<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated September 30, 1993)
$175,000,000
[LOGO OF USAIR APPEARS HERE]
9 5/8% SENIOR NOTES DUE FEBRUARY 1, 2001
UNCONDITIONALLY GUARANTEED BY USAIR GROUP, INC.
----------------
INTEREST PAYABLE FEBRUARY 1 AND AUGUST 1
----------------
Interest on the 9 5/8% Senior Notes due February 1, 2001 (the "Notes") of
USAir, Inc. ("USAir" or the "Company") is payable semi-annually in arrears on
February 1 and August 1 of each year, commencing August 1, 1994. The Notes
will mature on February 1, 2001. The Notes may not be redeemed prior to matu-
rity by the Company and are not subject to any sinking fund. Payment of the
principal of and interest on the Notes is unconditionally guaranteed by USAir
Group, Inc. ("USAir Group" or the "Guarantor"), the holding company parent of
USAir.
The Notes will be represented by one or more Global Notes registered in the
name of the Depository's nominee. Beneficial interests in the Global Notes
will be shown on, and transfers thereof will be effected only through, records
maintained by the Depository and its participants. Except as described herein,
Notes in definitive form will not be issued. The Notes will trade in the
Depository's Same-Day Funds Settlement System until maturity, and secondary
market trading activity for the Notes will therefore settle in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds. See "Description of the Notes and
Guarantees--Same-Day Settlement and Payment".
See "Risk Factors" for a discussion of certain factors which should be con-
sidered by prospective purchasers of the securities offered hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note............................... 100.000% 1.625% 98.375%
- --------------------------------------------------------------------------------
Total.................................. $175,000,000 $2,843,750 $172,156,250
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from February 2, 1994.
(2) The Company has agreed to indemnify the Underwriter against certain lia-
bilities, including liabilities under the Securities Act of 1933, as
amended.
(3) Before deduction of estimated expenses of $100,000 to be paid by the Com-
pany.
----------------
The Notes offered by this Prospectus Supplement are offered by the Under-
writer subject to prior sale, withdrawal, cancellation or modification of the
offer without notice, to delivery to and acceptance by the Underwriter and to
certain further conditions. It is expected that delivery of the Notes will be
made in book-entry form through the facilities of the Depository on or about
February 2, 1994.
----------------
LEHMAN BROTHERS
January 26, 1994
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------
FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE NOTES OF USAIR GUARANTEED BY USAIR GROUP OFFERED
HEREBY TO CALIFORNIA RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO (1) "AC-
CREDITED INVESTORS" WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT
OF 1933, (2) BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE
COMPANIES, INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF
1940, PENSION AND PROFIT SHARING TRUSTS, ANY CORPORATIONS OR OTHER ENTITIES
WHICH, TOGETHER WITH SUCH CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A
NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PRE-
PARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY
AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES
OF THE FOREGOING, (3) ANY NATURAL PERSON OR ANY CORPORATION, PARTNERSHIP OR OR-
GANIZATION (OTHER THAN A CORPORATION, PARTNERSHIP OR ORGANIZATION FORMED FOR
THE SOLE PURPOSE OF PURCHASING THE SECURITIES BEING OFFERED HEREBY) WHO PUR-
CHASES AT LEAST $100,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED HEREBY, OR
(4) ANY NATURAL PERSON WHO (A) HAS INCOME OF $65,000 AND A NET WORTH OF
$250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME,
HOME FURNISHINGS AND PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT PURCHASING
THE SECURITIES OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT
IT COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT SELL
OR OTHERWISE TRANSFER SUCH SECURITY TO A CALIFORNIA RESIDENT UNLESS THE TRANS-
FEREE COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL ADVISE
THE TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL BE
DEEMED TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary does not purport to be complete and is qualified in its
entirety by the detailed information appearing elsewhere in this Prospectus
Supplement and the accompanying Prospectus. FOR INFORMATION THAT SHOULD BE CON-
SIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" IN THIS PROSPECTUS SUPPLE-
MENT. Capitalized terms which are not defined herein are defined elsewhere in
this Prospectus Supplement.
THE COMPANY
USAir, Inc. ("USAir" or the "Company"), principal operating subsidiary of
USAir Group, Inc. ("USAir Group" or the "Guarantor"), was the sixth largest
United States air carrier ranked by revenue passenger miles flown during the
year ended December 31, 1992. USAir enplaned more than 54.6 million passengers
during 1992. As of December 31, 1993, USAir provided regularly scheduled air
service through 120 airports to 156 cities in the United States, Puerto Rico,
Canada, the Bahamas, Bermuda, the Cayman Islands, France, Germany, the United
Kingdom and the Virgin Islands. On January 19, 1994, USAir ceased serving the
United Kingdom. See "Recent Developments--BA Investment Agreement--U.S.-U.K.
Routes" and "--Code Sharing." USAir plans to commence service to Mexico in
March 1994.
THE GUARANTOR
The Guarantor's primary business activity is ownership of all the common
stock of USAir, Piedmont Airlines, Inc. (formerly Henson Aviation, Inc.),
Jetstream International Airlines, Inc., Pennsylvania Commuter Airlines, Inc.,
USAir Fuel Corporation, USAir Leasing and Services, Inc. and Material Services
Company, Inc. USAir accounted for approximately 93% of the Guarantor's operat-
ing revenues during the year ended December 31, 1992 and the nine months ended
September 30, 1993, respectively.
BUSINESS STRATEGY
In response to substantial losses beginning in the second half of 1989, USAir
initiated a strategic plan which has enabled the Company to maintain its com-
petitiveness during the adverse market environment that has prevailed in the
airline industry since that time. Management believes that the actions taken as
a result of this plan have enhanced the Company's ability to respond to the
challenges facing it today.
The key elements of USAir's strategic plan have been to:
. Realign its domestic route system;
. Negotiate new labor agreements to enhance productivity and reduce labor
costs;
. Reduce capital and operating costs; and
. Expand its international presence.
Route Realignment. Over the past three years, USAir has implemented a signif-
icant change in its route system. The objectives of the realignment were (i) to
build on USAir's traditional strengths on the East Coast by increasing depar-
tures, changing aircraft types or introducing new service in certain markets
and (ii) to eliminate or reduce service in certain markets which were unprofit-
able and where USAir had no long-term strategic role.
On May 2, 1991, USAir ceased operating its fleet of 18 British Aerospace BAe
146-200 aircraft, discontinued service to eight airports in California, Oregon
and Washington, and eliminated some flights at Baltimore/Washington, and Cleve-
land Hopkins International Airports. In connection with this restructuring,
USAir closed four flight crew bases, two heavy maintenance facilities and one
reservations office. Effective January 7, 1992, USAir discontinued its hub op-
erations at Dayton, Ohio due to operating losses there.
S-3
<PAGE>
Effective May 2, 1992, USAir further adjusted service at its hub at
Baltimore/Washington International Airport ("BWI") to better match capacity
with demand in certain markets.
During this same period, USAir has taken significant actions to build its
presence in East Coast markets. On January 17, 1992, USAir purchased certain
jet and commuter take-off and landing slots at New York City's LaGuardia Air-
port and Washington National Airport from Continental Airlines ("Continental")
and assumed Continental's leasehold obligations associated with the new East
End Terminal at LaGuardia Airport. As a result of the acquisition, USAir ex-
panded its operations at LaGuardia, including the initiation of non-stop serv-
ice to eight additional cities, four of which were in Florida. USAir reached an
agreement during 1992 with the creditors of the Trump Shuttle to manage and op-
erate the shuttle under the name "USAir Shuttle" and USAir Group acquired an
option to purchase the shuttle. Effective August 1, 1992, USAir leased 28 jet
take-off and landing slots at Washington National Airport in order to offer ex-
panded service from Washington National Airport to five Florida cities and New
Orleans. In August 1993, USAir purchased eight of these slots. On October 1,
1992, USAir moved its major hub operation at Pittsburgh to the new Pittsburgh
International Airport terminal, where USAir leases 53 of 75 gates. Effective
February 1, 1993, USAir and USAir Express service within the state of Florida
commenced operating under the brand name "USAir Florida Shuttle." In addition,
USAir started hourly service between Miami and Tampa and Miami and Orlando.
On February 16, 1994, USAir will implement certain schedule adjustments to
increase the utilization and productivity of aircraft, personnel and ground fa-
cilities in certain short-haul markets of under 500 miles. See "Recent Develop-
ments--Changes in Short-Haul Operations."
New Labor Agreements. A key component of USAir's strategic plan has been to
negotiate new agreements with its labor unions in order to increase productivi-
ty, reduce employee health care costs, obtain temporary wage reductions and
freeze a defined benefit pension plan applicable to non-contract employees.
Over the past eighteen months, USAir successfully reached agreement on new
contracts with its three largest unions and implemented temporary salary reduc-
tions for non-contract employees, thereby obtaining concessions substantially
in the form sought by USAir. Taken together, these measures provide for tempo-
rary wage reductions and suspension of longevity/step increases in wages that
will save USAir approximately $120 million during the period June 1992 through
March 1994. These concessions provide for productivity improvements which are
expected to save USAir approximately $55 million during the same period. When
fully implemented, these productivity enhancements may save an additional $171
million annually. All employees affected by these changes have also agreed to
participate in contributory managed care medical and dental programs which are
expected to save approximately $51 million annually.
The labor agreements also include provisions for the issuance of stock op-
tions to employees and the creation of a profit sharing plan commencing in
1993. See "Business Strategy--New Labor Agreements" and "Recent Developments--
Results for the Year Ended December 31, 1993."
Reduced Capital and Operating Costs. USAir's discretionary spending consists
primarily of capital expenditures and certain budgeted expense items. In addi-
tion to the savings discussed under "New Labor Agreements" above, for the past
three years the Company has taken certain actions to reduce capital and operat-
ing costs. Beginning in 1990, USAir has completed a number of agreements with
The Boeing Company ("Boeing") and other equipment manufacturers which have sub-
stantially reduced the Company's capital commitments during the 1991-1996 peri-
od, and introduced the Boeing 757-200 aircraft type, with its lower seat mile
costs, into USAir's fleet. See "Management's Discussion and Analysis of Finan-
cial Condition and Results of Operations--Liquidity and Capital Resources."
USAir implemented a workforce reduction program in September 1990. More than
3,600 positions were eliminated through layoffs, furloughs and voluntary sepa-
rations in connection with that program. A further reduction of more than 3,500
positions resulted from the May 1991 restructuring. In addition, USAir imple-
S-4
<PAGE>
mented an employee suggestion program, "Ideas That Fly," at a cost of $25 mil-
lion in 1992 and an additional $16 million in 1993. This program saved approxi-
mately $22 million and approximately $110 million in 1992 and 1993, respective-
ly. In September 1993, USAir announced steps to reduce projected operating
costs in 1994 by approximately $200 million. These measures will include a
workforce reduction of approximately 2,500 full time positions, revision of
USAir's vacation, holiday and sick leave policy and a review of planned 1994
capital expenditures. The workforce reduction, which USAir anticipates will be
completed by mid-1994, will be comprised primarily of the elimination of ap-
proximately 1,800 customer service, 200 flight attendant and 200 maintenance
positions. USAir has taken a non-recurring charge of approximately $68.8 mil-
lion primarily in the third quarter of 1993 for severance, early retirement and
other personnel-related expenses in connection with the workforce reduction.
Expanded International Presence. In early 1990 the Board of Directors began
to consider ways to strengthen USAir Group's position in the competitive air-
line industry and ensure the long-term viability of USAir Group. The Board of
Directors considered various alternatives to maximize stockholder value and de-
termined that an alliance with an appropriate major foreign airline and the de-
velopment of a global airline alliance would produce economies of scale and
synergies which should enable USAir Group not just to survive but to thrive. On
July 21, 1992, USAir Group and British Airways Plc ("BA") entered into an in-
vestment agreement (as amended, the "1992 Agreement"), which was terminated by
BA on December 22, 1992 because BA had concluded that the U.S. Department of
Transportation (the "DOT") would be unwilling to issue necessary regulatory ap-
provals. After the termination of the 1992 Agreement, USAir Group and BA began
negotiating a restructured BA investment in USAir Group. On January 21, 1993,
USAir Group and BA entered into a new investment agreement and a wholly owned
subsidiary of BA purchased 30,000 shares of a new series of preferred stock
from USAir Group for an aggregate purchase price of $300 million. On May 26,
1993, the holders of voting stock of USAir Group ratified this sale of pre-
ferred stock and approved the transactions and acts contemplated by the new in-
vestment agreement. On June 10, 1993, a wholly owned subsidiary of BA purchased
two additional series of preferred stock from USAir Group for approximately
$100.7 million pursuant to BA's exercise of preemptive and optional purchase
rights under such investment agreement which were triggered by issuances of
common stock by USAir Group. See "Recent Developments--BA Investment Agree-
ment--Miscellaneous." In 1991, the latest calendar year for which relevant in-
dustry statistics are available, BA ranked first in the world in the number of
international scheduled passengers carried. BA operates one of the most exten-
sive international scheduled airline route networks, comprising some 155 desti-
nations in 72 countries, and in the year ended March 31, 1993, BA carried ap-
proximately 20 million passengers on its international scheduled services.
USAir Group believes that the transactions and acts contemplated by the new in-
vestment agreement will give USAir increased access to international traffic,
strengthen USAir Group's financial condition, broaden its access to capital
markets and help achieve USAir's goal of becoming an effective, viable competi-
tor in the international airline industry.
THE OFFERING
SECURITIES OFFERED........ $175,000,000 principal amount of 9 5/8% Senior
Notes (the "Notes") due February 1, 2001.
MATURITY DATE............. February 1, 2001.
INTEREST PAYMENT DATES.... February 1 and August 1 of each year, commencing on
August 1, 1994.
