compensation plans under SFAS No. 123 in
1997 and 1996 are presented below.
Had compensation cost for the Company's grants for stock-based
compensation plans been determined using the fair value method under SFAS No.
123, the Company's pro forma net loss, and net loss per common share for 1997,
1996 and the four months ended December 31, 1995 would approximate the amounts
below (in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended Year Ended Four Months Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------- ---------------------------- --------------------------
As Reported Pro forma As Reported Pro forma As Reported Pro forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(110,835) $(114,942) $(284,815) $(285,716) $(30,138) $(30,350)
Net loss per common share $(2.37) $(2.45) $(7.27) $(7.30) $(1.05) $(1.06)
</TABLE>
The pro forma amounts do not give any effect to options granted prior
to January 1, 1995.
Operating results include charges of $2.2 million and $0.02 million for
the year ended December 31, 1996 and the four months ended December 31, 1995,
respectively, to reflect the excess of the market price of TWA's common stock
on the date of grant over the exercise price, over the vesting period. There
were no such charges in 1997. The 1996 charge includes $1.8 million in
respect to the accelerated vesting of certain awards in connection with the
severance of certain officers.
14. EXTRAORDINARY ITEMS:
In 1997 and 1996, the Company consummated a series of privately
negotiated exchanges with a significant holder of the 12% Senior Secured
Reset Notes which resulted in the return to the Company of approximately
$51.8 million, in 1997, and $45.3 million, in 1996, in 12% Senior Secured
Reset Notes and approximately $1.4 million, in 1997, and $1.5 million, in
1996, in accrued interest thereon in exchange for the issuance of
approximately 7.7 million, in 1997, and 4.5 million, in 1996, in shares of
Company Common Stock. As a result of the exchange of the 12% Senior Secured
Reset Notes, the Company recorded an extraordinary non-cash charge of $7.2
million in 1997 and $8.2 million in 1996 representing the difference between
the fair value of the common stock issued (based upon the trading price of
the Company's common stock on the dates of exchanges) and the carrying value
of the Senior Secured Reset Notes retired.
F-38
<PAGE> 88
During December 1997, the Company prepaid the remaining 12% Senior
Secured Reset Notes, incurring an extraordinary non-cash charge of $3.9
million relative to the write off of the unamortized discount on the Notes.
The Company recorded extraordinary charges of approximately $9.9
million in 1997 and $1.6 million in 1996 due to the early extinguishment of a
portion of the PBGC Notes as a result of Karabu applying approximately $90.4
million in 1997 and $6.4 million in 1996 in ticket proceeds as prepayments on
the PBGC Notes.
The extraordinary gain recorded in the four months ended December 31,
1995 was due to the cancellation of debt as a result of a settlement between
TWE, a subsidiary, and an aircraft lessor. The extraordinary gain recorded in
the eight months ended August 31, 1995 was for the discharge of indebtedness
pursuant to the Company's '95 Reorganization.
15. DISPOSITION OF ASSETS:
Disposition of assets resulted in net losses of approximately $1.1
million and $0.2 million during 1996 and for the eight months ended August
31, 1995, respectively, and net gains of $16.0 million and $3.3 million
during 1997 and for the four months ended December 31, 1995, respectively.
In 1997, TWA recorded gains of $7.4 million in connection with the sale
of three gates at Newark International Airport and $8.6 million in connection
with the sale of spare flight equipment, aircraft, engines and other
miscellaneous property.
In 1996, TWA recorded a gain of approximately $8.0 million in
connection with the hull insurance settlement for the aircraft destroyed in
the Flight 800 incident. The gain was offset by a loss of $8.3 million on
the sale of expendable aircraft parts and losses of $0.8 million on other
miscellaneous dispositions.
In November 1995, TWA entered into an agreement to sublease certain of
TWA's leased commissary facilities in Los Angeles. As part of this
agreement, TWA sold its commissary furnishings and equipment, resulting in a
gain of $2.0 million.
16. SPECIAL CHARGES AND OTHER NONRECURRING ITEMS:
The 1996 operating loss includes an aggregate of approximately $85.9
million in special charges and nonrecurring items, primarily as follows: (i)
approximately $26.7 million to reflect the write-off of the carrying value of
TWA's New York-Athens route authority over which TWA has elected to
discontinue service, (ii) approximately $53.7 million to reflect the
reduction in carrying value of TWA's owned L-1011 and B-747 aircraft and
related spare parts which are expected to be retired from service over the
next year and (iii) approximately $5.5 million for employee severance
liabilities related to the termination of service to Athens and Frankfurt.
The write-down of owned aircraft and related spare parts was based upon
management's estimates of the net proceeds to be received upon the
disposition of these assets. Additionally, the Company has obligations under
operating leases for B-747 aircraft aggregating approximately $36 million
over the next six years. Management currently estimates that it will be able
to recover substantially all of these costs pursuant to subleases of these
aircraft and, accordingly, no provision has been made for any such costs at
this time. Management's estimates relative to the costs of the retirement of
the L-1011 and B-747 fleets and related spare parts are based upon current
market conditions, preliminary discussions with interested parties and other
factors. The actual costs could differ materially from the current
estimates.
The operating income for the eight months ended August 31, 1995,
includes a special charge of $1.7 million for shut-down related expenses of
TWE.
F-39
<PAGE> 89
17. OTHER CHARGES AND CREDITS-NET:
<TABLE>
<CAPTION>
(Amounts in Thousands) Predecessor
Reorganized Company Company
---------------------------------------------- ------------
Year Year Four Months Eight Months
Ended Ended Ended Ended
December 31, December 31, December 31, August
1997 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Expenses associated with the restructuring of
debt and flight equipment leases $ - $ - $ 3,000 $11,000
Provisions for losses resulting from claims and
litigation judgments against TWA 143 235 26 351
Foreign currency transaction (gains) losses-net 578 (642) 1,156 384
Finance charge income earned on receivables
carried by TWA (8,112) (8,030) (2,662) (6,198)
Credits related to settlement of various contract
disputes, litigation and other matters (289) (2,500) - -
Credits related to vendor discounts applied (5,412) (7,074) (2,282) (4,109)
Equity in (earnings)/losses of TWA's investment in
Worldspan (Note 4) (11,305) (11,919) 11,535 (3,607)
Miscellaneous other nonoperating charges
(credits)-net (1,035) (668) (3,162) (200)
-------- -------- ------- -------
Total Other Charges and Credits-net $(25,432) $(30,598) $ 7,611 $(2,379)
======== ======== ======= =======
</TABLE>
18. AIRCRAFT COMMITMENTS:
TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce plc
relating to the purchase of ten A330-300 twin-engine wide body aircraft and
related engines, spare parts and equipment for an aggregate purchase price of
approximately $1.0 billion. The agreements, as amended, require the delivery
of the aircraft in 2001 and 2002 and provide for the purchase of up to ten
additional aircraft. TWA has not yet made arrangements for the permanent
financing of the purchases subject to the agreements. In the event of
cancellation, predelivery payments of approximately $18 million would be
subject to forfeiture.
In February 1996, TWA executed definitive agreements providing for the
operating lease of 10 new B-757 aircraft, all of which have been delivered.
These aircraft have an initial lease term of 10 years. Although individual
aircraft rentals escalate over the term of the leases, aggregate rental
obligations are estimated to average approximately $59 million per annum over
the lease terms. The Company also entered into an agreement in February 1996
with Boeing for the purchase of ten B-757 aircraft and related engines, spare
parts and equipment for an aggregate purchase price of approximately $500
million. The agreement also provides for the purchase of up to ten
additional aircraft. As of February 1, 1998, TWA had taken delivery of five
of such aircraft and had five on firm order. Furthermore, to the extent TWA
exercises its options for additional aircraft, the Company will have the
right to an equal number of additional option aircraft. Four of the five
aircraft already delivered were manufacturer financed and one was leased.
TWA has obtained commitments for debt financing for approximately 80% of the
total costs associated with the acquisition of four of the remaining five
aircraft which have not been delivered and obtained commitments for 100%
lease financing of the total costs of the remaining fifth aircraft. Such
commitments are subject to, among other things, so-called material adverse
change clauses which make the availability of such debt and lease financing
dependent upon the financial condition of the Company.
F-40
<PAGE> 90
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
---- ------
<C> <C> <C>
1998 $ 52.1 $ 48.5
1999 52.4 194.0
2000 -- --
2001 610.7 --
2002 272.0 --
</TABLE>
During 1997, TWA reached agreements for the lease of two new B-767-300ER
aircraft, one of which has been delivered in March 1998 and the second is
scheduled to be delivered in April 1998. The longer-range 300ER series
aircraft will be utilized on TWA's international routes.
The Company has entered into an agreement to acquire from the
manufacturer fifteen new MD-83s. The long-term leasing arrangement provides
for delivery of the aircraft between the second quarter of 1997 and the first
quarter of 1999. The Company has taken delivery of seven of the MD-83
aircraft and expects to take delivery of six additional planes during the
remainder of 1998 and two additional planes in 1999.
On February 25, 1998, the Company's Board of Directors approved letters
of intent to acquire 24 new MD-83 aircraft from the manufacturer. The
proposed long-term leasing arrangement provides for delivery of the aircraft
in 1999. Although the Company anticipates that rental payments for such
aircraft would represent a substantial financial commitment, it is not
possible to accurately estimate the amount of such payments at this time.