GUARANTOR................. USAir Group will unconditionally guarantee the due
and punctual payment of principal and interest on
the Notes. This guarantee will be unsecured and
will rank pari passu with all other unsecured and
unsubordinated guarantees and indebtedness of
USAir Group. See "Description of the Notes and
Guarantees" in this Prospectus Supplement and "De-
scription of Debt Securities" in the accompanying
Prospectus.
S-5
<PAGE>
RANKING................... The Notes will be the senior unsecured
unsubordinated obligations of the Company and will
rank pari passu with all other unsecured
unsubordinated obligations of the Company. See
"Description of the Notes and Guarantees" in this
Prospectus Supplement.
COVENANTS................. The Indenture under which the Notes will be issued
will contain certain covenants that, among other
things, will limit the ability of the Company and
its subsidiaries to pay dividends, engage in
transactions with stockholders and affiliates,
sell assets, engage in mergers and consolidations
and make investments in unrestricted subsidiaries.
See "Description of the Notes and Guarantees--Cer-
tain Covenants of the Company."
USE OF PROCEEDS........... The net proceeds from the public offering of the
Notes will be added to USAir's working capital and
will be used for general corporate purposes. See
"Use of Proceeds."
RATIOS OF EARNINGS TO FIXED CHARGES
USAIR The following table sets forth the ratio of earnings to fixed charges
for USAir for the periods indicated. Earnings represent earnings before income
taxes and fixed charges (excluding interest capitalized). Fixed charges consist
of interest and the portion of rental expense deemed representative of the in-
terest factor.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ------------------------
ENDED SEPTEMBER 30, 1993 1992 1991 1990 1989 1988
------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio............. * * * * * 1.5
</TABLE>
- --------
* For the nine months ended September 30, 1993 and the years ended December 31,
1992, 1991, 1990 and 1989, earnings were not sufficient to cover fixed
charges. Additional earnings of approximately $308 million, $610 million,
$411 million, $674 million and $287 million, respectively, would have been
required to achieve ratios of 1.0.
USAIR GROUP The following table sets forth the ratio of earnings to fixed
charges for USAir Group for the periods indicated. Earnings represent earnings
before income taxes and fixed charges (excluding interest capitalized). Fixed
charges consist of interest and the portion of rental expense deemed represen-
tative of the interest factor.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ------------------------
ENDED SEPTEMBER 30, 1993 1992 1991 1990 1989 1988
------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio............. + + + + + 1.6
</TABLE>
- --------
+ For the nine months ended September 30, 1993 and the years ended December 31,
1992, 1991, 1990 and 1989, earnings were not sufficient to cover fixed
charges. Additional earnings of approximately $242 million, $622 million,
$444 million, $716 million and $137 million, respectively, would have been
required to achieve ratios of 1.0.
S-6
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the specific
risk factors set forth below as well as the other information set forth in this
Prospectus Supplement and accompanying Prospectus.
INDUSTRY CONDITIONS AND COMPETITION The airline industry is cyclical in that
demand for air transportation has tended to mirror general economic conditions.
Although airline traffic and operating revenues generally benefitted from the
economic growth which occurred through much of the 1980s, USAir and the indus-
try have been adversely affected by the economy's more recent recession and
slow recovery. USAir's airline operations are also subject to seasonal varia-
tions in demand. First and fourth quarter results are often adversely affected
by winter weather and, with certain exceptions, reduced travel demand, while
the second and third quarters generally are characterized by more favorable
weather conditions as well as higher levels of passenger demand.
Most of USAir's operations are in competitive markets. USAir experiences com-
petition in varying degrees with other air carriers and with all forms of sur-
face transportation. USAir competes with at least one major airline on most of
its routes between major cities. Vigorous price competition exists in the air-
line industry, and competitors have frequently offered sharply reduced discount
fares in many of these markets. Airlines use discount fares and other promo-
tions to stimulate traffic during slack travel periods, to generate cash flow
and to increase relative market share in selected markets. Discount and promo-
tional fares are often subject to various restrictions such as minimum stay re-
quirements, advance ticketing, limited seating and refund penalties. USAir has
often elected to match such promotional and discount fares and expects that it
will continue to face vigorous price competition. To the extent that low fares
continue and their depressive effect on revenue is not offset by stimulation of
additional traffic or by reduced costs, airline earnings will continue to be
adversely affected. See "--Entry and Potential Entry of Low Cost Competitors."
Of the eleven airlines classified as "major" carriers by the U.S. Department
of Transportation (the "DOT") in January 1991, two have ceased operations and
one is currently operating under Chapter 11 of the Bankruptcy Code. Eastern Air
Lines ("Eastern"), which declared bankruptcy in March 1989, ceased operations
in January 1991. Pan American World Airways filed for Chapter 11 protection
from creditors in January 1991 and ceased operations in December 1991. Conti-
nental Airlines ("Continental"), America West Airlines and Trans World Airlines
("TWA") filed for bankruptcy in December 1990, June 1991 and January 1992, re-
spectively. Continental and TWA reorganized and emerged from bankruptcy in
April 1993 and November 1993, respectively. In addition, Midway Airlines, a
smaller carrier that had been a competitor of USAir at Philadelphia, declared
bankruptcy in March 1991 and ceased operations in November 1991. Airlines oper-
ating under Chapter 11 often engage in discount pricing to generate the cash
flow necessary for their survival. In addition, when these airlines emerge from
bankruptcy they may have substantially reduced their debt and lease obligations
and other operating costs. These reduced costs may permit the reorganized car-
riers to enter new markets and offer discount fares, which may be intended to
generate cash flow, preserve and enhance market share and rehabilitate the car-
riers' image in the marketplace. The availability of the assets of bankrupt
carriers has enabled certain financially stronger participants in the market,
including USAir, to consolidate their positions by purchasing routes, aircraft,
takeoff and landing slots and other assets. While substantial capacity has been
removed in domestic markets, these bankruptcies and failures illustrate the
difficulties facing the airline industry today.
During the first quarter of 1992, USAir's revenue passenger miles ("RPMs,"
one RPM representing the transportation of one fare paying passenger for one
mile) decreased over the same period in 1991; however, yield, or revenue per
RPM, improved by approximately 6.9%. The decline in traffic was attributable to
the economic recession and the restructuring of USAir's route system in May
1991, which involved, among other things, the elimination of scheduled service
to eight airports in California, Oregon and Washington. It is not possible to
estimate accurately how many business and leisure travelers decided not to
travel during 1991 and 1992 as a result of the recession and weak recovery.
During the second quarter of 1992, American Airlines, Inc. ("American") intro-
duced a four-tier fare structure which resulted in the proliferation of deeply
discounted promotional fares in the second and third quarters of 1992. See the
discussion of these fares and their effects in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
S-7
<PAGE>
Although the promotional fares significantly stimulated leisure traffic during
the second and third quarters of 1992, yields suffered substantial declines
versus comparable periods in 1991.
Although yields at USAir recovered and improved significantly in the fourth
quarter of 1992 and in the first three quarters of 1993, systemwide traffic re-
mains relatively weak. In addition, the domestic airline industry was charac-
terized in 1991 and 1992 by substantial losses, excess capacity, intense compe-
tition and the carriers operating under the protection of Chapter 11 of the
Bankruptcy Code. All of these factors contribute to the volatility of the air-
line industry in general and of the pricing environment in particular. Any of
these factors, which continued into 1993, or other developments, including the
emergence of certain carriers from bankruptcy, the entry or potential entry of
low-cost carriers in USAir's markets and a resurgence in low-fare competition
from these and other carriers, could result in another outbreak of "fare wars"
which could have a material adverse effect on USAir's yields and financial con-
dition. See "--Entry and Potential Entry of Low Cost Competitors."
The Company's financial results for 1993 were better than results in 1992.
However, the Company's revenue growth in 1993 was not as strong as expected due
to sluggish economic conditions and USAir had a net loss of approximately
$418.8 million for the year ended December 31, 1993. The loss included non-
recurring charges of approximately (i) $68.8 million for severance, early re-
tirement and other personnel-related expenses recorded primarily in the third
quarter of 1993 in connection with a workforce reduction at USAir of approxi-
mately 2,500 full-time positions between November 1993 and the first half of
1994, (ii) $36.8 million for employee paybacks related to the temporary reduc-
tions of employees' wages and salaries discussed in "Business Strategy--New La-
bor Agreements," (iii) $13.5 million for a reserve for certain properties and
facilities expenses at airports where USAir has, among other things, discontin-
ued or reduced its service and (iv) $8.8 million related to a loss on USAir's
investment in the Galileo International Partnership, which operates a computer-
ized reservations system, recorded in the fourth quarter of 1993. See "Business
Strategy--Reduced Capital and Operating Costs," "Recent Developments--Results
for the Year Ended December 31, 1993" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
For information on possible further effects of the recent economic recession,
consolidation in the domestic airline industry and globalization and other
trends in the airline industry, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ENTRY AND POTENTIAL ENTRY OF LOW COST COMPETITORS In September 1993, South-
west Airlines, Inc. ("Southwest"), a low cost, low fare, "no frills" air car-
rier which had not previously provided service to or in the eastern U.S., inau-
gurated service at Baltimore/Washington International Airport ("BWI") to Midway
Airport in Chicago and to Cleveland Hopkins International Airport at fares sub-
stantially below those previously offered by USAir in the same markets. BWI is
one of USAir's hub airports. See "The Company". Unlike the other major U.S. air
carriers, Southwest does not structure its operations around connecting hub
airports, relying instead on high frequency point-to-point service. USAir re-
sponded by matching most of Southwest's fares and increasing the frequency of
service in these and related markets. In October 1993, Continental, which had
reorganized under bankruptcy proceedings earlier in 1993, inaugurated high fre-
quency, low fare service on certain routes in the eastern United States. USAir
is a competitor on most of the markets served by these routes. While Continen-
tal initiated or proposed to initiate service to certain cities, such as
Charleston, South Carolina, Greensboro, North Carolina, and Jacksonville, Flor-
ida, most of the markets included as part of its new program, for example, Bal-
timore, were previously served by that carrier through Continental's hubs at
Newark, Cleveland and Houston. However, under its new program, Continental
linked certain of these cities independently of such hubs while continuing to
provide features which accompany its hub flights, including advanced seat as-
signment, frequent flier mileage and interline connections. Continental has re-
cently announced plans to expand the program to additional short-haul markets.
Although the service provided by Southwest and Continental described above does
not currently overlap materially with USAir's systemwide operations, USAir can-
not predict if or when Southwest, Continental or other low cost carriers may
expand their operations to additional markets in which the Company competes. In
December 1993, Southwest completed its acquisition of Morris Air, a regional
air carrier with operations concentrated in the western U.S. Although Southwest
has announced no plans, this acquisition could enable Southwest to divert re-
sources to expand its operations in the eastern U.S. In January 1994, Continen-
tal announced that it will reduce operations at its Denver, Colorado hub. Al-
though it has announced no plans, this measure could enable
S-8
<PAGE>
Continental to expand its high frequency, low fare service described above in
additional short-haul markets served by USAir. Furthermore, increases in traf-
fic which are stimulated by the lower fares offered by Southwest, Continental
and USAir are not likely to offset totally USAir's reduced revenue resulting
from lower yields in relevant markets. See "--Industry Conditions and Competi-
tion," "Recent Developments--Changes in Short-Haul Operations" and "Manage-
ment's Discussion and Analysis of Financial Condition and Results of Opera-
tions--Competitive Environment/Industry Trends."
Most of the major U.S. air carriers, including USAir, are vulnerable to low
fare competition from carriers like Southwest and Continental or "start-up"
carriers. However, it is unclear how broadly Southwest can extend its opera-
tions without the convenience of interline connections, advanced seat assign-
ments, meal service and hub connections--all of which are offered by USAir and
the other major U.S. air carriers. Although Continental substantially reduced
its debt and lease obligations in its bankruptcy reorganization, the Company
believes that its ability to continue to compete by offering low fares may be
limited by the fact that, unless circumstances change, it will continue to bear
the costs associated with excess capacity and certain unprofitable operations.
"Start-up" carriers face, among other substantial hurdles, the difficulties as-
sociated with obtaining federal certification and raising capital.
RECENT SUBSTANTIAL LOSSES USAir suffered substantial net losses in 1993,
1992, 1991, and 1990 and in the second half of 1989 of $419 million (which in-
cludes the change in method of accounting for postemployment benefits and cer-
tain non-recurring charges), $1.2 billion (which includes the change in method
of accounting for postretirement benefits other than pensions), $284 million,
$427 million and $174 million, respectively, as the result of, among other
things, the economic recession; excess capacity in the airline industry; the
Persian Gulf War; significant increases in the price of jet fuel; widespread
fare discounting coupled with the introduction and adoption by the domestic
airline industry in April 1992 of the four-tiered fare structure; increased la-
bor, rental, interest expense and other costs, including costs associated with
the mergers on April 9, 1988 and August 5, 1989 of Pacific Southwest Airlines
("PSA") and Piedmont Aviation, Inc. ("Piedmont"), respectively, into USAir; and
non-recurring and special charges associated with measures taken, as described
in the next paragraph and under "Business Strategy," to seek to return the Com-
pany to profitability. See--"Industry Conditions and Competition" and "Recent
Developments--Results for the Year Ended December 31, 1993." Many of the fac-
tors which adversely affected the results of operations in 1989-1993, particu-
larly fare discounting, may continue in 1994. In addition, two low-cost carri-
ers have entered certain East Coast markets operated by USAir during the third
quarter of 1993 and offered substantially reduced fares in those markets. See
"Risk Factors--Entry and Potential Entry of Low Cost Competitors" and "Manage-
ment's Discussion and Analysis of Financial Condition and Results of Opera-
tions." The Company was profitable in each of the calendar years 1980 through
1988 and in the first half of 1989, and its aggregate net income for that pe-
riod was $824 million.