There can be no assurance that such aircraft acquisition program will be
concluded or as to the final terms of any such program.
19. FRESH START REPORTING:
Pursuant to SOP 90-7, TWA adopted fresh start reporting which has
resulted in the creation of a new reporting entity and the Company's assets
and liabilities being adjusted to reflect fair values on the '95 Effective
Date. For accounting purposes, the '95 Effective Date was deemed to be
September 1, 1995. In the fresh start reporting, an aggregate value of $270
million was assigned to TWA's Common Stock and Employee Preferred Stock.
These values were established by management with the assistance of its
financial advisors. These valuations considered TWA's expected future
performance, relevant industry and economic conditions, and analyses and
comparisons with comparable companies.
The reorganization value of TWA has been allocated to the Reorganized
Company's assets and liabilities in a manner similar to the purchase method
of accounting for a business combination. Management obtained valuations
from independent third parties which, along with other market and related
information and analyses, were utilized in assigning fair values to assets
and liabilities. A summary of the impact of the '95 Reorganization and the
related fresh start adjustments is presented below. The fresh start
adjustments resulted in, among other things, the allocation of substantial
amounts to reorganization value in excess of amounts allocable to
identifiable assets, the amortization of which, while not requiring the use
of cash, will significantly affect future operating results.
F-41
<PAGE> 91
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<Fa> ADJUSTMENTS<Fb> ADJUSTMENTS<Fc> COMPANY
----------- ------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 239,796 $ - $ - $ - $ 239,796
Receivables 297,022 (1,449) - - 295,573
Spare parts, materials and supplies 146,191 - - - 146,191
Prepaid expenses and other 60,947 - - - 60,947
---------- --------- --------- -------- ----------
Total Current Assets 743,956 (1,449) - - 742,507
---------- --------- --------- -------- ----------
Property and Equipment 631,087 - (24,239) - 606,848
---------- --------- --------- -------- ----------
Other Assets:
Investment in affiliated companies 110,325 - - - 110,325
Other investments and receivables 163,715 - - - 163,715
Routes, gates and slots 737,171 - (278,722) - 458,449
Reorganization value in excess of
amounts allocable to identifiable
assets 153,840 - - 685,224 839,064
Other assets 28,531 - ( 9,392) - 19,139
---------- --------- --------- -------- ----------
Total Other 1,193,582 - (288,114) 685,224 1,590,692
---------- --------- --------- -------- ----------
Total $2,568,625 $ (1,449) $(312,353) $685,224 $2,940,047
========== ========= ========= ======== ==========
Current Liabilities:
Current maturities of long-term debt $ 472,510 $(404,665) $ - $ - $ 67,845
Current obligations under capital leases 42,643 - (647) - 41,996
Advance ticket sales 253,642 - - - 253,642
Accounts payable and other accrued
expenses 518,030 24,466 3,739 - 546,235
---------- --------- --------- -------- ----------
Total 1,286,825 (380,199) 3,092 - 909,718
---------- --------- --------- -------- ----------
Liabilities Subject To Chapter 11
Reorganization Proceedings 748,855 (748,855) - - -
---------- --------- --------- -------- ----------
Noncurrent Liabilities and Deferred Credits:
Long-term debt, less current maturities - 765,435 - - 765,435
Obligations under capital leases,
less current obligations 317,196 - (42,440) - 274,756
Other noncurrent liabilities and deferred
credits 673,428 18,612 (30,762) - 661,278
---------- --------- --------- -------- ----------
Total 990,624 784,047 (73,202) - 1,701,469
---------- --------- --------- -------- ----------
Redeemable Preferred Stock - 58,860 - - 58,860
---------- --------- --------- -------- ----------
Shareholders' Equity (Deficiency):
Old Preferred Stock 125 - - (125) -
Old Common Stock 200 - - (200) -
Employee Preferred Stock - - - 53 53
New Common Stock - - - 172 172
Additional paid-in capital 161,692 143,800 - (35,717) 269,775
Accumulated Deficit (619,696) 140,898 (242,243) 721,041 -
---------- --------- --------- -------- ----------
Total (457,679) 284,698 (242,243) 685,224 270,000
---------- --------- --------- -------- ----------
Total $2,568,625 $ (1,449) $(312,353) $685,224 $2,940,047
========== ========= ========= ======== ==========
<FN>
<Fa> 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.
<Fb> 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
F-42
<PAGE> 92
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.
<Fc> To record adjustments to reflect the elimination of the remaining
deficit in shareholders' equity after the adjustments arising from <Fa>
and <Fb> above and to reflect the associated reorganization value in
excess of amounts allocable to identifiable assets.
</TABLE>
F-43
<PAGE> 93
20. SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED):
Selected consolidated financial data (unaudited) for each quarter
within 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- ---------- ---------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Operating revenues $762,306 $844,442 $ 908,381 $ 812,823
======== ======== ========== =========
Operating income (loss) $(99,486) $ 5,932 $ 63,757 $ 537
======== ======== ========== =========
Disposition of assets, gains (losses) - net $ 9,350 $ 3,030 $ 2,828 $ 796
======== ======== ========== =========
Income (loss) before extraordinary items $(70,032) $(11,995) $ 13,276 $ (21,111)
======== ======== ========== =========
Extraordinary items $ (1,532) $ (2,405) $ (6,985) $ (10,051)
======== ======== ========== =========
Net income (loss) $(71,564) $(14,400) $ 6,291 $ (31,162)
======== ======== ========== =========
Per share amounts:
Basic:
Earnings (loss) before extraordinary items $ (1.51) $ (.31) $ .17 $ (.44)
======== ======== ========== =========
Extraordinary items $ (.03) $ (.05) $ (.13) $ (.18)
======== ======== ========== =========
Net income (loss) $ (1.54) $ (.36) $ .04 $ (.62)
======== ======== ========== =========
Diluted<Fa>:
Net income (loss) $ (1.54) $ (.36) $ .04 $ (.62)
======== ======== ========== =========
YEAR ENDED DECEMBER 31, 1996
Operating revenues $782,433 $965,808 $1,002,867 $ 803,299
======== ======== ========== =========
Special charges (Note 16) $ - $ - $ - $ 85,915
======== ======== ========== =========
Operating income (loss) $(54,191) $ 62,028 $ 26,019 $(232,383)
======== ======== ========== =========
Disposition of assets, gains (losses) - net $ (214) $ 239 $ (87) $ (1,073)
======== ======== ========== =========
Income (loss) before extraordinary items $(37,107) $ 25,262 $ (6,905) $(256,277)
======== ======== ========== =========
Extraordinary items $ - $ - $ (7,420) $ (2,368)
======== ======== ========== =========
Net income (loss) $(37,107) $ 25,262 $ (14,325) $(258,645)
======== ======== ========== =========
Per share amounts:
Basic:
Earnings (loss) before extraordinary items and
special dividend requirements $ (.98) $ .48 $ (.24) $ (5.51)
======== ======== ========== =========
Extraordinary items and special dividend
requirements $ (.48) $ - $ (.16) $ (.05)
======== ======== ========== =========
Net income (loss) $ (1.46) $ .48 $ (.40) $ (5.56)
======== ======== ========== =========
Diluted<Fa>:
Net income (loss) $ (1.46) $ .44 $ (.40) $ (5.56)
======== ======== ========== =========
<FN>
<Fa> Amounts have been restated pursuant to SFAS No. 128.
</TABLE>
The results for each period include all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods.
The consolidated financial results on an interim basis are not
necessarily indicative of future financial results on either an interim or
annual basis. TWA's air transportation business is highly seasonal with the
second and third quarters of the calendar year historically producing
substantially better operating results than the first and fourth quarters.
The results for the fourth quarter of 1996 include an adjustment to
reduce aircraft fuel and oil costs by approximately $8.8 million, as a result
of federal fuel excise taxes paid which were refunded to the Company.
F-44
<PAGE> 94
21. FOREIGN OPERATIONS:
TWA conducts operations in various foreign countries, principally in
Europe and the Middle East. Operating revenues from foreign operations were
approximately $518.1 million in 1997, $719.2 million in 1996, $228.7 million
in the four months ended December 31, 1995 and $474.4 million in the eight
months ended August 31, 1995.
22. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires disclosures with regards to fair values of all financial
instruments, whether recognized or not recognized in the balance sheet,
subject to certain exceptions. Solely for purposes of complying with this
accounting standard, the Company has estimated the fair value of certain of
its financial instruments, as further described below. Because no market
exists for a significant portion of TWA's financial instruments, fair value
estimates provided below are based on judgments regarding current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The discussion of financial instruments below conforms with the presentation
in the Consolidated Balance Sheet and relates to the amounts at December 31,
1997 and 1996.
(a) Cash, cash equivalents and receivables: The carrying amounts of these
assets are estimated to approximate fair value due to the generally
short maturities of these instruments.
(b) Other investments and receivables: The carrying amounts of these assets
are estimated to approximate fair value due to the generally short
maturities of the underlying instruments which are, however,
classified as long-term assets because TWA's ability to access these
amounts is generally restricted by contractual provisions.
(c) Accounts payable and other accrued liabilities: The carrying amounts of
these liabilities are estimated to approximate fair value due to the
generally short maturities of these instruments.
(d) Debt: On December 31, 1997, none of TWA's debt was publicly traded, while
at December 31, 1996, the Company's publicly-traded debt had a carrying
value of $111.8 million and a market value of $126.0 million. The Company
believes the fair value of the remaining debt which had an aggregate
carrying value of approximately $787.9 million and $589.1 million at
December 31, 1997 and 1996, respectively, was approximately $800.4
million and $466.4 million on those dates.
In connection with credit card sales, the Company has agreed to
maintain specified levels of deposits or a letter of credit. At December 31,
1997, a letter of credit of $15.0 million had been issued for the Company's
benefit to provide the required level of deposits. Additionally, in 1997, a
letter of credit in the amount of $2.6 million was issued to secure the
Company's obligations under certain workers compensation agreements.
F-45
<PAGE> 95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
March 31, 1998 TRANS WORLD AIRLINES, INC.
By: /s/ Gerald L. Gitner
---------------------------------
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald L. Gitner Director, Chairman of the March 31, 1998
- --------------------------- Board and Chief Executive
Gerald L. Gitner Officer (Principal Executive
Officer)
/s/ Michael J. Palumbo Senior Vice President and March 31, 1998
- --------------------------- Chief Financial Officer
Michael J. Palumbo (Principal Financial Officer
and Principal Accounting
Officer)
John W. Bachmann<F*> Director March 31, 1998
- ---------------------------
John W. Bachmann
William F. Compton<F*> Director March 31, 1998
- ---------------------------
William F. Compton
Eugene P. Conese<F*> Director March 31, 1998
- ---------------------------
Eugene P. Conese
William M. Hoffman<F*> Director March 31, 1998
- ---------------------------
William M. Hoffman
D-1
<PAGE> 96
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Edgar M. House<F*> Director March 31, 1998
- ---------------------------
Edgar M. House
Thomas H. Jacobsen<F*> Director March 31, 1998
- ---------------------------
Thomas H. Jacobsen
Myron Kaplan<F*> Director March 31, 1998
- ---------------------------
Myron Kaplan
David M. Kennedy<F*> Director March 31, 1998
- ---------------------------
David M. Kennedy
Merrill A. McPeak<F*> Director March 31, 1998
- ---------------------------
Merrill A. McPeak
Thomas F. Meagher<F*> Director March 31, 1998
- ---------------------------
Thomas F. Meagher
William O'Driscoll<F*> Director March 31, 1998
- ---------------------------
William O'Driscoll
G. Joseph Reddington<F*> Director March 31, 1998
- ---------------------------
G. Joseph Reddington
Blanche M. Touhill<F*> Director March 31, 1998
- ---------------------------
Blanche M. Touhill
Stephen M. Tumblin<F*> Director March 31, 1998
- ---------------------------
Stephen M. Tumblin
<FN>
<F*>By: /s/ Michael J. Palumbo March 31, 1998
-----------------------
Attorney-in-fact
</TABLE>
D-2
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT INDEX
<C> <S>
<F*>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)
<F*>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)
<F*>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)
<F*>2.4 Final Decree, dated December 28, 1995, related to the `95 Reorganization (Exhibit
2.7 to 12/31/95 Form 10-K)
<F*>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)
<F*>3(ii) Amended and Restated By-Laws of Trans World Airlines, Inc., effective May 24,
1996 (Exhibit 3(ii) to 6/96 10-Q)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>4.5 ALPA Stock Trust, dated August 31, 1993, between TWA and the ALPA Trustee
(Exhibit 4.7 to 9/93 10-Q)
<F*>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)
<F*>4.7 Registration Rights Agreement, dated November 3, 1993, between TWA and the
Initial Significant Holders (Exhibit 4.9 to 9/93 10-Q)
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<PAGE> 98
<C> <S>
<F*>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)
<F*>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)
<F*>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)
<F*>4.11 TWA Air Line Pilots Supplemental Stock Plan, effective September 1, 1994 (Exhibit
4.13 to 9/95 10-Q)
<F*>4.12 TWA Air Line Pilots Supplemental Stock Plan Trust, effective August 23, 1995
(Exhibit 4.14 to 9/95 10-Q)
<F*>4.13 TWA Air Line Pilots Supplemental Stock Plan Custodial Agreement, effective
August 23, 1995 (Exhibit 4.15 to 9/95 10-Q)
<F*>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)
<F*>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)
<F*>4.16 Form of 12% Senior Secured Note due 2002 (contained in Indenture filed as Exhibit
4.15)
<F*>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)
<F*>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)
<F*>4.19 Form of Indenture relating to TWA's 9 1/4% Convertible Subordinated Debentures due
2007 (Exhibit 4.19 to Registrant's Registration Statement on Form S-3, No.
333-44689)
<F*>4.20 Registration Rights Agreement dated as of December 2, 1997 between the Company
and the Initial Purchasers (Exhibit 4.20 to Registrant's Registration Statement on
Form S-3, No. 333-44689)
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<PAGE> 99
<C> <S>
<F*>4.21 Indenture dated as of December 9, 1997 by and between TWA and First Security
Bank, National Association, as Trustee, relating to TWA's 11 1/2% Senior Secured
Notes due 2004 (Exhibit 4.21 to Registrant's Registration Statement on Form S-4,
No. 333-44661)
<F*>4.22 Form of 11 1/2% Senior Secured Note due 2004 (contained in Indenture filed as
Exhibit 4.21)
<F*>4.23 Registration Rights Agreement dated as of December 9, 1997 among the Company
and Lazard Frres & Co. LLC and PaineWebber Incorporated, as initial purchasers,
relating to TWA's 11 1/2% Senior Secured Notes due 2004 (Exhibit 4.23 to
Registrant's Registration Statement on Form S-4, No. 333-44661)
<F*>4.24 Sale and Service Agreement dated as of December 30, 1997 between TWA and
Constellation Finance LLC, as purchaser, relating to TWA's receivables (Exhibit
4.24 to Registrant's Registration Statement on Form S-4, No. 333-44661)
<F*>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)
<F*>10.1.2 Equipment Operating Lease Agreement, dated November 4, 1993, between TWA
and St. Louis (Exhibit 10.2 to 9/93 10-Q)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
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<PAGE> 100
<C> <S>
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>10.7 '92 Labor Agreements (Exhibits 2.1, 2.2 and 2.3 to 9/92 8-K)
<F*>10.8 Comprehensive Settlement Agreement, dated January 5, 1993 (Exhibit 10(iv)(1) to
`92 10-K)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
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<PAGE> 101
<C> <S>
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
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<PAGE> 102
<C> <S>
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
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<PAGE> 103
<C> <S>
<F*>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)
<F*>10.23.1 Key Employee Stock Incentive Plan (Exhibit 10.33.1 to Registrant's Registration
Statement on Form S-4, No. 33-84944)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
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<PAGE> 104
<C> <S>
<F*>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)
<F*>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)
<F*>10.35 Employee Stock Incentive Program dated as of August 23, 1995 by TWA (Exhibit
10.49 to 12/31/95 Form 10-K)
<F*>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)
<F*>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)
<F*>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)
<F*>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)
<F*>10.40 Letter Agreement dated January 6, 1997 between the Company and Edward Soule
(Exhibit 10.33 to 12/31/96 Form 10-K)
<F*>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)
<F*>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)
<F*>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)
<F*>10.44 Separation Agreement dated July 25, 1997 between the Company and Charles J.