USAir has taken a number of measures commencing in 1990 in an effort to im-
prove its financial condition, including deferral of deliveries of certain air-
craft; reductions in capital expenditures; retirements of inefficient aircraft;
termination of service to certain cities; closing of certain facilities; sub-
stantial personnel reductions; sales of non-strategic assets; obtaining reduc-
tion of salaries of pilot, flight attendant, mechanic and related employees and
non-contract employees for twelve-month periods commencing June 1992 (in the
case of pilot and non-contract employees), October 1992 (in the case of me-
chanic and related employees) and April 1993 (in the case of flight attendant
employees); reduction of other personnel benefits; and the freeze of a defined
benefit pension plan applicable to non-contract employees. See "Recent Develop-
ments" and "Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations." However, many of the adverse factors contributing to the
losses in recent years, such as the uncertain economic climate, fare restruc-
turing and discounting and fuel costs, are not subject to USAir's control and
constitute significant constraints on the Company's ability to operate profit-
ably. The future results of USAir's operations are a function of these and
other factors, such as adequate levels of traffic and yield to offset expenses.
Accordingly, there can be no assurance as to the results of USAir's operations
in the future. In addition, USAir does not believe that economic conditions in
the airline industry are likely to improve dramatically in the near future.
However, since airline industry participants, including USAir, are subject to
various economic, political and market factors, the Company's expectations of
operating results and economic conditions are subject to change. See "Manage-
ment's Discussion and Analysis of Financial Condition and Results of Opera-
tions."
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LEVERAGE The Company has substantial outstanding indebtedness. As of Septem-
ber 30, 1993, consolidated indebtedness of the Company, including obligations
under capital leases but excluding obligations under operating leases, was ap-
proximately $2.6 billion (approximately 82% of its total capitalization). Fol-
lowing the issuance by the Company in November 1993 of certain equipment notes
related to the USAir Pass Through Certificates, Series 1993-A, consolidated
indebtedness of the Company was approximately $2.7 billion (approximately 83%
of its total capitalization). See the consolidated financial statements con-
tained in the Company's Annual Report on Form 10-K for the year ended December
31, 1992, as amended, and the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993, which are incorporated by reference herein,
and "Capitalization."
The degree to which the Company is leveraged could have important conse-
quences to holders of the Notes, including the following: (i) the Company's
ability to obtain additional financing in the future may be impaired; (ii)
certain of the Company's competitors are less leveraged than the Company,
which may place the Company at a competitive disadvantage; and (iii) the
Company's leverage could make it more vulnerable to a downturn in the airline
industry, which historically has been sensitive to changes in general economic
conditions.
UNSECURED STATUS OF THE NOTES In the event of any liquidation, dissolution
or winding up of the Company, holders of the Notes will be entitled to look to
the unencumbered assets of the Company as the source of payment of the princi-
pal of, premium, if any, and interest on the Notes. Such payment will be made
prior to any payment of any outstanding indebtedness that is subordinate in
right of payment to the Notes and on any equity securities of the Company.
There is currently no outstanding indebtedness of the Company, however, that
is subordinate in right of payment to the Notes.
Because the Notes are unsecured obligations of the Company, the proceeds of
the liquidation of assets which constitute collateral under the Company's se-
cured debt and capitalized lease obligations will be subject to the prior
claims of the related secured creditors on such obligations and, therefore,
may be unavailable for any payments in respect of the Notes in the event of a
liquidation, dissolution or winding up of the Company.
Consequently, in such event, holders of the Notes will share ratably in the
proceeds of the liquidation of unencumbered assets with other holders of
unsubordinated debt obligations of the Company and, to the extent the liquida-
tion of collateralized assets is inadequate to discharge related secured obli-
gations, with the holders of such secured debt obligations.
At September 30, 1993, USAir had $84 million aggregate principal amount of
12 7/8% Senior Debentures due 2000 and $300 million 10% Senior Notes due 2003
outstanding which will rank pari passu with the Notes, and $2.2 billion aggre-
gate principal amount of secured debt obligations outstanding (including capi-
tal lease obligations and intercompany loans payable to USAir Group, but ex-
cluding guarantees of certain debt and operating lease obligations of certain
wholly owned commuter airline subsidiaries of USAir Group and certain debt ob-
ligations of the Galileo International Partnership, which operates a computer-
ized reservations system). At that date, USAir had $2.3 billion in net book
value of assets which were subject to such secured debt obligations. In addi-
tion, at December 31, 1993, $162 million of assets of the Company had been
pledged to secure available commitments under USAir Group's revolving credit
agreement with a group of banks.
NO ASSURANCE AS TO FURTHER BA INVESTMENT As of December 31, 1993, a wholly
owned subsidiary of British Airways Plc ("BA") had purchased a total of ap-
proximately $401 million in preferred stock of USAir Group. See "Business
Strategy--Expanded International Presence" and "Recent Developments--BA In-
vestment Agreement." The only circumstance in which BA is required to make any
additional investment in USAir Group is if prior to January 22, 1998 the DOT
has given final approval of all transactions and acts contemplated by the In-
vestment Agreement, as defined under "Business Strategy--Expanded Interna-
tional Presence," at a time when BA still holds securities purchased or re-
ceived upon conversion or exchange under such Investment Agreement and USAir
Group has not repurchased or redeemed any such securities. There can be no as-
surance that DOT approval will be obtained. The Company believes that the DOT
may continue to link approval of the governance provisions of the Investment
Agreement to the achievement of certain U.S. objectives in negotiations on the
bilateral air services agreement between the United States and the United
Kingdom ("U.K."). Accordingly, there can be no assurance that conditions for
mandatory additional BA investments will be satisfied and BA may choose not to
make additional investments voluntarily.
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<PAGE>
THE COMPANY
USAir is a major air carrier principally engaged in the business of trans-
porting passengers, property and mail. USAir's principal operating hubs are
located in Pittsburgh, Pennsylvania; Charlotte, North Carolina; Philadelphia,
Pennsylvania; and Baltimore, Maryland. USAir enplaned more than 54.6 million
passengers in 1992, and, as of December 31, 1992, was the sixth largest United
States air carrier ranked by RPMs flown. As of December 31, 1993, USAir pro-
vided regularly scheduled air service through 120 airports to 156 cities in
the United States, Puerto Rico, Canada, the Bahamas, Bermuda, the Cayman Is-
lands, France, Germany, the United Kingdom and the Virgin Islands, with an op-
erating fleet of 443 jet aircraft comprised of 12 Boeing 767-200, 22 Boeing
757-200, 8 Boeing 727-200, 54 Boeing 737-400, 31 McDonnell Douglas MD-80, 101
Boeing 737-300, 81 Boeing 737-200, 73 McDonnell Douglas DC-9-30, 40 Fokker 100
and 21 Fokker F28-4000 aircraft. USAir ceased serving the United Kingdom on
January 19, 1994. See "Recent Developments--BA Investment Agreement--U.S.-U.K.
Routes" and "--Code Sharing." USAir was incorporated in Delaware in 1982, and
its executive offices are located at 2345 Crystal Drive, Arlington, Virginia
22227 and its telephone number is (703) 418-7000. USAir plans to initiate
service between Philadelphia and Tampa and Mexico City, Mexico in March 1994.
THE GUARANTOR
The Guarantor's primary business activity is ownership of all the common
stock of USAir, Piedmont Airlines, Inc. (formerly Henson Aviation, Inc.),
Jetstream International Airlines, Inc. ("Jetstream"), Pennsylvania Commuter
Airlines, Inc., USAir Fuel Corporation, USAir Leasing and Services, Inc., and
Material Services Company, Inc. USAir accounted for approximately 93% of the
Guarantor's operating revenues during the year ended December 31, 1992 and the
first nine months of 1993, respectively. The Guarantor was incorporated in
Delaware in 1982, and its executive offices are located at 2345 Crystal Drive,
Arlington, Virginia 22227 and its telephone number is (703) 418-5306.
BUSINESS STRATEGY
In response to substantial losses beginning in the second half of 1989,
USAir initiated a strategic plan which has enabled the Company to maintain its
competitiveness during the adverse market environment that has prevailed in
the airline industry since that time. Management believes that the actions
taken as a result of this plan have enhanced the Company's ability to respond
to the challenges facing it today.
The key elements of USAir's strategic plan have been to:
. Realign its domestic route system;
. Negotiate new labor agreements to enhance productivity and reduce la-
bor costs;
. Reduce capital and operating costs; and
. Expand its international presence.
ROUTE REALIGNMENT
Over the past three years, USAir has implemented a significant change in its
route system. The objectives of the realignment were (i) to build on USAir's
traditional strengths on the East Coast by increasing departures, changing
aircraft types or introducing new service in certain markets and (ii) to elim-
inate or reduce service in certain markets which were unprofitable and where
USAir had no long-term strategic role.
On May 2, 1991, USAir ceased operating its fleet of 18 British Aerospace BAe
146-200 aircraft, discontinued service to eight airports in California, Oregon
and Washington, and eliminated some flights at BWI and Cleveland Hopkins In-
ternational Airport. Although other service was added to partially offset
these reductions, the net effect was a decrease of approximately three percent
in USAir's system available seat miles, and a net reduction in scheduled de-
partures of 10 percent from January 1991 service levels. In connection with
this restructuring USAir closed four flight crew bases, two heavy maintenance
facilities and one reservations office. (These measures are collectively re-
ferred to as the "May 1991 Restructuring.") (In April 1993, USAir reintroduced
long-haul service at John Wayne Airport in Orange County, California, one of
the airports that USAir ceased serving in the May 1991 Restructuring.)
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Effective January 7, 1992, USAir discontinued its hub operations at Dayton,
Ohio due to operating losses there. Daily jet departures from Dayton were re-
duced from 72 to 23. The majority of USAir's jet flights between Dayton and
smaller and medium-sized "spoke" cities was shifted to USAir's hub at Pitts-
burgh, Pennsylvania, and there was no reduction in total systemwide capacity as
a result of this action.
Effective May 2, 1992 USAir adjusted service at its hub at BWI to better
match capacity with demand in certain markets. Overall daily jet departures at
BWI were reduced from 111 to 88 while daily USAir Express commuter departures
were increased from 87 to 103. Certain of the reductions in jet departures re-
sulted from typical seasonal adjustments.
Over the past three years, USAir has taken significant actions to build its
presence in East Coast markets. On January 17, 1992, USAir purchased 62 jet
take-off and landing slots and 46 commuter slots at New York City's LaGuardia
Airport and six jet slots at Washington National Airport from Continental for
$61 million. USAir also assumed Continental's leasehold obligations associated
with the new East End terminal, which commenced operations on September 12,
1992, and a flight kitchen at La Guardia Airport. USAir acquired the 46 com-
muter slots and 24 of the jet slots at LaGuardia Airport on February 1, 1992;
the remaining 38 jet slots at LaGuardia Airport and all six jet slots at Wash-
ington National Airport were transferred to USAir on May 1, 1992. As a result
of the acquisition, USAir expanded its operations at LaGuardia including the
initiation of non-stop service to eight additional cities, four of which were
in Florida. The New York-Florida markets are among the largest in the nation.
USAir Express carriers used the commuter slots to expand service primarily to
cities in the northeastern United States. Expansion into these jet and commuter
markets enhanced USAir's presence in the New York area and in the northeast. In
addition, the East End terminal permitted USAir to consolidate its mainline,
commuter and USAir Shuttle operations in adjoining facilities, which the Com-
pany believes are the most comfortable and convenient at LaGuardia Airport.
USAir reached an agreement during 1992 with the creditors of the Trump Shut-
tle to manage and operate the shuttle under the name "USAir Shuttle" for a pe-
riod of up to ten years. Under the agreement, USAir Group has an option to pur-
chase the shuttle operation on or after October 10, 1996. The USAir Shuttle
commenced operations in April 1992 between New York City, Boston and Washing-
ton, D.C.
Effective August 1, 1992, USAir leased 28 jet take-off and landing slots at
Washington National Airport from Northwest Airlines, Inc. ("Northwest"). USAir
is using the slots to offer expanded service from Washington to five Florida
cities and New Orleans. In August 1993, USAir purchased eight of these slots
from Northwest. USAir continues to lease the remaining slots from Northwest.
On October 1, 1992, USAir moved its major hub operation at Pittsburgh to the
new Pittsburgh International Airport terminal, where USAir leases 53 of 75
gates. The Company believes that the Pittsburgh hub, one of the largest hub
airports (measured by departures) in the U.S., is one of the most efficient
connecting complexes in the nation.
Effective February 1, 1993, USAir and USAir Express service within the state
of Florida commenced operating under the brand name "USAir Florida Shuttle." In
addition, USAir started hourly service between Miami and Tampa and Miami and
Orlando. On February 1, 1993 total USAir and USAir Express daily departures in
the intra-Florida markets and to cities outside Florida increased approximately
27% over February 1992 levels. To enhance customer service and bolster brand
loyalty within the state, USAir offered special benefits, bonus miles and up-
grades to Florida residents participating in its Frequent Traveler Program.
On February 16, 1994, USAir will implement the first phase of the introduc-
tion of a new short-haul product in 18 city-pair markets of approximately 500
miles or less. USAir will increase the utilization and productivity of air-
craft, personnel and ground facilities in these markets by decreasing the
amount of time that aircraft used in these markets spend on the ground between
flights from an average of 45 minutes to as low as 25 minutes. USAir will oper-
ate a fleet of 22 Boeing 737-200 aircraft in these markets and will adjust pas-
senger check-in and boarding procedures to reflect the more efficient nature of
this service. In these markets, aircraft utilization for this fleet is expected
to increase from approximately 6.9 to 8.4 daily departures per aircraft. Initi-
ation of the service will not involve any immediate pricing changes or new per-
sonnel. Ultimately, USAir anticipates that enhancements to the short-haul prod-
uct will be completed in summer 1994
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<PAGE>
and that long-haul and transatlantic service will be redesigned later in 1994.