Thibaudeau (Exhibit 10.2 to 6/97 form 10-Q)
<F*>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)
<F*>10.46.1 Pledge and Security Agreement dated as of December 9, 1997 from the Company to
First Security Bank, National Association, as Collateral Agent, in connection with
the 11 1/2% Senior Secured Notes due 2004 (Exhibit 10.46.1 to Registrant's
Registration Statement on Form S-4, No. 333-44661)
E-8
<PAGE> 105
<C> <S>
<F*>10.46.2 Acquired Slot Trust Agreement Declaration of Trust dated as of December 9, 1997
between the Company and First Security Bank, National Association, as Slot Trustee,
in connection with the 11 1/2% Senior Secured Notes due 2004 (Exhibit 10.46.2 to
Registrant's Registration Statement on Form S-4, No. 333-44661)
<F*>10.46.3 Master Sub-License Agreement dated as of December 9, 1997 between the Company
and First Security Bank, National Association, in connection with the 11 1/2% Senior
Secured Notes due 2004 (Exhibit 10.46.3 to Registrant's Registration Statement on
Form S-4, No. 333-44661)
<F*>10.46.4 Collateral Pledge and Security Agreement dated as of December 9, 1997 between the
Company and First Security Bank, National Association, as Trustee, in connection
with the 11 1/2% Senior Secured Notes due 2004 (Exhibit 10.46.4 to Registrant's
Registration Statement on Form S-4, No. 333-44661)
<F*>10.47.1 Exchange Agreement dated as of June 10, 1996 between TWA and Elliott
Associates, L.P. as amended (Exhibit 10.1 to 9/20/96 Form 8-K)
<F*>10.47.2 Exchange Agreement dated as of June 10, 1996 between TWA and Westgate
International, L.P., as amended (Exhibit 10.2 to 9/20/96 Form 8-K)
<F*>10.48.1 Form of Letter Agreement between TWA and executive officers (continuing
employment) (Exhibit 10.1 to 3/97 Form 10-Q)
<F*>10.48.2 Form of Letter Agreement between TWA and executive officers (new hire) (Exhibit
10.2 to 3/97 Form 10-Q)
10.49 Change in Control Agreement for executive officers
10.50 Termination Agreement with Richard P. Magurno dated March 2, 1998
11 Statement of Computation of Per Share Earnings
12 Statement of Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
24 Powers of Attorney
27 Financial Data Schedule
<FN>
- --------------------
<F*>Incorporated by reference
</TABLE>
E-9
<PAGE> 106
SCHEDULE II
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1997,
the Year Ended December 31, 1996,
the Four Months Ended December 31, 1995 and
the Eight Months Ended August 31, 1995
(Amounts in Thousands)
<CAPTION>
Column A Column B Column C Column D Column E
- --------------------------------- ------------ ---------- ---------- ----------
Additions
Balance at Charged to Balance at
Beginning of Costs & End of
Description Period Expenses Deductions Period
- --------------------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Reserves deducted from assets to
which they apply:
Allowance for doubtful
accounts $12,939 $ 2,457 $ 6,062<Fa> $ 9,334
======= ======= ======= =======
Allowance for obsolescence $29,463 $ 1,635 $11,922 $19,176
======= ======= ======= =======
Year Ended December 31, 1996
Reserves deducted from assets to
which they apply:
Allowance for doubtful
accounts $13,517 $ 8,037 $ 8,615<Fa> $12,939
======= ======= ======= =======
Allowance for obsolescence $ 2,201 $28,889 $ 1,627 $29,463
======= ======= ======= =======
Four Months Ended December 31, 1995
Reserves deducted from assets to
which they apply:
Allowance for doubtful
accounts $16,155 $ 700 $ 3,338<Fa> $13,517
======= ======= ======= =======
Allowance for obsolescence $ - $ 2,308 $ 107 $ 2,201
======= ======= ======= =======
Eight Months Ended August 31, 1995
Reserves deducted from assets to
which they apply:
Allowance for doubtful
accounts $14,832 $ 6,781 $ 5,458<Fa> $16,155
======= ======= ======= =======
Allowance for obsolescence $20,928 $ 4,604 $25,532<Fb> $ -
======= ======= ======= =======
<FN>
- -----------------
<Fa> Accounts written off, less recoveries.
<Fb> Includes adjustment to eliminate allowance for obsolescence in the amount
of $25,146 in connection with fresh start reporting.
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.49
CHANGE IN CONTROL AGREEMENT
AGREEMENT by and between Trans World Airlines, Inc., a Delaware
corporation (the "Company") and --------- (the "Executive") dated as of
- --------.
WHEREAS, the Company and Executive are parties to an Employment
Agreement dated as of ----------- (the "Employment Agreement");
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is essential to the best interests of the Company and its
shareholders to foster the continuous employment of Executive,
notwithstanding the possibility, threat or occurrence of a Change in Control
(as defined in Section 2) of the Company;
WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
Executive in his assigned duties without distraction in the face of
potentially disturbing circumstances arising from any possible Change in
Control of the Company; and
WHEREAS, the Board has concluded that the interests of the Company
described above can be best satisfied by agreeing to make certain payments to
the Executive if the Executive's employment is terminated following a Change
in Control and has delegated to the Chairman of the Board and the Chairman of
the Compensation Committee the responsibility and authority to negotiate an
appropriate agreement with Executive;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Amendment to Employment Agreement and Key Employee Stock Incentive
Program; Term of Agreement. This Agreement shall constitute an amendment to
the Employment Agreement and, as related to the Executive, to the Trans World
Airlines, Inc. Key Employee Stock Incentive Program (the "KESIP") to the
extent described below. This Agreement shall continue in effect until the
second anniversary of the date hereof or, should a Change in Control occur
during such two year period, until the second anniversary of the occurrence
of the Change in Control; provided
1
<PAGE> 2
that on each anniversary of the date hereof prior to the occurrence of a
Change in Control (a "Renewal Date"), the term shall be automatically
extended so as to continue until the second anniversary of a Renewal Date or,
should a Change in Control occur prior to such second anniversary of a
Renewal Date, until two years after the occurrence of the Change in Control,
unless 60 days prior to a Renewal Date the Company shall give notice to
Executive that the term shall not be so extended.
2. Change in Control. For purposes of this Agreement and, as related
to the Executive, the KESIP, "Change in Control" shall mean the following and
shall be deemed to have occurred if any of the following events shall have
occurred:
(a) Any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") shall have become the
beneficial owner (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (i) the then outstanding
shares of common stock and employee preferred stock of the Company
(the "Outstanding Company Stock") or (ii) the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company
Voting Securities") provided, however, that the following shall not
constitute a Change in Control: (i) any acquisition of beneficial
ownership of Outstanding Company Stock or Outstanding Company Voting
Securities by the Company or a corporation controlled by the Company,
(ii) any acquisition of such beneficial ownership (other than one
described in clause (e) below) by employees of the Company pursuant to
and in accordance with the terms of any employee plan maintained
pursuant to a collective bargaining agreement binding on the Company
(such plans, collectively, the "Plans") so long as such acquisition
does not result in the Plans in the aggregate owning more than 40% of
the Outstanding Company Stock or Outstanding Company Voting Securities
nor in the participants in, and the trustees of, such Plans having the
ability to exercise more voting or other control over the Company than
is currently permitted to be exercised by the participants in or
trustees of any Plan under the applicable governance provisions of the
Company's charter, By-Laws and collective bargaining agreements, (iii)
any acquisition of such
2
<PAGE> 3
beneficial ownership by any Person pursuant to a reorganization,
merger or consolidation, if, following such reorganization, merger or
consolidation, the conditions described in clauses (i), (ii) and (iii)
of subsection (c) of this Section 2 are satisfied, or (iv) any
acquisition of such beneficial ownership in connection with any
issuance of securities by the Company to any Person who discloses in a
Schedule 13-D or Schedule 13-G filed under the Exchange Act in
connection with such acquisition an intention to engage promptly in a
distribution of at least 75% of the securities so acquired (or the
securities into, or for which, such securities may be converted or
exchanged); provided, however, that if no such distribution shall
occur within 180 days following such acquisition, then a Change in
Control shall be deemed to have occurred as of the date of the
original acquisition; or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason within a period of 18
months to constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be
considered as though the individual were a member of the Incumbent
Board (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 applicable terms of such employee preferred stock), but excluding,
for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election
contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board (any such contest or solicitation, a "Proxy Contest");
or
(c) Approval by the shareholders of the Company of any
reorganization, merger or consolidation, provided that such proposal
is consistent with the Labor Protective Provisions set out in Section
1(D) of the currently effective collective bargaining agreement
between the Company and the Air Line Pilots Association and Section
2(C) of the December 15, 1994 Amendment to the currently
3
<PAGE> 4
effective collective bargaining agreement between the Company and the
International Association of Machinists and Aerospace Workers, unless,
following such reorganization, merger or consolidation, (i) more than
60% of, respectively, the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Stock and Outstanding Company Voting Securities
immediately prior to such reorganization, merger or consolidation in
substantially the same proportions as their ownership, immediately
prior to such reorganization, merger or consolidation, of the
Outstanding Company Stock and Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding (A) the Company and (B)
any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 20%
or more of the Outstanding Company Stock or Outstanding Voting
Securities, as the case may be) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares
of common stock of the corporation resulting from such reorganization,
merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (iii) at least a majority
of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation;
(d) Approval by the shareholders of the Company of the sale or
other disposition of all or substantially all of the assets of the
Company, provided that such proposal is consistent with the collective
bargaining agreements binding on the Company, other than to a
corporation, with respect to which following such sale or other
disposition, (i) more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation
4
<PAGE> 5
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Stock and Outstanding Company
Voting Securities immediately prior to such sale or other disposition
in substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company
Stock and Outstanding Company Voting Securities, as the case may be,
(ii) no Person (excluding (A) the Company and (B) any Person
beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, 20% or more of the Outstanding
Company Stock or Outstanding Company Voting Securities, as the case
may be) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors and (iii) at least a majority of the members
of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition of
assets of the Company;
(e) Any Person (other than the Plans) acting in concert with
any employees of the Company or any group, union, organization or
other Person representing such employees (an "Employee Group") or any
Person having any agreement or understanding with an Employee Group,
whether written or oral, relating to the acquisition or voting of
shares of capital stock of the Company, the nomination or election of
directors of the Company, the terms and conditions of employment of
any members of any Employee Group or any other matter that relates to
or might facilitate the ability of such Person to cause to occur any
of the events listed in paragraphs (a) through (d) above (an "Employee
Group Agreement"), shall have become the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 15% or
more of either the then Outstanding Company Stock or the then
Outstanding Company Voting Securities; or
(f) As a result, directly or indirectly, in whole or in part, of
actions taken by any Person acting in concert with an Employee
5
<PAGE> 6
Group or being a party to any Employee Group Agreement, individuals
who, as of the date hereof, constitute the members of the Board not
nominated or elected by any Employee Group (the "Non Employee
Directors") cease for any reason within a period of 18 months to
constitute at least a majority of the Board; provided, however that
any individual becoming a director subsequent to the date hereof whose
election or nomination for election by the Company's shareholders was
approved by at least a majority of the Non-Employee Directors shall be
considered as if the individual were a Non-Employee Director, but
excluding for this purpose any such individual whose initial
assumption of office occurs as a result of an actual or threatened
Proxy Contest.
Notwithstanding the foregoing, if following a Change in Control
described in (c) or (d) above and prior to the termination of Executive's
employment with the Company, the Board determines in good faith that the
transaction underlying such Change in Control will not be consummated, this
Agreement, including the term thereof, shall continue as if a Change in
Control had not been deemed to have occurred.
In addition, the introductory language in Section 10.1 of the KESIP
shall be amended to read as follows:
"Upon the occurrence of a Change in Control or, in the case of a Change
in Control described in paragraph (c) or (d) of the definition of a Change in
Control, upon the earlier of (i) a termination of employment following a
Change in Control by reason of death or Disability, by the Company without
Cause or by an Employee for Good Reason or (ii) the consummation of the
transaction underlying such Change in Control, unless otherwise specifically
prohibited under applicable laws, or by the rules and regulations of any
governing governmental agencies or national securities exchanges:"
3. Termination Following Change in Control. (a) If a Change in
Control shall have occurred, in lieu of the payments and benefits Executive
would otherwise have received pursuant to the Employment Agreement, upon a
termination of employment during the term of this Agreement by the Company
without Cause (as defined below), or by Executive for Good Reason (as defined
below), Executive shall be entitled to the benefits provided in Section 4.
Executive's entitlements, if any, following a
6
<PAGE> 7
termination of employment by reason of death, Disability or Retirement, by
the Company for Cause or by Executive other than for Good Reason shall
continue to be governed by the terms of the Employment Agreement
("Disability" and "Retirement" each as defined in the Employment Agreement);
provided that, in the case of a termination for Cause, Executive shall have
received a Notice of Termination satisfying the requirements of Subsection
(b) below.
For purposes of this Agreement and, following a Change in Control, for
purposes of the KESIP (which shall to such extent be deemed amended hereby),
"Cause" shall mean any of the following:
(i) Executive is convicted of or engages in conduct which
constitutes a felony or a misdemeanor involving moral turpitude;
(ii) Executive is found by the Board to have failed or refused in
any material respect to perform his duties and responsibilities (after
notice and opportunity to cure if such material failure or refusal can
be cured);
(iii) Executive is found by the Board to have willfully engaged
in conduct which is demonstrably and materially injurious to the
Company;
(iv) Executive has breached his duty of loyalty to, or committed
any act of fraud, theft or dishonesty against or involving the Company
or any of its affiliated companies; or
(v) Executive has breached any material provision of this
Agreement or the Employment Agreement.
For purposes of this Agreement and, following a Change in Control, for
purposes of the KESIP (which shall to such extent be deemed amended hereby as
related to the Executive), "Good Reason" shall mean, without Executive's
express written consent, any of the following:
(I) Executive is removed from Executive's position as in effect
immediately prior to the Change in Control for any reason other than
by reason of death, Disability or Retirement or for Cause;
(II) Executive is assigned any duties inconsistent in a material
respect with Executive's position (including status,
7
<PAGE> 8
offices, titles and reporting relationships), authority, duties or
responsibilities as in effect immediately prior to the Change in
Control if such assignment results in a diminution in such position,
authority, duties or responsibilities (excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly following notice thereof
given by Executive);
(III) The Company fails to pay Executive any amounts otherwise
vested and due under the Employment Agreement (including any bonus),
the KESIP or any other compensation plan of the Company and such
failure continues for ten business days following notice to the
Company thereof;
(IV) Executive's annual base salary as in effect immediately
prior to the Change in Control (or thereafter if higher) is reduced;
(V) The failure by the Company to continue to provide Executive
with benefits at least as favorable in the aggregate as those enjoyed
by Executive under the Company's pension, life insurance, medical,
health and accident, disability, travel, deferred compensation and
savings plans in which Executive was participating at the time of the
Change in Control, the taking of any action by the Company which would
directly or indirectly materially reduce such benefits in the
aggregate or deprive Executive of any material fringe benefit enjoyed
by Executive at the time of the Change in Control unless such material
fringe benefit is replaced with a comparable benefit, or the failure
by the Company to continue to provide Executive with the number of
paid vacation days to which Executive is entitled;
(VI) The failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this
Agreement and the Employment Agreement, as contemplated in Section 7
hereof; or
(VII) Any purported termination of Executive's employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection (b) below, which termination for purposes
of this Agreement shall be ineffective.
8
<PAGE> 9
Notwithstanding the foregoing, a termination shall not be treated as a
termination for Good Reason unless Executive shall have delivered a Notice of
Termination (as defined below) within 90 days of having actual knowledge of
the occurrence of one of such events stating that Executive intends to
terminate employment for Good Reason.
(b) Notice of Termination. Following a Change in Control, any
purported termination of employment by the Company or by Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 8 hereof. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(c) Date of Termination, Following a Change in Control, "Date of
Termination" shall mean the date specified in the Notice of Termination,
which shall not be less than 30 nor more than 60 days from the date such
Notice of Termination is given) (except for a termination pursuant to Section
3(a)(VI), in which event the date upon which any succession referred to
therein becomes effective shall be deemed the Date of Termination, or a
termination by the Company for Cause, in which event the date such notice is
received shall be the Date of Termination). For purposes of this Agreement,
any good faith determination of "Good Reason" made by Executive shall be
conclusive.
4. Compensation Upon Termination Without Cause or for Good Reason.
Following a Change in Control, upon any termination of Executive's employment
by the Company without Cause (other than because of death, Disability or
Retirement), or any termination of employment by Executive for Good Reason,
in any case, during the term of this Agreement, in lieu of the payments and
benefits (not including any payments and benefits payable under the KESIP)
Executive would otherwise have received pursuant to the Employment Agreement
and in lieu of any severance benefits Executive would otherwise be eligible
to receive under the Company's severance plan, if any, as in effect
immediately prior to the Change in Control, Executive shall be entitled to
the following benefits and payments, payable (unless otherwise provided
below) in a lump sum in cash within ten days after the Date of Termination:
9
<PAGE> 10
(a) Full base salary through the Date of Termination at the rate
in effect at the time the Notice of Termination is given or, if
higher, at the rate in effect immediately prior to the reduction
giving rise (pursuant to Section 3(a)(IV)) to Good Reason for such
termination, plus all other amounts to which Executive is entitled
under any compensation or benefit plan of the Company at the time such
payments are due under the terms of such plans.
(b) A severance payment (the "Severance Payment") equal to two
times the sum of Executive's annual base salary and bonus with respect
to the year (out of the three years immediately preceding the year in
which such termination occurs or the three years immediately preceding
the Change in Control, if higher) for which such sum is highest,
reduced by any base salary or bonus paid Executive in respect of any
period after the Date of Termination.
(c) Life, disability, accident and health insurance benefits
substantially similar to those which Executive was receiving
immediately prior to the Change in Control (or thereafter, if higher)
until the earlier to occur of (i) the second anniversary of the Date
of Termination or (ii) such time as Executive is covered by comparable
programs of a subsequent employer; provided, however, that in the
event the Company is unable to provide such benefits, the Company
shall make annual payments to Executive in an amount such that
following Executive's payment of applicable taxes thereon, Executive
retains an amount equal to the cost to Executive, net of any cost
which would otherwise be borne by Executive, of obtaining comparable
life, disability, accident and health insurance coverage. Benefits
otherwise receivable by Executive pursuant to this Section 4(c) shall
be reduced to the extent comparable benefits are actually received
during the two year period following termination, and any such
benefits actually received by Executive shall be reported to the
Company.
(d) Lifetime pass privileges for Executive and family members
of the same type and priority received prior to the Date of
Termination (or thereafter, if more favorable), which pass privileges
shall apply to travel on any airline controlled by the Company or the
Company's successor, as the case may be.
10
<PAGE> 11
(e) In addition to all other amounts payable under this Section
4, Executive shall be entitled to receive all benefits payable under
any other plan or agreement relating to retirement benefits (including
plans or agreements of any successor following a Change in Control) in
accordance with the terms of such plan or agreement; provided that, to
the extent permitted by applicable law, Executive shall be credited
under such plans or agreements of any successor with two years
additional service with the Company after the Date of Termination for
vesting and eligibility purposes.
5. Mitigation. Executive shall not be required to mitigate the amount
of any payment or benefit provided for in Section 4 by seeking other
employment or otherwise, nor (except as specifically provided in Section 4)
shall the amount of any payment or benefit provided for in Section 4 be
reduced by any compensation earned by Executive as the result of employment
by another employer or by retirement benefits after the Date of Termination,
or otherwise.
6. Parachute Payments. Anything in this Agreement to the contrary
notwithstanding, if a reduction in the aggregate amount of payments Executive
otherwise would be entitled to receive under this Agreement (after taking
into account all other payments paid, payable or deemed payable pursuant to
Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code")
to Executive under any other plan or agreement between Executive and the
Company, including by reason of the vesting of any options or other awards
under the KESIP, which payments are deemed contingent on a change described
in Section 280G(b)(2)(A)(i) of the Code ("Contingent Payments") would result
in a greater "Net After-Tax Amount" then the payments under this Agreement
shall first be reduced and such Contingent Payments shall next be reduced in
such manner as to provide the greatest Net After-Tax Amount. For purposes of
this Agreement, Net After-Tax Amount shall mean the net amount of any
Contingent Payments together with the amount of the payments Executive is
entitled to receive under this Agreement, after giving effect to all taxes
which would be applicable to such payments, including, but not limited to,
any tax under Section 4999 of the Code. The determination of whether any
such payment reduction shall be effected shall be made by KPMG Peat Marwick
LLP or such other independent public accounting firm,
11
<PAGE> 12
acceptable to Executive, that the Company shall select and such determination
shall be binding upon Executive and the Company.