If the changes in the short-haul product are successful, USAir may implement
the changes in other short-haul markets. There can be no assurance, however,
that the changes will result in improved financial results for USAir.
NEW LABOR AGREEMENTS
A key component of USAir's strategic plan was to negotiate new agreements
with its labor unions in order to increase productivity and obtain temporary
wage reductions.
In October 1991, USAir announced a comprehensive cost reduction program which
included, among other things, temporary reductions in wages and salaries for
employees, suspension of longevity increases in wages and salaries, employee
contributions for medical and dental benefits, improved productivity and the
freezing of a fully-funded defined benefit pension plan which covered non-con-
tract employees. Certain of these measures are included in new collective bar-
gaining agreements USAir negotiated in 1992 and 1993 with its pilot, flight at-
tendant and mechanic and related employees. Consistent with this program, USAir
sought concessionary contracts with each of its unions and stated that salary
reductions for non-contract employees would take effect only when the first ma-
jor union agreed to wage reductions. The Company believes that it has been
largely successful in implementing during 1992 and early 1993 the elements of
the comprehensive cost reduction program.
In the second quarter of 1992, the Air Line Pilots Association ("ALPA"),
which represents USAir's pilot employees, reached agreement on a new contract
which becomes amendable on May 1, 1996. The new contract included temporary
wage reductions and suspension of longevity/step increases which USAir esti-
mates have resulted in savings of approximately $58 million in the twelve-month
period which began in June 1992. USAir estimates that additional savings of ap-
proximately $15 million resulted from productivity improvements over the same
period. When fully implemented, the Company expects the productivity improve-
ments will save the airline up to approximately $83 million annually. In addi-
tion, the pilots agreed to participate in contributory managed care medical and
dental programs, which the Company expects will save approximately $10 million
annually.
In June 1993, the wages of pilot employees reverted to pre-reduction levels,
and on September 1, 1993, in accordance with the terms of ALPA's agreement with
USAir, pilot employees received a 2.5% increase in their wages. These employees
will receive further wage increases on (i) July 1, 1994, of approximately 5.5%,
(ii) July 1, 1995 of 2% and (iii) January 1, 1996 of 1%.
In accordance with its previously announced policy, when ALPA agreed to the
cost reduction program, USAir imposed wage reductions and suspension of
longevity/step increases on its non-contract employees for the twelve-month pe-
riod commencing in June 1992. The Company estimates that it saved approximately
$32 million from these measures. Earlier in 1992, USAir implemented the con-
tributory managed care medical and dental programs for non-contract employees,
which it expects will result in approximately $20 million in annual savings.
Prior to January 1, 1992, USAir exclusively paid contributions to the basic de-
fined benefit pension plan for its non-contract employees. USAir froze this
pension plan at the end of 1991, which resulted in a one-time book gain of ap-
proximately $107 million in 1991. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The wages of the non-contract
employees reverted to pre-reduction levels in June 1993 and these employees
generally received average increases in wages of approximately 5%.
On October 8, 1992, following a four-day strike, USAir reached agreement with
the International Association of Machinists ("IAM"), which represents USAir's
mechanics and related employees, on a new contract which becomes amendable on
October 1, 1995. The new contract included wage reductions and suspension of
longevity/step increases for the twelve-month period commencing October 1992,
which the Company estimates resulted in savings of approximately $20 million.
USAir estimates that productivity improvements, which are also provided for in
the new contract, resulted in savings of approximately $22 million in 1993 and
will result in savings of $45 million annually when the improvements are fully
implemented. In addition, IAM employees agreed to participate in contributory
managed care medical and dental programs, which the Company expects will save
approximately $14 million annually.
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<PAGE>
In November 1993, the wages of the IAM-represented employees reverted to pre-
reduction levels and on November 1, 1993, in accordance with the terms of the
IAM's agreement with USAir, the wages of these employees increased by 2%. These
employees will receive further wage increases on June 1, 1994 and April 1, 1995
of 3.5% and 4.5%, respectively.
In February 1993, USAir reached an agreement with the Association of Flight
Attendants ("AFA"), which represents its flight attendant employees, on a new
contract which becomes amendable on January 1, 1997. The contract, which was
ratified by the AFA membership in March 1993, provides for wage reductions and
suspensions of longevity/step increases for the twelve-month period commencing
April 1, 1993, which the Company expects will result in savings of approxi-
mately $10 million. The Company estimates that productivity improvements, which
are also provided for in the new contract, will result in savings of approxi-
mately $18 million over the twelve-month period commencing April 1, 1993 and
$43 million annually when the improvements are fully implemented. In addition,
AFA employees agreed to participate in contributory managed care medical and
dental programs, which the Company expects will save approximately $6.9 million
annually.
In March 1994, the wages of the flight attendant employees will revert to
pre-reduction levels, and on April 1, 1994, in accordance with the terms of the
AFA agreement with USAir, the wages of these employees will increase by 3%.
These employees will receive further wage increases on January 31, 1995 and
January 31, 1996 of 4% commencing on each date.
On March 31, 1993 the Transport Workers Union (the "TWU"), which represents
175 flight dispatch employees, reached agreement with USAir on a contract which
becomes amendable on September 1, 1996. The agreement provides for productivity
improvements. These employees also participate in wage reductions, suspension
of longevity/step increases and contributory managed care medical and dental
programs because of their non-contract status when such measures were imple-
mented for non-contract employees. The defined benefit pension plan for such
employees was frozen on December 31, 1991 because of such employees' non-con-
tract status at that time.
On July 29, 1993, USAir reached agreement with the TWU, which also represents
approximately 60 USAir flight simulator engineers, on a new four-year contract
which becomes amendable on August 1, 1997. The contract will result in savings
of approximately $140,000 over the 12-month period commencing August 1, 1993,
in the form of temporary salary reductions and suspension of longevity/step in-
creases. In addition, the flight simulator engineers agreed to participate in
contributory managed care medical and dental programs which the Company expects
will save approximately $50,000 annually. In addition, the defined benefit pen-
sion plan for these employees was frozen effective September 1, 1993, and will
be replaced by a defined contribution pension plan beginning September 1, 1994.
Taken together, the above measures provide for temporary wage reductions and
suspension of longevity/step increases in wages that USAir estimates will save
approximately $120 million during the period June 1992 through March 1994.
These concessions provide for productivity improvements which are expected to
save USAir approximately $55 million during the same period. When fully imple-
mented, these productivity enhancements may save an additional $171 million an-
nually. All employees affected by these changes have also agreed to participate
in contributory managed care medical and dental programs which are expected to
save approximately $51 million annually.
USAir recorded a non-recurring charge of approximately $36.8 million in the
fourth quarter of 1993 based on an actuarial projection of the repayment of the
amount of the temporary wage and salary reductions discussed above in the event
that the employees who sustained the pay cuts leave the employ of USAir. USAir
will adjust this accounting charge in subsequent periods to reflect the change
in the present value of the liability and changes in actuarial assumptions in-
cluding, among other things, actual experience with the rate of attrition for
these employees and whether such employees have received payments under the
profit sharing program discussed in the next paragraph.
In exchange for the pay reductions and pension freeze, affected employees
will participate in a profit sharing program and have been, or will be, granted
options to purchase common stock, par value $1.00, of USAir Group ("Common
Stock"). The profit sharing program is designed to recompense those employees
whose pay has been reduced by paying an amount equal to (i) two times salary
foregone plus (ii) one times
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<PAGE>
salary foregone (subject to a minimum of $1,000) for the freeze of pension
plans described above. Estimated savings of approximately $23 million attribut-
able to suspension of longevity/step increases will not be subject to repayment
through the profit sharing program. For each year the profit sharing program is
in effect, pre-tax profits, as defined in the program, of USAir Group would be
distributed to participating employees as follows:
25% of the first $100 million in pre-tax profits
35% of the next $100 million in pre-tax profits
40% of the pre-tax profits exceeding $200 million
This profit sharing program will be in effect until USAir employees are rec-
ompensed for salary and pension benefits forgone.
Under the stock option program, employees whose pay has been reduced have re-
ceived or will receive options to purchase 50 shares of Common Stock at $15 per
share for each $1,000 of salary reduction. The options will become exercisable
following the twelve-month period of the salary reduction program. Generally,
participating employees will have five years from the grant date to exercise
such options. As of December 31, 1993, options to purchase approximately 5.0
million shares of Common Stock were outstanding under the program.
REDUCED CAPITAL AND OPERATING COSTS
USAir's discretionary spending consists primarily of capital expenditures and
certain budgeted expense items. In addition to the savings discussed under "New
Labor Agreements" above, for the past four years the Company has taken certain
actions to reduce capital and operating costs. Beginning in 1990, USAir has
completed a number of agreements with The Boeing Company ("Boeing") and other
equipment manufacturers which have substantially reduced the Company's capital
commitments during the 1991-1996 period and introduced the Boeing 757-200 air-
craft type, with its relatively lower seat mile operating costs, into USAir's
fleet.
In 1990, USAir agreed with Boeing to defer the delivery of 26 firm orders for
Boeing 737 series aircraft and firm orders for two Boeing 767-200 aircraft from
1991 and 1992 to 1993 and beyond. At the same time these deliveries were de-
ferred, USAir exercised options to purchase an additional 34 Boeing 737 series
aircraft for delivery in 1994, 1996 and 1997. During 1991, USAir rescheduled 15
of the Boeing 737 series aircraft originally scheduled for delivery during
1993-1994 to 1995-1997.
In December 1991, USAir reached agreements with Boeing and with General Elec-
tric Capital Corporation ("GE Capital") to acquire up to 40 757-200 aircraft
during 1992-1997. USAir agreed to lease ten aircraft owned by GE Capital and
formerly operated by Eastern. In December 1992, USAir agreed to sublease an ad-
ditional 757-200 aircraft from Boeing that was formerly operated by Eastern.
USAir added these eleven aircraft to its operating fleet during 1992. USAir
also agreed with Boeing to purchase 15 new 757-200 aircraft in 1993 and 1994,
and took options to purchase 15 more 757-200s in 1996 and 1997. In April 1993,
USAir and Boeing reached an agreement to exercise the options on 757-200 air-
craft previously scheduled for delivery in 1996-1997 and accelerate their de-
livery to 1995-1996, and to convert a firm order for a 767-200 aircraft, origi-
nally scheduled for delivery in 1994, to a firm order for a 757-200 aircraft,
also scheduled for delivery in 1994. Boeing granted USAir options to purchase
15 additional 757-200 aircraft for 1995 and beyond. In addition, Boeing re-
lieved USAir of its obligation to purchase 20 of its 60 firm orders for Boeing
737 series aircraft and agreed to reschedule delivery of the remaining 40 on
order. No new firm order 737 aircraft are scheduled to be delivered to USAir
during 1993-1996, while 12 new 737 aircraft will be delivered annually in the
years 1997-1999 and four will be delivered in the year 2000. Overall, the de-
ferrals have substantially reduced USAir's capital commitments and financing
needs between 1993 and 1996. See "Management's Discussion and Analysis of Fi-
nancial Condition and Results of Operations--Liquidity and Capital Resources."
USAir implemented a workforce reduction program in September 1990, in re-
sponse to the economic recession and financial losses that caused USAir to de-
crease its planned capacity growth for 1991. More than 3,600 positions were
eliminated through layoffs, furloughs and voluntary separations in connection
with that
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<PAGE>
program. A further reduction of more than 3,500 positions resulted from the May
1991 Restructuring. In addition, USAir implemented an employee suggestion pro-
gram, "Ideas That Fly," at a cost of $25 million in 1992 and an additional $16
million in 1993. This program saved USAir approximately $22 million and $110
million in 1992 and 1993, respectively.
In September 1993, USAir announced steps to reduce projected operating costs
in 1994 by approximately $200 million. These measures will include a workforce
reduction of approximately 2,500 full time positions, revision of USAir's vaca-
tion, holiday and sick leave policy and a review of planned 1994 capital expen-
ditures. The workforce reduction, which USAir anticipates will be completed by
mid-1994, will be comprised primarily of the elimination of approximately 1,800
customer service, 200 flight attendant and 200 maintenance positions. USAir re-
corded a non-recurring charge of approximately $68.8 million primarily in the
third quarter of 1993 for severance, early retirement and other personnel-re-
lated expenses in connection with the workforce reduction.
In addition, recently USAir has been examining various measures to restruc-
ture its operations to increase efficiency and lower costs in certain short-
haul markets of approximately 500 miles or less in distance. Certain carriers
have a substantial cost-advantage over USAir in these markets and consumers ap-
pear to be increasingly price conscious, particularly in these markets. On Feb-
ruary 16, 1994 USAir will implement certain scheduling adjustments to increase
the utilization and productivity of aircraft, personnel and ground facilities
in certain short-haul markets. During 1994, USAir anticipates that it may im-
plement further changes in its short-haul product and enhance its domestic and
transatlantic service based on certain consumer surveys it has conducted. See
"Risk Factors--Industry Conditions and Competition", "--Entry and Potential En-
try of Low Cost Competitors," "Recent Developments--Changes in Short-Haul Oper-
ations" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EXPANDED INTERNATIONAL PRESENCE
Beginning in 1990 the Board of Directors of USAir Group began to consider
ways to strengthen USAir Group's position in the intensely competitive airline
industry and ensure the long-term viability of USAir Group. In connection with
these efforts, USAir Group considered various alternatives in order to maximize
stockholder value, including the possible issuance of additional equity or
other securities and the sale of all or part of USAir Group. After considering
various possibilities, the Board of Directors decided to seek an alliance with
a major foreign airline, pursuant to which the two airlines would integrate
their operations and develop a global airline. The Board of Directors believed
this strategy, by producing economies of scale and synergies, was most likely
to improve USAir Group's relative position in the airline industry and would
enable USAir Group not just to survive but to thrive. The Board of Directors
determined that such an alliance would result in substantial savings by avoid-
ing duplication of personnel and equipment needs.