7. Successors; Binding Agreement. (a) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement and the
Employment Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean the Company as
herein before defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise. Prior to a Change in Control, the term "Company" shall
also mean any affiliate of the Company to which Executive may be transferred
and the Company shall cause such successor employer to be considered the
"Company" bound by the terms of this Agreement and this Agreement shall be
amended to so provide. Following a Change in Control the term "Company"
shall not mean any affiliate of the Company to which Executive may be
transferred unless Executive shall have previously approved of such transfer
in writing, in which case the Company shall cause such successor employer to
be considered the "Company" bound by the terms of this Agreement and this
Agreement shall be amended to so provide.
(b) This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Executive should
die while any amount would still be payable hereunder if Executive had
continued to live, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to Executive's
devisee, legatee or other designee or, if there is no such designee, to
Executive's estate.
8. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, or by such other delivery service
providing receipts, in either case postage prepaid, addressed to the
respective addresses set forth on the signature page of this Agreement;
provided that all notices to the Company shall be directed
12
<PAGE> 13
to the attention of the General Counsel, or to such other address as either
party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
9. Withholding Taxes. The Company may withhold from any amounts
payable under this Agreement such Federal, state and local taxes as may be
required to be withheld pursuant to any applicable law or regulation.
10. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed
to in writing and signed by Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement.
11. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
12. Validity. If any provision of this Agreement shall be declared to
be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
13. Counterparts. This Agreement may be signed in several
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
14. Arbitration. Except as otherwise provided in any nonsolicitation
or confidentiality covenant binding upon Executive, any dispute or
controversy arising under or in connection with this Agreement shall be
settled exclusively by arbitration in New York in accordance with the rules
of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
13
<PAGE> 14
15. Status Prior to Change in Control. Nothing contained in this
Agreement shall impair or interfere in any way with Executive's right to
terminate employment or the right of the Company or any subsidiary to
terminate Executive's employment with or without Cause prior to a Change in
Control. Nothing contained in this Agreement shall be construed as a
contract of employment between the Company and Executive.
16. Legal Fees. The Company shall pay all legal fees and expenses
which may be incurred by Executive in contesting or disputing any termination
of employment following a Change in Control or in seeking to obtain or
enforce any right or benefit provided by this Agreement, which payment shall
be made in advance of the final disposition of any such contest.
17. Conflict with Employment Agreement and Key Employee Stock
Incentive Program. Executive acknowledges that this Agreement is in full
satisfaction of the Company's obligation under Section 4(c) of the Employment
Agreement to enter into a change of control severance agreement with
Executive on terms and conditions no less favorable in any material respect
to those offered to any other of the Company's officers serving at the same
level as Executive and that Executive has no further rights under such
Section 4(c). In the event of any conflict between this Agreement and the
Employment Agreement, the KESIP or any other agreement between the parties,
the provisions of this Agreement shall control and shall be deemed an
amendment thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
TRANS WORLD AIRLINES, INC.
By------------------------
Kathleen A. Soled
EXECUTIVE Senior Vice President and General Counsel
Trans World Airlines, Inc.
- ------------------------ One City Centre
Name of Executive 515 N. Sixth Street
Address St. Louis, MO 63101
14
<PAGE> 1
EXHIBIT 10.50
March 2, 1998
VIA FEDERAL EXPRESS
- -------------------
Mr. Richard P. Magurno
Apt. 7B
2575 S. Bayshore Drive
Coconut Grove, Florida 33133
Dear Dick:
This letter will confirm our agreement concerning the termination of your
employment by Trans World Airlines, Inc. ("TWA" or the "Company"). This
Agreement shall be deemed to constitute a severance agreement in lieu of
notice of your termination. In this connection, we have agreed as follows:
1. Your last day on the active payroll of TWA will be June 12, 1998
("termination date"). During the period commencing February 1, 1998
to the termination date you will continue to be paid your normal
earnings less all statutory tax withholdings and normal payroll
deductions. As of the termination date you will be deemed to have
used all of your unused earned and accrued vacation for 1998.
2. Following the termination date TWA will continue to issue monthly
checks to you in an amount equal to your monthly earnings less all
statutory tax withholdings and normal payroll deductions up to and
including the check issued on March 15, 1999. (The check issued to
you on June 15, 1998 will be comprised of payment equal to twelve days
of earnings on the active TWA payroll and eighteen days of the ten
month severance payment.) The Company will issue a final check to you
on April 15, 1999, in the amount of $9,576.24, representing payment
for the final twelve days of severance payment due for the period from
April 1 through April 12, 1999.
3. 357,366 of the non-qualified stock options (the "Option") issued to you
under TWA's Key Employee Stock Incentive Program ("KESIP") will be
treated as vested options and such vested options will be exercisable
by you in accordance with the terms of the KESIP, as amended to date.
4. In accordance with the KESIP, your vested options will expire sixty
(60) days following the date (after the termination date) on which TWA
files its Form 10-Q with the United Securities and Exchange Commission
which filing should be on or about August 15, 1998 ("Option
Termination Period") provided that, if at any time during the Option
Termination Period either TWA requests that you not trade in
securities of the Company for a period of time or you notify TWA that
counsel reasonably acceptable to the Company has advised you that
applicable securities laws prohibit trading securities of the Company
(either such period being referred to herein as a "Restricted Period")
then TWA, subject to any applicable Option expiration dates set out in
the KESIP Agreement between you and TWA ("the KESIP Agreement"), shall
extend the period during which the Option may be exercised until the
close of business on the day which follows the Restricted Period, by
the number of days remaining in such Option Termination Period as of
the beginning of the Restricted Period. To the extent that there is
any inconsistency between the terms and conditions of this Agreement
and those of the KESIP or the KESIP Agreement, the terms and
conditions of this Agreement shall control.
5. You and eligible dependents will retain coverage at TWA's expense for
TWA Medical and Dental Benefits, as well as the current TWA Basic
Group Life Insurance through January 31,
<PAGE> 2
Richard P. Magurno
March 2, 1998
Page 2
1999. After January 31, 1999, you will be eligible to convert your
TWA Additional Group Life Insurance to individual coverage.
Information regarding life insurance conversion will be provided to
you. Current Additional Life Insurance will cease as of January 31,
1999. Current Voluntary Accidental Death and Dismemberment, and
Disability Insurance will cease as of January 31, 1999.
6. You and your eligible family members as defined in Chapter 13 of TWA's
Management Policy and Procedure Manual will be entitled to Class A
pass privileges until January 31, 1999. A non-ID Term Pass will be
issued to you, and when you receive it you will promptly return your
current ID term pass to the undersigned on behalf of TWA. Your
eligible family members will make application for travel through the
TWA Legal Department or the Employee Travel Department. Use of the
above passes will be subject to TWA's pass policy and applicable
restrictions published in its Management Policy and Procedure Manual,
as the same may be in effect from time to time. You will promptly
return to the undersigned on behalf of TWA all term passes issued to
you by other air carriers.
7. Your participation in the Retirement Savings Plan for Non-Contract
Employees of TWA will end on January 31, 1999, on which date TWA's
contribution on your after-tax savings will be 100% vested.
Distribution of your vested account balance will thereafter be made as
you elect in accordance with the terms of the Plan.
8. Any and all coverage and benefits, other than those set out in
paragraph 5, 6 and 7 herein, under any TWA group benefit or insurance
plan and any other benefits, privileges, or emoluments whatsoever
pertaining to your employment by TWA shall be discontinued as of
midnight, January 31, 1998.
9. Unless otherwise agreed by the parties, you will return to TWA any
computers and all accessories, software and appurtenances thereto and
cellular telephones or pagers which are the property of or leased by
TWA and in your possession, and any other Company property, documents
or material that may be in your possession, by not later than January
31, 1998.
10. You agree to make yourself reasonably available (taking into
consideration your then current employment circumstances) and to
cooperate with TWA as may be reasonably necessary in connection with
any litigation or other proceedings which have arisen or may arise,
directly or indirectly, out of or in connection with the performance
of your duties while you were employed by TWA. TWA will compensate
you for said services pursuant to its standard compensation of an
hourly rate based upon your last salary while still employed by TWA
or, if greater your then current salary. You agree not to serve as an
expert witness or otherwise testify against TWA in any litigation
against TWA brought by any third parties unless you are under a court
order or subpoena to do so. You will promptly notify TWA if you are
so subpoenaed or ordered by any court to so testify in any litigation
against TWA.
12. You agree that under any of the circumstances set forth herein:
(a) you shall not for a period of two years following your
termination date, directly or indirectly solicit (or assist or encourage the
solicitation of) any employee of the Company or any of its subsidiaries or
affiliated companies or anyone who was so employed at any time within twelve
(12) months prior to termination of your employment by the Company to be
employed by you or by any entity in which you own or expect to own any equity
interest in excess of five (5) percent of any class of the outstanding
securities thereof, or by any entity by which you are employed or for which
you serve or expect to serve in any capacity; nor encourage or induce any
Company employee to terminate his or her Company employment. For the
purposes of this paragraph, the term "solicit" shall mean any contact by you
with or providing information to others who may be
<PAGE> 3
Richard P. Magurno
March 2, 1998
Page 3
expected to contact any employees of the Company or of any of its
subsidiaries or affiliated companies regarding their employment status, job
satisfaction, interest in seeking employment with you, with any person
affiliated with you or by whom you are employed but shall not include print
advertising for personnel or responding to any unsolicited request for a
personal recommendation for or evaluation of a Company employee or an
employee of any of the Company's subsidiaries or affiliated companies.
(b) you shall hold forever hereafter in a fiduciary capacity
for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its subsidiaries or
affiliated companies, including but not limited to commercial, operational,
marketing, pricing, personnel or financial information including costs,
strategies, forecasts or trade secrets, acquisition strategies or candidates
or personnel acquisition plans ("confidential information") which shall have
been obtained by you during or by reason of your employment by the Company or
by any of its subsidiaries or affiliated companies and which shall not be
public knowledge. You shall not, without the prior written consent of the
Company or unless required to do so by reason of a court order or subpoena
(in which case you shall give Company prompt notice of any such other
subpoena or order, or request therefore, so as to provide Company the maximum
opportunity to contest the same), communicate or divulge any such
confidential information to anyone other than the Company or those designated
by it.
(c) you shall not for a period of two years following your
termination date discuss or disclose to the media or Company personnel the
circumstances or terms of your termination of employment.
(d) you shall not publicly disparage or denigrate the Company
or any of its officers, directors or practices.
(e) you specifically agree that you will not advise or consult
with Pan American Airlines, its subsidiaries, affiliates, assigns and
successors, or any other entity with respect to the subleasing of TWA's
terminal gates located at John F. Kennedy International Airport to Pan
American Airlines.
To the extent that any covenant or agreement contained in this
paragraph 12 shall be determined by a Court to be invalid or unenforceable in
any respect or to any extent, the covenant or agreement shall not be rendered
void, but instead shall be automatically amended to such lesser scope or to
such lesser extent as will grant Company the maximum restriction on your
conduct and activities permitted by applicable law in such circumstances.
13. In consideration of the foregoing, you agree as follows:
(a) With the exception of claims arising out of a breach of
this Agreement, you irrevocably and unconditionally release, remise, acquit
and forever discharge Trans World Airlines, Inc., its past and present
parents, subsidiaries, divisions, controlling parties, officers, directors,
agents, employees, successors, and assigns (separately and collectively
"releasees") jointly and individually, of and from any and all claims,
demands, causes of action, obligations, damages or liabilities, in law or in
equity, arising from any and all bases, however denominated, known or
unknown, relating to your employment by TWA and the termination thereof,
including, but not limited to, any and all claims of employment
discrimination under any federal, state or local law, rule or regulation.
This release expressly refers to, includes and releases all rights or claims
arising under the Age Discrimination in Employment Act of 1967, as amended,
Title 29 U.S. Code 621, et. seq. This release extends to any relief, no
matter how described, including, but not limited to, back pay, front pay,
reinstatement, compensatory
<PAGE> 4
Richard P. Magurno
March 2, 1998
Page 4
damages, punitive damages, liquidated damages or damages for pain and
suffering. You further agree that you will not file nor permit to be filed
on your behalf any such claim, will not permit yourself to be a member of any
class seeking relief against releasees, and will not counsel or assist in the
prosecution of any claims against the releasees, whether those claims are on
behalf of yourself or others, unless you are under a court order or subpoena
to do so. In the event you are served with such a court order or subpoena,
you agree to notify TWA's Legal Department of such service within 24 hours of
your obtaining actual knowledge of service or your receipt of same,
whichever first occurs. This release extends to and includes all rights or
claims arising on or before the date of signing of this Agreement, but shall
not extend to or include any rights or claims that may arise after the date
on which this Agreement is signed.
(b) You further acknowledge that the only consideration for
signing this Agreement and all that you are ever to receive from the
releasees are the terms stated in this Agreement and that no other promises
or agreements of any kind have been made to you or with you by any person or
entity whatsoever to cause you to sign this Agreement; and that you have
signed this Agreement as your free and voluntary act. You further acknowledge
that pursuant to the terms of this Agreement you are and will be receiving
benefits from TWA which are substantially above and beyond those benefits to
which you are already entitled under TWA's published corporate policies and
procedures governing termination of employment; that you have had a full,
fair and adequate opportunity of at least twenty-one (21) days in which to
reflect upon and consider the terms of this Agreement; that you have been
advised to consult, and have consulted, with an attorney of your choosing
prior to signing this Agreement; that no pressure or duress of any kind has
been applied to you with respect to your signing this Agreement; and that you
understand and are fully satisfied with the terms and provisions of this
Agreement.
(c) Under the Older Workers Benefits Protection Act of 1990,
you have seven (7) days from the date of your signing of this Agreement to
revoke the Agreement, and this Agreement shall not become effective or
enforceable until this revocation period has expired and you have not revoked
the Agreement.
14. This Agreement shall be governed by and be construed in accordance with
the internal laws of the State of Missouri, without reference to principles
of conflicts of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. Neither this Agreement
nor any of its terms may be amended, waived, added to or modified other than
by written agreement executed by the parties hereto or their respective
successors and legal representatives.
15. All notices and other communications hereunder shall be in writing and
shall be given by facsimile or by hand delivery to the other party or by
regular or registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to you:
---------
Richard P. Magurno
Apt. 7B
2575 S. Bayshore Drive
Coconut Grove, Florida 33133
If to the Company:
-----------------
Trans World Airlines, Inc.
One City Centre
515 North 6th Street
St. Louis, Missouri 63101
Attn: General Counsel
<PAGE> 5
Richard P. Magurno
March 2, 1998
Page 5
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
16. The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of
this Agreement.
17. This Agreement contains the entire understanding between the parties
concerning the subject matter hereof and supersedes all prior agreements,
understandings, discussions, negotiations and undertakings, whether written
or oral, among the parties with respect thereto.
Sincerely,
James F. Martin
Senior Vice President - Human Resources
Read, Acknowledged and Agreed to
this ------- day of --------, 1998:
- ------------------------------
Richard P. Magurno
<PAGE> 1
EXHIBIT 11
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<CAPTION>
FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
ADJUSTMENTS TO NET INCOME (LOSS):
Loss before extraordinary items $ (89,862) $(275,027) $(33,638)
Preferred stock dividend requirements (16,119) (16,648) (4,751)
Special dividend requirement relating to redemption
of 12% Preferred Stock - (20,001) -
--------- --------- --------
Loss before extraordinary items applicable to common stock (105,981) (311,676) (38,389)
Extraordinary items, net of income taxes (20,973) (9,788) 3,500
--------- --------- --------
Net loss applicable to common stock for basic earnings
per share calculation (126,954) (321,464) (34,889)
Diluted Earnings Per Share adjustment - dividend requirements
on 8% and 9 1/4% Preferred Stock assumed to be converted 16,119 16,648 4,751
--------- --------- --------
Net loss applicable to common stock for diluted earnings
per share calculation $(110,835) $(304,816) $(30,138)
========= ========= ========
ADJUSTMENTS TO OUTSTANDING SHARES:
Basic Earnings Per Share:
Average number of shares of common stock<F1> 53,477 44,189 33,330
Diluted Earnings Per Share Adjustments:
Incremental shares associated with the assumed exercise of
options and warrants<F2> 832 3,759 1,645
Common shares assumed to be issued upon conversion of
8% and 9 1/4% Preferred Stock 10,412 7,401 -
--------- --------- --------
Total average number of common and common equivalent
shares used for diluted earnings per share calculation 64,721 55,349 34,975
========= ========= ========
PER SHARE AMOUNTS:
Loss before extraordinary item and special preferred dividend:
Basic $ (1.98) $ (6.60) $ (1.15)
Diluted<F3> $ (1.39) $ (4.97) $ (0.96)
Net loss:
Basic $ (2.37) $ (7.27) $ (1.05)
Diluted<F3> $ (1.71) $ (5.51) $ (0.86)
<FN>
- --------------------
<F1> Includes 6,397 shares for the year ended December 31, 1997, 5,681 for the
year ended December 31, 1996, and 5,349 shares for the period ended
December 31, 1995, of Employee Preferred Stock which, except for a
liquidation preference of $.01 per share and the right to elect a certain
number of directors to the Board of Directors, is the functional equivalent
of Common Stock.
<F2> Pursuant to an employee stock incentive plan (ESIP or the Plan), the
Company is required to distribute additional shares of common stock and
Employee Preferred Stock as a result of the distribution of additional
shares following the effective date of the '95 Reorganization. The
Company distributed 931,604 additional shares in July 1997 under this
provision. Additionally, the ESIP provides that, beginning in 1997,
employees may significantly increase their ownership, through grants or
purchases, as set forth in the Plan. The earnings (loss) per share
computations do not give any effect to the potential issuance of these
shares.
<F3> As the effects of including the incremental shares associated with
options and warrants and the assumed conversion of the 8% Preferred Stock
are antidilutive, these amounts are not presented in the accompanying
statements of consolidated operations.