During 1992, USAir Group conducted discussions with several possible invest-
ors, including Lufthansa German Airlines ("Lufthansa") and Air Canada, in con-
nection with its on-going exploration of strategic alternatives. None of these
potential investors offered to enter into a transaction with USAir Group.
On May 6, 1992, representatives of USAir Group were contacted by BA in con-
nection with a possible investment by BA in USAir Group. Between May 20 and
July 10, 1992, representatives of BA and USAir Group met on several occasions
to discuss the terms of a possible investment by BA in USAir Group.
On July 21, 1992, USAir Group and BA entered into an investment agreement
providing for the purchase by BA of $750 million of USAir Group's convertible
preferred stock (as amended, the "1992 Agreement"). The 1992 Agreement provided
for termination if necessary regulatory approvals were not received. In a Sep-
tember 1992 public address, the Secretary of Transportation stated that DOT ap-
proval of the 1992 Agreement would be tied to liberalization of the bilateral
agreement governing commercial aviation between the United Kingdom and the
United States. Discussions were held between the two governments regarding the
bilateral treaty, but no resolution was reached. Stating that it had received
indications that the required approvals would not be forthcoming, BA terminated
the 1992 Agreement on December 22, 1992, announcing that it would continue dis-
cussions with USAir Group.
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After the termination of the 1992 Agreement, USAir Group and BA began negoti-
ating a restructured BA investment in USAir Group. As described under "Recent
Developments--BA Investment Agreement," on January 21, 1993, BA and USAir Group
entered into a new investment agreement (the "Investment Agreement") and a
wholly owned subsidiary of BA purchased 30,000 shares of the Series F Cumula-
tive Convertible Senior Preferred Stock, without par value, of USAir Group
("Series F Preferred Stock") for an aggregate purchase price of $300 million.
On May 26, 1993, holders of voting stock of USAir Group ratified the sale of
the Series F Preferred Stock and approved the transactions and acts contem-
plated by the Investment Agreement. On June 10, 1993, a wholly owned subsidiary
of BA purchased two additional series of preferred stock from USAir Group pur-
suant to BA's exercise of preemptive and optional purchase rights under the In-
vestment Agreement which were triggered by certain issuances of Common Stock by
USAir Group. See "Recent Developments--BA Investment Agreement--Miscellaneous"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
USAir Group believes that the transactions and acts contemplated by the In-
vestment Agreement will (a) strengthen its financial condition, (b) broaden its
access to capital markets, (c) increase USAir's access to international traffic
and enable the Company to take advantage of strategic opportunities which may
be available from time to time to enhance its competitive position in the in-
dustry and (d) help the Company achieve its goal of becoming an effective, via-
ble competitor in the international airline industry.
In November 1993, USAir commenced service between BWI and St. Thomas, Virgin
Islands and between Charlotte and Tampa and Grand Cayman, Cayman Islands. In
addition, USAir plans to commence nonstop service from Philadelphia and Tampa
to Mexico City in March 1994.
RECENT DEVELOPMENTS
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1993 For the year ended December 31,
1993, USAir had a net loss of $418.8 million, which included non-recurring
charges of $156.2 million, on revenue of $6.6 billion, which compares to a net
loss of $1.2 billion, which included non-recurring charges of $782.7 million,
on revenue of $6.2 billion for 1992. Before non-recurring charges in 1993 and
1992, USAir had operating and pre-tax losses for 1993 of $29.6 million and
$262.5 million, respectively, versus operating and pre-tax losses for 1992 of
$262.2 million and $445.8 million, respectively.
The non-recurring charges for 1993 included, among other charges, approxi-
mately (i) $43.7 million for the cumulative effect of an accounting change, as
required by Statement of Financial Accounting Standard No. 112, "Employers' Ac-
counting for Postemployment Benefits" ("FAS 112"), which was adopted during the
third quarter of 1993, retroactive to January 1, 1993, (ii) $68.8 million for
severance, early retirement and other personnel-related expenses recorded pri-
marily during the third quarter of 1993 in connection with a workforce reduc-
tion of approximately 2,500 full-time positions between November 1993 and the
first half of 1994, (iii) $36.8 million based on an actuarial projection of the
repayment of certain employee pay reductions discussed in "Business Strategy--
New Labor Agreements," recorded in the fourth quarter of 1993, (iv) $13.5 mil-
lion for certain properties and facilities expenses at airports where USAir
has, among other things, discontinued or reduced its service recorded in the
fourth quarter of 1993 and (v) $8.8 million related to a loss on USAir's in-
vestment in the Galileo International Partnership, which operates a computer-
ized reservations system, recorded in the fourth quarter of 1993. Non-recurring
charges for 1992 included, among other charges, approximately $638.8 million
for the cumulative effect of an accounting change, as required by Statement of
Financial Accounting Standard No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106"), which was adopted
during the fourth quarter of 1992, retroactive to January 1, 1992, and certain
aircraft-related charges. See "Management's Discussion and Analysis of Finan-
cial Condition and Results of Operations."
For the fourth quarter of 1993, USAir had a net loss of $119.9 million, which
included non-recurring charges of $60.2 million, on revenue of $1.7 billion
versus a net loss of $255.6 million, which included non-recurring charges of
$143.9 million, on revenue of $1.5 billion for the comparable period of 1992.
Before non-recurring charges in the fourth quarters of 1993 and 1992, USAir had
operating income of $8.5 million
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and a pre-tax loss of $59.7 million for the 1993 quarter versus operating and
pre-tax losses of $61.9 million and $111.7 million, respectively, for the 1992
quarter. USAir's results for the fourth quarter of 1993 were favorably affected
by a disruption of American's operations due to a strike of American's flight
attendant employees in November 1993, while USAir's results for the fourth
quarter of 1992 were adversely affected by a disruption of its operations due
to a strike of USAir's mechanics and related employees in November 1992.
CHANGES IN SHORT-HAUL OPERATIONS Recently USAir has been examining various
measures to restructure its operations to increase efficiency and lower costs
in certain short-haul markets of approximately 500 miles or less in distance.
Certain carriers have a substantial cost-advantage over USAir in these markets
and consumers appear to be increasingly price conscious, particularly in these
markets. On February 16, 1994, USAir will implement the first phase of the in-
troduction of a new short-haul product in 18 city-pair markets of approximately
500 miles or less. USAir will increase the utilization and productivity of air-
craft, personnel and ground facilities in these markets by decreasing the
amount of time that aircraft used in these markets spend on the ground between
flights from an average of 45 minutes to as low as 25 minutes. USAir will oper-
ate a fleet of 22 Boeing 737-200 aircraft in these markets and will adjust pas-
senger check-in and boarding procedures to reflect the more efficient nature of
this service. In these markets, aircraft utilization for this fleet is expected
to increase from approximately 6.9 to 8.4 daily departures per aircraft. Initi-
ation of the service will not involve any immediate pricing changes or new per-
sonnel. Ultimately, USAir anticipates that enhancements to the short-haul prod-
uct will be completed in summer 1994 and that long-haul and transatlantic serv-
ice will be redesigned later in 1994. If the changes in the short-haul product
are successful, USAir may implement the changes in other short-haul markets.
There can be no assurance, however, that the changes will result in improved
financial results for USAir.
BA INVESTMENT AGREEMENT
Following is a summary of certain provisions of the Investment Agreement.
Terms of the Series F Preferred Stock The Series F Preferred Stock is con-
vertible into shares of Common Stock at a conversion price of $19.41 and will
have a liquidation preference of $10,000 per share plus an amount equal to ac-
crued dividends. See "--Miscellaneous" for a discussion of an antidilution ad-
justment to the conversion price of the Series F Preferred Stock. The Series F
Preferred Stock may be converted at the option of USAir Group at any time after
January 21, 1998 if the average composite closing market price of Common Stock
during any 30-day calendar period is at least 133% of the conversion price. The
Series F Preferred Stock will be entitled to cumulative quarterly dividends of
7% per annum when and if declared and to share in certain other distributions.
The Series F Preferred Stock must be redeemed by USAir Group on January 15,
2008. Each share of the Series F Preferred Stock will be entitled to a number
of votes equal to the number of shares of Common Stock into which it is con-
vertible and will vote with the Common Stock and USAir Group's Series A Cumula-
tive Convertible Preferred Stock, without par value ("Series A Preferred
Stock"), and any other capital stock with general voting rights for the elec-
tion of directors, as a single class. Subject to adjustment, 515.2886 shares of
Common Stock are issuable on conversion per share of Series F Preferred Stock
(determined by dividing the $10,000 liquidation preference per share of Series
F Preferred Stock by the $19.41 conversion price), and 15,458,658 shares of
Common Stock would be issuable on conversion of all Series F Preferred Stock.
However, under the terms of any USAir Group preferred stock that is or will be
held by BA ("BA Preferred Stock"), conversion rights (and as a result voting
rights) may not be exercised to the extent that doing so would result in a loss
of USAir Group's or any of its subsidiaries' operating certificates and author-
ities under Foreign Ownership Restrictions, as defined under "Board Representa-
tion" below, and it is assumed for this purpose that Series F Preferred Stock
will be fully converted before any other BA Preferred Stock. Under Foreign Own-
ership Restrictions, no more than 25% of the Company's voting interest may be
held by persons other than U.S. citizens, including BA. With respect to divi-
dend rights and rights on liquidation, dissolution and winding up, the Series F
Preferred Stock ranks senior to USAir Group's $437.50 Series B Cumulative Con-
vertible Preferred Stock, without par value, and Junior Participating Preferred
Stock, Series D, no par value, and Common Stock, and pari passu with BA Pre-
ferred Stock and Series A Preferred Stock.
Moreover, the Certificate of Designation for the Series F Preferred Stock
provides that if on any one occasion on or prior to January 21, 1996, any court
or regulatory authority issues a final order that any material part of the In-
vestment Agreement is unenforceable (except pursuant to bankruptcy or like
event), then the conversion price of Series F Preferred Stock shall be reduced
by 10.2564%. In that event, if the then conversion price of the Series F Pre-
ferred Stock were $19.41, it would be reduced to $17.42.
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<PAGE>
On March 15, 1993, the DOT issued an order (the "DOT Order") finding, among
other things, that "BA's initial investment of $300 million does not impair
USAir's citizenship" under Foreign Ownership Restrictions as defined under
"Board Representation" below. However, the DOT instituted a proceeding to con-
sider whether USAir will remain a U.S. citizen if the transactions and acts
contemplated by the Investment Agreement, including the transactions discussed
under "Possible Additional BA Investments" and "Certain Governance Matters" be-
low, are consummated. The DOT has suspended indefinitely the period for com-
ments from interested parties to the proceeding pending its resolution of re-
quests by other airlines for production of additional documents from USAir. The
DOT Order states that the DOT expects and advises USAir Group and BA not to
proceed with the Second Purchase and Final Purchase, as such terms are defined
under "Possible Additional BA Investments," until the DOT has completed its re-
view of USAir's citizenship. USAir cannot predict the outcome of the proceeding
or if the transactions contemplated under the Investment Agreement, particu-
larly those discussed under "Possible Additional BA Investments" and "Certain
Governance Matters", will be consummated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
issues and considerations pertaining to globalization of the airline industry
and "--Miscellaneous" for information regarding BA's purchase of two additional
series of preferred stock from USAir Group pursuant to its exercise of optional
and preemptive purchase rights under the Investment Agreement.
Board Representation USAir Group increased the size of its Board of Directors
by three on January 21, 1993 and the Board of Directors filled the newly cre-
ated directorships with designees of BA. Under the terms of the Investment
Agreement, USAir Group must use its best efforts to cause BA to be proportion-
ally represented on the Board of Directors (on the basis of its voting inter-
est), up to a maximum representation of 25% of the total number of authorized
directors ("Entire Board"), assuming that such proportional representation is
permitted by then applicable U.S. statutory and DOT regulatory or interpreta-
tive foreign ownership restrictions ("Foreign Ownership Restrictions"), until
the later of the closing of the Second Purchase, as defined under "Possible Ad-
ditional BA Investments" below, and the date on which BA may exercise under
Foreign Ownership Restrictions the rights described under "Certain Governance
Matters" below. See "Management's Discussion and Analysis of Financial Condi-
tion and Results of Operations--Competitive Environment/Industry Trends" for a
discussion of currently applicable Foreign Ownership Restrictions.
U.S.-U.K. Routes Under the Investment Agreement, USAir Group agreed that as
promptly as commercially practicable it would divest or, if divestiture were
not possible, relinquish, all licenses, certificates and authorities for each
of USAir's routes between the U.S. and the U.K. (the "U.K. Routes") at such
time as BA and USAir implement the code-sharing arrangement contemplated by the
Investment Agreement discussed below. USAir Group and BA have agreed that they
should attempt to mitigate any negative impact on Company employees or communi-
ties served by the U.K. Routes and to share any losses suffered as a result of
such divestiture or relinquishment with due regard to their respective inter-
ests. Accordingly, BA is operating and marketing certain routes formerly oper-
ated by USAir under a "wet lease." Under a "wet lease," an airline, in this
case USAir, leases its aircraft and cockpit and cabin crews to another airline,
in this case BA, for the purpose of operating certain routes or flights. Rent-
als under the wet lease are based on USAir's costs. BA will retain the cumula-
tive profits received by it in respect of these routes on the basis of its
fully diluted stock ownership in USAir Group and pay the balance of the profits
to USAir Group annually. See "Code Sharing" below. If the contemplated profit
sharing cannot be performed, BA will reimburse USAir Group for a portion of any
losses suffered by USAir Group in the divestiture or relinquishment of the U.K.
Routes based on a formula set forth in the Investment Agreement. The route au-
thorities which USAir was required to sell or relinquish were the Philadelphia-
London and BWI-London route authorities purchased by USAir from TWA in April
1992 for $50 million, and its route authority between Charlotte and London. As-
sets related to the U.K. Routes were carried on USAir's books at approximately
$47.4 million at September 30, 1993 and USAir expects to recover such amount in
full pursuant to the provisions of the Investment Agreement described above.
During March and April of 1993, USAir reached agreement with two air carriers
to sell the Philadelphia-London and BWI-London route authorities, provided,
among other conditions, governmental authorities permitted the transfer of
these route authorities to other cities. In June 1993, the DOT denied applica-
tions for such transfers on the grounds that the U.S.-U.K. bilateral air serv-
ices agreement does not permit such transfers. In July 1993, the DOT awarded
the Philadelphia-London route authority to American. USAir
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<PAGE>
ceased operating the BWI-London route authority on October 1, 1993 as a result
of the implementation of the wet leasing and code sharing arrangements with BA.
See "Code Sharing." In April 1993, USAir agreed to sell to the Metropolitan
Nashville Airport Authority, Nashville, Tennessee for $5 million its operating
authority between Charlotte and London Gatwick Airport. In December 1993, the
DOT issued an order which disapproved USAir's proposed sale of this route to
Nashville and awarded the BWI-London and Charlotte-London route authorities to
American, which will transfer the U.S. gateway cities for these route authori-
ties to Nashville and Raleigh/Durham, North Carolina. USAir ceased serving the
Charlotte-London route on January 19, 1994 and implemented the code sharing and
wet leasing arrangement with BA in that market on that date.
Code Sharing BA and USAir Group entered into a code share agreement on Janu-
ary 21, 1993 (the "Code Share Agreement") pursuant to which certain USAir
flights will carry the airline designator code of both BA and USAir and may be
held out by BA as service to a point in the United States as though those serv-
ices were BA's own. These flights are intended by USAir Group and BA eventually
to include all routes provided for under the bilateral air services agreement
between the U.S. and the U.K. to the extent possible, consistent with commer-
cial viability and technical feasibility.
The DOT Order, among other things, granted USAir for one year a statement of
authorization, and BA an exemption, for certain code sharing and wet leasing
arrangements contemplated by the Investment Agreement (the "Initial Code Share
Authority"), except that the DOT dismissed without prejudice USAir's applica-
tion for a statement of authorization to wet lease aircraft and crews to BA for
services between Charlotte and London because BA did not hold authority from
the U.K. to operate this route. As discussed below, BA has applied for, and
been granted, authority to operate this route. USAir filed an application to
wet lease aircraft and crews to BA for this route, which the DOT has approved.
USAir believes that the one-year term of the Initial Code Share Authority is
consistent with DOT policy and precedents with respect to other code sharing
arrangements. As contemplated in the Initial Code Share Authority, USAir can
code share with BA to approximately 38 cities in the U.S. beyond the
Baltimore/Washington, Philadelphia and Pittsburgh gateways. As of December 31,
1993, USAir and BA had implemented the code sharing arrangement for 16 U.S.
cities. In August 1993, USAir also applied for a statement of authorization,
and British Airways an exemption, for code sharing to 28 U.S. cities and (in
October 1993) to Mexico City (in addition to the 38 cities authorized in the
DOT Order) through nine U.S. gateways, including Charlotte (in addition to the
three gateways authorized in the DOT Order) (the "August Code Share Applica-
tion"). In November 1993, contrary to its policy and precedents, the DOT
granted the August Code Share Application for only 60 days, with the code shar-
ing authority thereunder to expire on January 12, 1994 (the "Supplemental Code
Share Authority"). The DOT stated that it expected progress towards liberaliz-
ing U.S. air carrier access to the U.K. in the negotiations scheduled for De-
cember 1993. USAir and BA then filed applications for one-year renewal of the
Initial Code Share Authority and the Supplemental Code Share Authority, which
renewal applications are currently pending. The December U.K. negotiating round
ended in a stalemate and the DOT subsequently extended the Supplemental Code
Share Authority to March 17, 1994, which coincides with the expiration of the
Initial Code Share Authority. The DOT subsequently granted the Mexico City code
share authority and also set March 17 as the expiration date. The U.S. has de-
clined to hold further negotiations on the bilateral agreement that were previ-
ously scheduled for January 1994. In January 1994, USAir and BA filed applica-
tions to code share to 64 additional U.S., and seven additional foreign, desti-
nations via the same and several additional U.S. gateways. These applications
are currently pending.
USAir and BA are in the process of exploring the economies and synergies that
may be possible as a result of the Code Share Agreement. USAir believes that
(i) the code-share cities in the U.S. will receive greater access to interna-
tional markets, (ii) it will have greater access to international traffic and
(iii) BA's and its customers will benefit from better on-line connections as
well as coordinated check-in and baggage checking procedures. USAir believes
that the code sharing arrangements will generate increased revenues; however,
the magnitude of any increase cannot be estimated at this time. When the code
share authority discussed above expires on March 17, 1994, the DOT may again
attempt to link renewal of the authorization to the U.K.'s liberalization of
U.S. air carrier access to the U.K.; however, the DOT Order acknowledged that
the code sharing arrangements contemplated by the Code Share Agreement are ex-
pressly permitted under the bilateral air services agreement between the U.S.
and U.K. Accordingly, USAir expects that the
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<PAGE>
code share authorizations under the Initial Code Share Authority and the Sup-
plemental Code Share Authority will be renewed; however, there can be no as-
surance that this will occur. See "Management's Discussion and Analysis of Fi-
nancial Condition and Results of Operations." USAir does not believe that the
DOT's failure to renew the authorizations would result in a material adverse
change in its financial condition; however, as a result of such failure, con-
summation of the Second Purchase and the Final Purchase, as defined under
"Possible Additional BA Investments" below, may be less likely. As discussed
under "Possible Additional BA Investments" below, USAir cannot predict whether
or when the Second Purchase or the Final Purchase will be consummated in any
event. See "Risk Factors--No Assurance as to Further BA Investment."
Possible Additional BA Investments Under the terms of the Investment Agree-
ment, assuming the Series F Preferred Stock or any shares issued upon conver-
sion thereof are outstanding and BA has not sold any shares of preferred stock
issued to it by USAir Group or any common stock or other securities received
upon conversion or exchange of the preferred stock, BA is entitled at its op-
tion to elect to purchase from USAir Group, on or prior to January 21, 1996,
50,000 shares of Series C Cumulative Convertible Senior Preferred Stock, with-
out par value ("Series C Preferred Stock"), at a purchase price of $10,000 per
share, to be paid by BA's surrender of the Series F Preferred Stock and a pay-
ment of $200 million (the "Second Purchase"), and, on or prior to January 21,
1998, assuming that BA has purchased or is purchasing simultaneously Series C
Preferred Stock, 25,000 (or more in certain circumstances) shares of Series E
Cumulative Convertible Exchangeable Senior Preferred Stock, without par value
("Series E Preferred Stock"), at a purchase price of $10,000 per share (the
"Final Purchase"). Series E Preferred Stock is exchangeable under certain cir-
cumstances at the option of USAir Group into certain USAir Group debt securi-
ties ("BA Notes"). If the DOT approves all the transactions and acts contem-
plated by the Investment Agreement, at the election of either BA or USAir
Group on or prior to January 21, 1998, BA's purchase of the Series C Preferred
Stock (unless previously consummated) and BA's purchase of the Series E Pre-
ferred Stock would be consummated under certain circumstances. If BA has not
elected to purchase the Series C Preferred Stock by January 21, 1996, then
USAir Group may at its option redeem, in whole or in part, Series F Preferred
Stock at the higher of market value or the price of $10,000 per share, plus
accrued dividends. USAir cannot predict whether or when the Second Purchase
and Final Purchase will be consummated.
Terms of the Series C Preferred Stock and Series E Preferred Stock The Se-
ries C Preferred Stock and Series E Preferred Stock are substantially similar
to Series F Preferred Stock, except as follows. Series C Preferred Stock will
be convertible into shares of Class B Common Stock or Non-Voting Class C Stock
(as such terms are defined under "Terms of BA Common Stock" below) at an ini-
tial conversion price of $19.8881, subject to Foreign Ownership Restrictions.
Each share of Series C Preferred Stock will be entitled to a number of votes
equal to the number of shares of Class B Common Stock into which it is con-
vertible, subject to Foreign Ownership Restrictions. If shares of Series C
Preferred Stock are transferred to a third party, they convert automatically
at the seller's option into either shares of Common Stock or a like number of
shares of Series G Cumulative Convertible Senior Preferred Stock. Series E
Preferred Stock will be convertible into shares of Common Stock or Non-Voting
Class ET Stock (as defined under "Terms of BA Common Stock" below) at an ini-
tial conversion price of $21.82, subject to increase if the Series E Preferred
Stock is originally issued on or after January 21, 1997, subject to Foreign
Ownership Restrictions. Each share of Series E Preferred Stock will be enti-
tled to a number of votes equal to the number of shares of Common Stock into
which it is convertible, subject to Foreign Ownership Restrictions.
Terms of BA Common Stock To the extent permitted by Foreign Ownership Re-
strictions, an amendment to USAir Group's charter, which is to be filed with
the Delaware Secretary of State immediately prior to the Second Purchase, will
create three new classes of common stock--Class B Common Stock, par value
$1.00 per share ("Class B Common Stock"), Non-Voting Class C Common Stock, par
value $1.00 per share ("Non-Voting Class C Stock"), and Non-Voting Class ET
Common Stock, par value $1.00 per share ("Non-Voting Class ET Common Stock,"
collectively with Class B Common Stock and Non-Voting Class C Common Stock,
"BA Common Stock")--all of which may be held only by BA or one of its wholly
owned subsidiaries. Except with respect to voting and conversion rights, the
BA Common Stock will be substantially identical to the Common Stock. Shares of
BA Common Stock will convert automatically to shares of Common Stock upon
their transfer to a third party. Subject to Foreign Ownership Restrictions,
Class B
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Common Stock will be entitled to one vote per share. After the effectiveness of
the above charter amendment, to the extent permitted by Foreign Ownership Re-
strictions, Class B Common Stock will vote as a single class with Series C Pre-
ferred Stock on the election of one-fourth of the directors and the approval of
the holders of Class B Common Stock and Series C Preferred Stock voting as a
single class will be required for certain matters.
Certain Governance Matters Following the Second Purchase and assuming these
changes are permitted under Foreign Ownership Restrictions, the above charter
amendment will fix the size of USAir Group's board of directors at 16, one-
fourth of whom would be elected by BA. In addition, the vote of 80% of the
USAir or USAir Group boards of directors will be required for approval of the
following (with certain limited exceptions): (i) any agreement with the DOT re-
garding citizenship and fitness matters; (ii) any annual operating or capital
budgets or financing plans; (iii) incurring capital expenditures not provided
for in a budget approved by the vote of 80% of the board in excess of $10 mil-
lion in the aggregate during any fiscal year; (iv) declaring and paying divi-
dends on any capital stock of USAir Group or any of its subsidiaries (other
than dividends paid only to USAir Group or any wholly-owned subsidiary of USAir
Group and any dividends on preferred stock); (v) making investments in other
entities not provided for in approved budgets in excess of $10 million in the
aggregate during any fiscal year; (vi) incurring additional debt (other than
certain debt specified in the Investment Agreement) not in an approved financ-
ing plan in excess of $50 million in the aggregate during any fiscal year;
(vii) incurring off-balance sheet liabilities (e.g., operating leases) not in
an approved financing plan in excess of $50 million in the aggregate during any
fiscal year; (viii) appointment, compensation and dismissal of certain senior
executives; (ix) acquisition, sale, transfer or relinquishment of route author-
ities or operating rights; (x) entering into material commercial or marketing
agreements or joint ventures; (xi) issuance of capital stock (or debt or other
securities convertible into or exchangeable for capital stock), other than (A)
the stock options to be granted to employees in return for pay reductions under
the USAir Group 1992 Stock Option Plan, as described under "Business Strategy--
New Labor Agreements," (B) to USAir Group or any direct or indirect wholly
owned subsidiary of USAir Group, (C) pursuant to the terms of USAir Group secu-
rities outstanding when a certain amendment to USAir Group's charter required
in connection with consummation of the Second Purchase becomes effective, or
(D) pursuant to the terms of securities the issuance of which was previously
approved by the vote of 80% of the board; (xii) acquisition of its own equity
securities other than from USAir Group or its subsidiaries, or pursuant to
sinking funds or an approved financing plan; and (xiii) establishment of a
board of directors' committee with power to approve any of the foregoing. This
supermajority vote requirement would allow any four directors, including those
elected by BA, to withhold approval of the actions described above if they be-
lieve them to be contrary to the best interests of USAir. The supermajority
vote would not be required with regard to the foregoing actions to the extent
they involve the enforcement by USAir Group of its rights under the Investment
Agreement.
Following the Second Purchase, to the extent permitted under Foreign Owner-
ship Restrictions, USAir Group and BA will integrate certain of their respec-
tive business operations pursuant to certain "Integration Principles" included
in the Investment Agreement. In addition, to the extent permitted by Foreign
Ownership Restrictions or pursuant to specific DOT approval, an "Integration
Committee," headed by the chief executive officers of USAir Group and BA and by
an Executive Vice President--Integration of USAir Group, would oversee the in-
tegration subject to the ultimate discretion of USAir Group's board of direc-
tors. As of the Final Purchase, to the extent permitted by Foreign Ownership
Restrictions, the Investment Agreement provides for the establishment of a com-
mittee ("Appointments Committee") of the board of directors of USAir Group,
composed of USAir Group's chief executive officer, BA's chief executive officer
and another director serving on both USAir Group's and BA's board of directors,
to handle all employment matters relating to managers at the level of vice
president and above, except for certain senior executives.