</TABLE>
<PAGE> 1
EXHIBIT 12
<TABLE>
TRANS WORLD AIRLINES, INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<CAPTION>
Prior
Predecessor
Company Predecessor Company Reorganized Company
----------- -------------------------------------- --------------------------------------
Ten Months Two Months Eight Months Four Months
Ended Ended Year Ended Ended Ended Year Ended Year Ended
October 31, December 31, December 31, August 31, December 31, December 31, December 31,
1993 1993 1994 1995 1995 1996 1997
----------- ------------ ------------ ------------ ------------ ------------ ------------
(Amounts in Thousands, except for ratio)
<S> <C> <C> <C> <C> <C> <C> <C>
Loss from operations before
income taxes $(362,620) $(88,140) $(432,869) $(338,309) $(32,268) $(274,577) $(89,335)
Add:
Interest on indebtedness<F1> 91,877 31,204 195,352 123,247 45,917 126,822 114,066
Portion of rents representative
of the interest factor 57,821 12,198 87,122 60,849 32,131 100,997 123,609
--------- -------- --------- --------- -------- --------- --------
Income as adjusted $(212,922) $(44,738) $(150,395) $(154,213) $ 45,780 $ (46,758) $148,340
--------- -------- --------- --------- -------- --------- --------
Fixed Charges:
Interest on indebtedness $ 91,877 $ 31,204 $ 195,352 $ 123,247 $ 45,917 $ 126,822 $114,066
Capitalized interest 2,104 267 2,133 - - 5,463 4,784
Portion of rents representative
of the interest factor 57,821 12,198 87,122 60,849 32,131 100,997 123,609
--------- -------- --------- --------- -------- --------- --------
Fixed charges $ 151,802 $ 43,669 $ 284,607 $ 184,096 $ 78,048 $ 233,282 $242,459
--------- -------- --------- --------- -------- --------- --------
Preferred stock dividends:
Preferred stock dividend
requirements $ 71,125 $ 2,425 $ 15,000 $ 11,554 $ 4,754 $ 36,649 $ 16,119
Tax adjustment 45,473 1,550 9,590 7,387 3,039 23,430 10,305
--------- -------- --------- --------- -------- --------- --------
Preferred stock dividends $ 116,598 $ 3,975 $ 24,590 $ 18,941 $ 7,793 $ 60,079 $ 26,424
--------- -------- --------- --------- -------- --------- --------
Combined fixed charges and
preferred stock dividends $ 268,400 $ 47,644 $ 309,197 $ 203,037 $ 85,841 $ 293,361 $268,883
--------- -------- --------- --------- -------- --------- --------
Ratio of earnings to combined fixed charges
and preferred stock dividends (0.79) (0.94) (0.49) (0.76) 0.53 (0.16) 0.55
--------- -------- --------- --------- -------- --------- --------
Deficiency $ 481,322 $ 92,382 $ 459,592 $ 357,250 $ 40,061 $ 340,119 $120,543
--------- -------- --------- --------- -------- --------- --------
<FN>
<F1> Includes amortization of debt expense.
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF TRANS WORLD AIRLINES, INC.
1. Ambassador Fuel Corporation
2. Royal Ambassador Insurance Company
3. Getaway Management Services, Inc.
4. International Aviation Security, Inc.
5. International Aviation Security France
6. International Airport Services
7. International Aviation Security Gesellschaft
8. International Aviation Security Italia S.r.l.
9. International Aviation Security S.A.
10. International Aviation Security Ltd.
11. International Aviation Security (UK)
12. International Aviation Security N.V
13. Mega Advertising, Inc.
14. Northwest 112th Street Corp.
15. Ozark Group, Inc.
16. TWA Getaway Vacations, Inc
17. The Getaway Group (UK), Inc
18. The TWA Ambassadors Club, Inc.
19. Transcontinental & Western Air, Inc.
20. Trans World Computer Services, Inc.
21. Trans World Express, Inc.
22. Trans World Pars, Inc.<F1>
23. TWA Aviation, Inc.
24. TWA de Mexico S.A. de C.V.
25. TWA Employee Services, Inc.
26. TWA Group, Inc.
27. TWA Nippon, Inc.
28. TWA Standards & Controls, Inc.
29. TWA-NY/NJ Gate Company, Inc.
30. TWA-LAX Gate Company, Inc.
31. TWA-San Francisco Gate Company, Inc.
32. TWA-Logan Gate Company, Inc.
33. TWA-D.C. Gate Company, Inc.
34. TWA-Omnibus Gate Company, Inc.
35. TWA-Hangar 12 Holding Company, Inc.
36. LAX Holding Company, Inc.
37. TWA Stock Holding Company, Inc.
38. ConFin Inc.
39. Constellation Finance LLC<F2>
[FN]
- --------------------
<F1> Holds 25% of Worldspan
<F2> Pursuant to Partnership Agreement ConFin is managing partner of this
entity. TWA is the limited partner.
<PAGE> 1
EXHIBIT 23.1
AUDITORS' CONSENT
THE BOARD OF DIRECTORS
TRANS WORLD AIRLINES, INC.:
We consent to incorporation by reference in the registration statements (No.
333-01561, 333-05163, 333-04787, 333-12739, 333-32441 and 333-39739) on Form S-8
and in the registration statements (No. 333-04977, 333-26639 and 333-44689) on
Forms S-3 of Trans World Airlines, Inc. of our report dated March 4, 1998,
relating to the consolidated balance sheets of Trans World Airlines, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the related statements of
consolidated operations, cash flows and shareholders' equity (deficiency) for
the years ended December 31, 1997 and 1996, the four months ended December 31,
1995 and the eight months ended August 31, 1995. In addition, our report refers
to the application of fresh start reporting as of September 1, 1995.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
March 30, 1998
<PAGE> 1
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, John W. Bachmann, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ John W. Bachmann
--------------------
John W. Bachmann
<PAGE> 2
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, William F. Compton, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of March,
1998.
/s/ William F. Compton
----------------------
William F. Compton
<PAGE> 3
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Eugene P. Conese, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 25th day of March,
1998.
/s/ Eugene P. Conese
--------------------
Eugene P. Conese
<PAGE> 4
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, William M. Hoffman, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ William M. Hoffman
----------------------
William M. Hoffman
<PAGE> 5
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Edgar M. House, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of March,
1998.
/s/ Edgar M. House
------------------
Edgar M. House
<PAGE> 6
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas H. Jacobsen, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ Thomas H. Jacobsen
----------------------
Thomas H. Jacobsen
<PAGE> 7
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Myron Kaplan, a Director of TRANS
WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ Myron Kaplan
----------------
Myron Kaplan
<PAGE> 8
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, David M. Kennedy, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ David M. Kennedy
--------------------
David M. Kennedy
<PAGE> 9
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Merrill A. McPeak, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ Merrill A. McPeak
---------------------
Merrill A. McPeak
<PAGE> 10
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas F. Meagher, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ Thomas F. Meagher
---------------------
Thomas F. Meagher
<PAGE> 11
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, William O'Driscoll, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ William O'Driscoll
----------------------
William O'Driscoll
<PAGE> 12
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, G. Joseph Reddington, a Director
of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and
appoint Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each
of them, my true and lawful attorneys-in-fact, with full power of
substitution and resubstitution, for me and in my name, on my behalf and in
my stead, in any and all capacities, to sign, pursuant to the requirements of
the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS
WORLD AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file
such Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ G. Joseph Reddington
------------------------
G. Joseph Reddington
<PAGE> 13
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Blanche M. Touhill, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ Blanche M. Touhill
----------------------
Blanche M. Touhill
<PAGE> 14
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Stephen M. Tumblin, a Director of
TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint
Gerald L. Gitner, Kathleen A. Soled and Michael J. Palumbo, and each of them,
my true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, on my behalf and in my stead, in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD
AIRLINES, INC. for the fiscal year ended December 31, 1997, and to file such
Annual Report on Form 10-K with the Securities and Exchange Commission,
together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all
capacities, any amendments and supplements to said Annual Report on Form
10-K, incorporating such changes as any of the said attorneys-in-fact deems
appropriate, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this ------ day of March,
1998.
/s/ Stephen M. Tumblin
Stephen M. Tumblin
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TRANS WORLD AIRLINES, INC.
AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 237,765
<SECURITIES> 0
<RECEIVABLES> 185,667
<ALLOWANCES> 9,334
<INVENTORY> 96,108
<CURRENT-ASSETS> 632,957
<PP&E> 934,984
<DEPRECIATION> 193,219
<TOTAL-ASSETS> 2,773,848
<CURRENT-LIABILITIES> 936,945
<BONDS> 919,462
0
121
<COMMON> 514
<OTHER-SE> 267,649
<TOTAL-LIABILITY-AND-EQUITY> 2,773,848
<SALES> 0
<TOTAL-REVENUES> 3,327,952
<CGS> 0
<TOTAL-COSTS> 3,357,212
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,457
<INTEREST-EXPENSE> 114,066
<INCOME-PRETAX> (89,335)
<INCOME-TAX> 527
<INCOME-CONTINUING> (89,862)
<DISCONTINUED> 0
<EXTRAORDINARY> (20,973)
<CHANGES> 0
<NET-INCOME> (110,835)
<EPS-PRIMARY> (2.37)
<EPS-DILUTED> (2.37)
</TABLE>