BA's governance rights after the Second Purchase and the Final Purchase are
subject to reduction if BA reduces its holding in USAir Group under the follow-
ing circumstances. If BA sells or transfers, in one or more transactions, BA
Preferred Stock, Common Stock or BA Common Stock (collectively, Common Stock
and BA Common Stock are hereinafter referred to as "Non-Preferred Stock") is-
sued directly or indirectly upon the conversion thereof such that the aggregate
purchase price of the BA Preferred Stock, BA Notes, Non-Preferred Stock or
other equity securities of USAir Group held by BA and its directly or indi-
rectly wholly owned subsidiaries following such sale or transfer (the "BA Hold-
ing") is less than both two-thirds of
S-22
<PAGE>
the aggregate purchase price of all BA Preferred Stock, BA Notes, Non-Preferred
Stock or other equity securities of USAir Group acquired by BA and its subsidi-
aries following January 21, 1993 and $750 million (or $500 million if the Final
Purchase has not occurred), then (i) the number of directors elected by the
Class B Common Stock and the Series C Preferred Stock, voting together as a
single class, will be limited to two, (ii) the directors elected by the Common
Stock, Series A Preferred Stock, Series E Preferred Stock, Series T Preferred
Stock, as defined under "Miscellaneous" below, and other capital stock with
voting rights will no longer be required to include two directors selected from
among the outside directors on the board of directors of BA, (iii) special
class voting rights applicable to the Class B Common Stock and Series C Pre-
ferred Stock will no longer apply and (iv) BA will no longer participate in the
Appointments Committee. In addition, if the BA Holding becomes less than both
one-third of the aggregate purchase price of all BA Preferred Stock, BA Notes,
Non-Preferred Stock or other equity securities of USAir Group acquired by BA
and its subsidiaries following January 21, 1993 and $375 million (or $250 mil-
lion if the Final Purchase has not occurred), then the number of directors
elected by the Class B Common Stock and the Series C Preferred Stock, voting
together as a single class, will be reduced to one. If the BA Holding becomes
less than $100 million, then the Class B Common Stock and the Series C Pre-
ferred Stock will no longer vote together as a single class with respect to the
election of any directors of USAir Group, but will vote together with the Com-
mon Stock, the Series A Preferred Stock and any other class or series of capi-
tal stock with voting rights with respect to the election of directors of USAir
Group.
Miscellaneous Under the terms of the Investment Agreement, BA has the right
to maintain its proportionate ownership (based on the assumed consummation of
the Second Purchase and the Final Purchase) of USAir Group's securities under
certain circumstances by purchasing shares of certain series of Series T Cumu-
lative Convertible Exchangeable Senior Preferred Stock, without par value ("Se-
ries T Preferred Stock"), Common Stock or BA Common Stock. Pursuant to these
provisions, on June 10, 1993, BA purchased (i) 152.1 shares of Series T-1 Pre-
ferred Stock for approximately $1.5 million as a result of certain issuances
during the period January 21 through March 31, 1993 of Common Stock in connec-
tion with the exercise of certain employee stock options and to certain defined
contribution retirement plans and (ii) 9,919.8 shares of Series T-2 Preferred
Stock for approximately $99.2 million as a result of USAir Group's issuance on
May 4, 1993 of 11,500,000 shares of Common Stock for net proceeds of approxi-
mately $231 million pursuant to a public underwritten offering. Because BA par-
tially exercised its preemptive right in connection with the Common Stock of-
fering the conversion price of the Series F Preferred Stock was antidilutively
adjusted on June 10, 1993 from $19.50 to $19.41 per share. As a result, the Se-
ries F Preferred Stock is convertible into 15,458,658 shares of Common Stock or
Non-Voting Class ET Common Stock.
The Investment Agreement also imposes certain restrictions on BA's right to
acquire additional voting securities, participate in solicitations with respect
to USAir Group securities or otherwise propose or discuss extraordinary trans-
actions concerning USAir Group. In addition, the Investment Agreement restricts
BA's right to transfer certain securities and requires that prior to transfer-
ring such securities. BA must, in most cases, first offer to sell the securi-
ties to USAir Group. BA has certain rights to require USAir Group to register
for sale USAir Group securities sold to it pursuant to the Investment Agree-
ment.
USAir believes that consummation of the transactions contemplated by the In-
vestment Agreement will enable it to compete more effectively by (i) increasing
USAir Group's equity capital and strengthening its balance sheet, (ii) reducing
reliance on the Credit Agreement and Receivables Agreement, as such terms are
defined under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources", and improving access
to capital markets, (iii) providing financial resources to help it withstand
adverse economic conditions and fare competition, (iv) providing financial re-
sources for the purchase of strategic assets which may be on the market from
time to time and (v) giving USAir greater access to international traffic.
The foregoing summary of the Investment Agreement and the BA transaction is
subject to and qualified in its entirety by reference to the material under the
caption "BA Investment Agreement" in the Prospectus dated April 28, 1993 of
USAir Group and the Proxy Statement filed with the Commission on April 26,
1993, including the Appendices thereto, of USAir Group, which are incorporated
by reference herein.
S-23
<PAGE>
ANTITRUST MATTERS In 1989 and 1990, a number of U.S. air carriers, including
USAir, received two Civil Investigative Demands ("CIDs") from the U.S. Depart-
ment of Justice ("DOJ") (a CID is a request for information in the course of an
antitrust investigation and does not constitute the institution of a civil or
criminal action) related to investigations of price fixing in the domestic air-
line industry.
The investigations by the DOJ culminated in the filing of a lawsuit against
Airline Tariff Publishing Company ("ATPCo") and eight major air carriers, in-
cluding USAir, alleging that the defendants had agreed to fix prices in viola-
tion of Section 1 of the Sherman Act through the methods used to disseminate
fare data to ATPCo, an airline-owned fare publishing service. To avoid the
costs associated with protracted litigation and an uncertain outcome, USAir and
another carrier decided to settle the lawsuit by entering into a consent decree
to modify their fare-filing practices in certain respects and to implement com-
pliance programs that would include education of employees regarding the carri-
er's responsibilities under the consent decree. Accordingly, the consent decree
and the U.S. Government's complaint were filed contemporaneously in the U.S.
District Court for the District of Columbia in December 1992. Due to certain
legal requirements associated with the settlement of government antitrust
suits, the consent decree could not be entered until a notice and comment pe-
riod had expired. On November 1, 1993, after it had reviewed the comments, the
Court entered the consent decree. USAir does not believe that the fare-filing
practices reflected in the consent decree will have a material adverse effect
on its financial condition or on its ability to compete with the airlines that
have not settled with the government. The consent decree also provided that if
any of the other airline defendants reaches a settlement with the DOJ that is
different from USAir's settlement, USAir can petition the Court to have its
consent decree amended to conform with the other settlements and the Court will
enter the amended consent decree.
On March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a set-
tlement involving USAir and five other U.S. air carrier defendants in the Do-
mestic Air Transportation Antitrust Litigation class action lawsuit. The class
action suit, which was filed in July 1990, alleged that the airlines used ATPCo
to signal and communicate carrier pricing intentions and otherwise limit price
competition for travel to and from numerous hub airports. Under the terms of
the settlement, the six air carriers will pay $45 million in cash and issue
$396.5 million in certificates valid for purchase of domestic air travel on any
of the six airlines. USAir's share of the cash portion of the settlement, $5
million, was recorded in results of operations for the second quarter of 1992.
The certificates would provide a dollar-for-dollar discount against the cost of
a ticket generally of up to a maximum of 10% per ticket, depending on the cost
of the ticket. It is possible that this settlement could have a dilutive effect
on USAir's passenger transportation revenue and associated cash flow. However,
due to the interchangeability of the certificates among the six carriers in-
volved in the settlement, the possibility that carriers not party to the set-
tlement will honor the certificates, and the potential stimulative effect on
travel created by the certificates, USAir cannot reasonably estimate the impact
of this settlement on future passenger revenue and cash flows. USAir has em-
ployed the incremental cost method to estimate a range of costs attributable to
the exercise of the certificates, based on the assumption that the estimated
maximum number of certificates to be redeemed for travel on USAir will be re-
lated to USAir's market share relative to the total market share of the six
carriers involved in the settlement. USAir's estimated percentage of such mar-
ket share is less than 9%. Incremental costs include unit costs for passenger
food, beverages and supplies, fuel, liability insurance, and denied boarding
compensation expenses expected to be incurred on a per passenger basis. USAir
has estimated that its incremental cost will not be material based on the
equivalent free trips associated with the settlement.
AIRLINE COMMISSION The National Commission to Ensure a Strong Competitive
Airline Industry (the "Airline Commission") issued its report in August 1993.
Among other things, the Airline Commission recommended that: (1) the air traf-
fic control system be modernized and the Federal Aviation Administration's (the
"FAA") air traffic control functions be performed by an independent federal
corporation; (2) the federal regulatory burden be reduced; (3) the airlines be
granted certain tax relief; and (4) the bankruptcy process be shortened. The
Airline Commission also favored raising the statutory limit on foreign owner-
ship of voting securities in U.S. airlines to 49 percent under certain circum-
stances. It further urged that the current international system of bilateral
agreements be replaced with multilateral arrangements.
In addition, the Airline Commission recommended that the DOT review the air-
lines' business, capital or
S-24
<PAGE>
financial plans with the assistance of a presidentially appointed advisory com-
mittee and, if an airline repeatedly failed to heed warnings or concerns of the
DOT Secretary, the DOT could "exercise its existing authority," among other
things, to revoke an airline's operating certificate.
In January 1994, the Clinton Administration issued a report which described
its program to implement certain of the Airline Commission's recommendations.
Among other things, the Administration stated that it supported the recommenda-
tion described above regarding the FAA, supported increasing to 49% the foreign
ownership restrictions provided there are reciprocal opportunities for U.S.
airlines and investors abroad, and opposed the recommendations regarding tax
relief and the appointment of the advisory committee discussed above. At this
time, it is impossible to predict whether any of the Airline Commission's rec-
ommendations will be enacted and, if enacted, their effect on USAir. It is also
difficult to anticipate whether the Congress will act in the near term on any
of the proposals requiring legislation.
UNITED AGREEMENT In August 1993, USAir reached an agreement in principle with
United Air Lines, Inc. ("United"), among other things, to (i) purchase from
United certain takeoff and landing slots at Washington National Airport and New
York LaGuardia Airport, (ii) purchase from United certain gates and related
space at Orlando International Airport, (iii) grant to United an option to pur-
chase certain gates and related space, and a right of first refusal to purchase
certain takeoff and landing slots, at Chicago O'Hare International Airport and
(iv) negotiate a code sharing agreement with United regarding USAir's flights
to and from Miami and United's flights between Miami and Latin America. In De-
cember 1993, USAir and United entered into a definitive agreement to effect the
transactions described in (i), (ii) and (iii) above. Consummation of each of
the transactions contemplated by the agreement is subject to a number of condi-
tions, including governmental approvals and, in the case of the code share
agreement, definitive documentation. In September 1993, USAir received a CID
from the DOJ related to an investigation of violations of Section 1 of the
Sherman Act in connection with USAir's agreement with United. At this time, it
is impossible to predict whether or when the transactions contemplated by
USAir's agreement with United will be consummated.
FUEL TAX In early August 1993, the Clinton Administration's budget package
was enacted. The budget package included a 4.3 cent per gallon tax on transpor-
tation fuels beginning October 1, 1993. The airline industry is exempt from the
tax until October 1, 1995. The effect on the economy in general, or on USAir in
particular, of this tax and the other tax increases and spending cuts contained
in the budget package cannot be predicted at this time.
LABOR ORGANIZING EFFORTS Certain unions are engaged in efforts to unionize
USAir's customer service and reservations employees. The Railway Labor Act (the
"RLA") governs, and the National Mediation Board (the "NMB") has jurisdiction
over, such campaigns. Under the RLA, the NMB could order an election among a
class or craft of eligible employees if a union submitted an application to the
NMB supported by authorization cards from at least 35% of the applicable class
or craft of employees. If the NMB ordered an election and a majority of the el-
igible employees voted for representation, USAir would be required to negotiate
a collective bargaining agreement with the union that wins the election. On
January 24, 1994, the United Steelworkers of America ("USWA") sent a letter to
USAir's management requesting voluntary recognition of the USWA as the collec-
tive bargaining agent for USAir's fleet service employees, a class or craft of
workers included among USAir's customer service employees. If USAir declines to
extend such recognition, the USWA also stated that it intends to file an appli-
cation with the NMB on January 28, 1994, claiming that it has obtained authori-
zation cards from more than 60% of the class or craft of fleet service employ-
ees. USAir does not intend to extend voluntary recognition to the USWA. If the
USWA's claims regarding authorization cards are accurate, it appears likely
that the NMB would order an election among the fleet service class or craft. At
this time, USAir cannot predict whether the NMB will order an election among
any other class or craft of employees. If an election were held, USAir also
cannot predict whether any class or craft of employees would vote for represen-
tation and if a union were certified, when a collective bargaining agreement
might be concluded and what its provisions might be.
USE OF PROCEEDS
All net proceeds to be received by the Company from the sale of the Notes
will be added to the working capital of the Company and will be available for
general corporate purposes. Until so utilized, the net proceeds will be in-
vested in income-producing securities.
S-25
<PAGE>
CAPITALIZATION
USAIR The following table sets forth the capitalization of USAir at September
30, 1993, and as adjusted for the sale of the (i) the Notes offered hereby and
(ii) the Equipment Notes issued by USAir on November 1, 1993 related to the
USAir 1993-A Pass Through Trusts, which issued the USAir Pass Through Certifi-
cates, Series 1993-A (the "Series 1993-A Certificates), as if these transac-
tions had occurred on such date. For additional information regarding long-term
debt and capital and operating obligations for USAir, see the financial state-
ments, and notes thereto, of USAir which are incorporated by reference herein.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1) AS ADJUSTED(2)
----------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, including current
maturities(3):
12 7/8% Senior Debentures due
2000............................. $ 84,000 $ 84,000 $ 84,000
10% Senior Notes due 2003......... 300,000 300,000 300,000
9 5/8% Senior Notes due 2001...... -- -- 175,000
13.2% U.S. Government Guaranteed
Obligations, Installments due
1993 to 1995..................... 7,725 7,725 7,725
8 5/8% Equipment Notes due 1998, 9
5/8% Equipment Notes due 2003 and
10 3/8% Equipment Notes due 2013. -- 337,679 337,679
13 1/8% Equipment Trust Certifi-
cates, Installments due 1993 to
1994............................. 1,934 1,934 1,934
3.9% to 12.0% Equipment Financing
Agreements, Installments due 1993
to 2016.......................... 1,740,308 1,571,267 1,571,267
3.9% to 8.6% Airport Facility Rev-
enue Bonds and Notes, Install-
ments due 1993 to 2022........... 28,670 28,670 28,670
4.6% to 4.9% Purchase Deposit
Notes............................ 142,994 142,994 142,994
6 3/8% to 12% Secured Financings
payable to USAir Group, Install-
ments due 1993 to 2016........... 146,998 105,080 105,080
Capitalized lease obligations..... 111,374 111,374 111,374
Other............................. 3,644 3,644 3,644
----------- ----------- -----------
Total long-term debt............ 2,567,647 2,694,367 2,869,367
----------- ----------- -----------
Stockholder's equity(3):
Common stock...................... $ 1 $ 1 $ 1
Paid-in capital................... 2,416,131 2,416,131 2,416,131
Retained earnings (deficit)....... (1,846,250) (1,846,250) (1,846,250)
Adjustment for minimum pension li-
ability(4)....................... (6,820) (6,820) (6,820)
----------- ----------- -----------
Total stockholder's equity...... 563,062 563,062 563,062
----------- ----------- -----------
Total capitalization............ 3,130,709 3,257,429 3,432,429
=========== =========== ===========
</TABLE>
- --------
(1) To demonstrate the effect of the sale of the Equipment Notes related to the
Series 1993-A Certificates and the partial application of net proceeds
thereof. The balance of the net proceeds were applied to pay the remainder
of the purchase price of three new Boeing 757-200 aircraft which were de-
livered to USAir in the fourth quarter of 1993.
(2) To demonstrate the effects of the sale of the Equipment Notes related to
the Series 1993-A Certificates and the partial application of net proceeds
thereof, as described under note (1) above, and the sale of the Notes of-
fered hereby.
(3) For additional information regarding long-term debt, obligations under cap-
ital leases and pensions, see notes (3), (4) and (8) to the audited consol-
idated statements of USAir included in the USAir Group and USAir combined
Annual Report on Form 10-K for the year ended December 31, 1992 and note
(3) to the unaudited consolidated USAir Group financial statements included
in the USAir Group and USAir combined quarterly report on Form 10-Q for the
quarter ended September 30, 1993, which are incorporated herein by refer-
ence.
(4) The adjustment for minimum pension liability will increase as of December
31, 1993 due to a change in the discount rate used to calculate pension li-
abilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Nine Months Ended Septem-
ber 30, 1993."
S-26
<PAGE>
USAIR GROUP The following table sets forth the consolidated capitalization of
USAir Group and its subsidiaries at September 30, 1993, as adjusted to give ef-
fect to the sale of the (i) Notes offered hereby and (ii) Equipment Notes is-
sued by USAir on November 1, 1993 related to the USAir Series 1993-A Pass
Through Trusts, which issued the Series 1993-A Certificates, as if the sales
had occurred on such date. For additional information regarding long-term debt,
redeemable preferred stock, capital stock, deferred compensation and pensions,
see the financial statements, and notes thereto, of USAir Group, and the proxy
statement for the 1993 annual meeting of stockholders of USAir Group, which are
incorporated herein by reference.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1) AS ADJUSTED(2)
----------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, including current
maturities(3):
12 7/8% Senior Debentures due
2000............................. $ 84,000 $ 84,000 $ 84,000
10% Senior Notes due 2003......... 300,000 300,000 300,000
9 5/8% Senior Notes due 2001...... -- -- 175,000
13.2% U.S. Government Guaranteed
Obligations, Installments due
1993 to 1996..................... 7,725 7,725 7,725
8 5/8% Equipment Notes due 1998, 9
5/8% Equipment Notes due 2003 and
10 3/8% Equipment Notes due 2013. -- 337,679 337,679
13 1/8% Equipment Trust Certifi-
cates, Installments due 1993 to
1994............................. 1,934 1,934 1,934
3.9% to 12.0% Equipment Financing
Agreements, Installments due 1993
to 2016.......................... 1,743,224 1,574,183 1,574,183
3.9% to 8.6% Airport Facility Rev-
enue Bonds and Notes, Install-
ments due 1993 to 2022........... 28,670 28,670 28,670
4.6% to 4.9% Purchase Deposit
Notes............................ 142,994 142,994 142,994
Credit Agreement Borrowings....... -- -- --
Capitalized lease obligations..... 112,775 112,775 112,775
Other............................. 4,244 4,244 4,244
----------- ----------- -----------
Total long-term debt............ 2,425,566 2,594,204 2,769,204
----------- ----------- -----------
Redeemable Series T Cumulative
Convertible Exchangeable Senior
Preferred Stock.................... 100,719 100,719 100,719
Redeemable Series F Cumulative Con-
vertible Senior Preferred Stock.... 300,000 300,000 300,000
Redeemable Series A Cumulative Con-
vertible Preferred Stock........... 358,000 358,000 358,000
Stockholders' equity (deficit) (3):
$437.50 Series B Cumulative Con-
vertible Preferred Stock......... 213,153 213,153 213,153
Common stock...................... 61,081 61,081 61,081
Paid-in capital................... 1,419,169 1,419,169 1,419,169
Retained earnings (deficit)....... (1,551,899) (1,551,899) (1,551,899)
Treasury stock.................... (86,486) (86,486) (86,486)
Deferred compensation............. (95,942) (95,942) (95,942)
Adjustment for minimum pension li-
ability(4)....................... (6,820) (6,820) (6,820)
----------- ----------- -----------
Total stockholders' equity (def-
icit).......................... (47,744) (47,744) (47,744)
----------- ----------- -----------
Total capitalization............ 3,136,541 3,305,179 3,480,179
=========== =========== ===========
</TABLE>
- --------
(1) To demonstrate the effect of the sale of the Equipment Notes related to the
Series 1993-A Certificates and the partial application of net proceeds
thereof. The balance of the net proceeds were applied to pay the remainder
of the purchase price of three new Boeing 757-200 aircraft which were
delivered to USAir in the fourth quarter of 1993.
(2) To demonstrate the effects of the sale of the Equipment Notes related to
the Series 1993-A Certificates and the partial application of net proceeds
thereof, as described under note (1) above, and the sale of the Notes
offered hereby.
(3) For additional information regarding long-term debt, obligations under
capital leases, redeemable preferred stock, deferred compensation, capital
stock and pensions, see notes (3), (4), (7), (8), (9) and (10) to the
audited consolidated financial statements of USAir Group included in the
USAir Group and USAir combined Annual Report on Form 10-K for the year
ended December 31, 1992 and notes (3), (4) and (5) to the unaudited
consolidated USAir Group financial statements included in the USAir Group
and USAir combined quarterly report on Form 10-Q for the quarter ended
September 30, 1993, which are incorporated herein by reference.
(4) The adjustment for minimum pension liability will increase as of December
31, 1993 due to a change in the discount rate used to calculate pension
liabilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Nine Months
Ended September 30, 1993."
S-27
<PAGE>
SELECTED FINANCIAL AND OPERATING INFORMATION
USAIR, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ---------------------------------------------------------
ENDED SEPT. 30, HISTORICAL PRO FORMA
---------------- --------------------------------------- ----------------
1993 1992 1992 1991 1990 1989 1988 1989(2) 1988(2)
------- ------- ------- ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
USAIR SELECTED FINANCIAL INFORMATION(1):
(IN MILLIONS)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Operating Revenues ........................ $4,933 $4,706 $ 6,236 $6,069 $6,138 $4,236 $2,830 $5,887 $5,367
Operating Expenses ........................ 5,023 4,906 6,611 6,285 6,680 4,461 2,682 5,881 4,962
Operating Income (Loss) ................... (90) (200) (375) (216) (542) (225) 148 6 405
Income (Loss) before accounting change .... (255) (334) (589) (284) (427) (151) 73 (11) 205
Accounting change(3) ...................... (44) (639) (639) -- -- -- -- -- --
Net Income (Loss) ......................... (299) (973) (1,228) (284) (427) (151) 73 (11) 205
CONSOLIDATED BALANCE SHEET:
Total Assets .............................. 6,913 6,861 6,718 6,564 6,395 6,066 2,900 5,442
Long-Term Obligations(4) .................. 3,463 3,012 3,049 1,956 1,656 1,052 635 769
Stockholder's Equity ...................... 563 1,124 862 2,097 2,381 2,809 1,116 2,822
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ---------------------------------------------------------
ENDED SEPT. 30, HISTORICAL PRO FORMA
---------------- --------------------------------------- ----------------
1993 1992 1992 1991 1990 1989 1988 1989(2) 1988(2)
------- ------- ------- ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
USAIR AIRLINE OPERATING STATISTICS:
Revenue Passengers (Millions)* .............. 39.5 42.0 54.7 55.6 60.1 44.5 32.5 61.2 61.9
Average Passenger Journey (Miles)* .......... 663 642 642 614 592 565 533 551 505
Revenue Passenger Miles (Millions)* ......... 26,166 26,970 35,097 34,120 35,551 25,132 17,315 33,697 31,282
Available Seat Miles (Millions)* ............ 44,398 45,178 59,667 58,261 59,484 41,052 28,234 55,610 52,107
Passenger Load Factor* ...................... 58.9% 59.7% 58.8% 58.6% 59.8% 61.2% 61.3% 60.6% 60.0%
Break Even Load Factor (net)(5).............. 61.5% 64.0% 63.2% 62.7% 64.5% 64.5% 58.7% 60.6% 56.0%
Yield* ...................................... 17.36c 16.22c 16.49c 16.67c 16.18c 15.84c 15.33c 16.50c 16.18c
Cost Per Available Seat Mile(5).............. 11.11c 10.79c 10.83c 10.78c 10.84c 10.74c 9.34c 10.46c 9.40c
Avg. Stage Length (Miles) ................... 537 513 516 495 469 453 438 440 407
Gallons of Fuel Consumed (Millions) ......... 866 898 1,183 1,168 1,283 992 617 1,264 1,192
Cost Per Gallon of Fuel ..................... 58.63c 60.38c 61.44c 66.41c 76.01c 60.59c 52.58c 59.54c 51.95c
Number of Employees at End of Period ........ 46,100 46,000 46,200 45,300 49,200 49,900 23,800 49,900 44,670
Operating Aircraft Fleet at End of Period ... 441 448 440 436 454 441 226 441 421
</TABLE>
- --------
(1) The selected Consolidated Balance Sheet financial information as of
December 31, 1991 and 1992 and the selected Consolidated Statement of
Operations financial information for the years 1990 through 1992 have been
summarized from audited information contained in the USAir Group and USAir
combined Annual Report on Form 10-K for the year ended December 31, 1992
and other analyses. This information should be read in conjunction with the
consolidated financial statements, including the notes thereto, of USAir
which are incorporated by reference herein. Numbers in the table may not
add due to rounding.
(2) Restated on a pro forma basis to reflect the mergers of Piedmont and PSA
into USAir as if each of the mergers had occurred on January 1, 1988. No
pro forma balance sheet information as of December 31, 1989 is presented
because Piedmont was merged into USAir on August 5, 1989.
(3) Cumulative effect of changes in method of accounting for (i) postemployment
benefits for inactive employees was implemented in the third quarter of
1993, retroactive to January 1, 1993 and (ii) postretirement benefits other
than pensions (net of income tax benefit of $107 million) effective as of
January 1, 1992.
(4) Long-term obligations include long-term debt, capital leases and
postretirement benefits other than pensions, non-current. Historical long-
term debt includes $147 million and $187 million payable to USAir Group at
September 30, 1993 and 1992, respectively and $130 million and $98 million
payable to USAir Group at December 31, 1992 and 1991, respectively; and
$170 million payable to Piedmont at December 31, 1988.
(5) Adjusted to exclude non-recurring, special items and revenues and expenses
(which amounts net to zero) generated under the wet lease arrangements with
BA. See "Recent Developments--BA Investment Agreement--U.S.-U.K. Routes"
and "--Code Sharing."
* Scheduled service only.
S-28
<PAGE>
SELECTED FINANCIAL INFORMATION
USAIR GROUP, INC.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPT. 30, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------
1993 1992 1992 1991 1990 1989 1988
------- -------- ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
USAIR GROUP SELECTED
FINANCIAL
INFORMATION(1):
(IN MILLIONS EXCEPT PER
SHARE AMOUNTS)
CONSOLIDATED STATEMENTS
OF OPERATIONS:
Operating Revenues..... $5,281 $ 5,052 $ 6,686 $6,514 $ 6,559 $6,251 $5,707
Operating Expenses..... 5,323 5,229 7,023 6,688 7,060 6,230 5,273
Operating Income
(Loss)................ (42) (177) (336) (174) (501) 21 434
Income (Loss) before
accounting change..... (233) (347) (601) (305) (454) (63) 165
Accounting change(2)... (44) (628) (628) -- -- -- --
Net Income (Loss)...... (277) (975) (1,229) (305) (454) (63) 165
Net Income (Loss) Ap-
plicable to Common
Stockholders.......... (331) (1,014) (1,281) (350) (488) (76) 165
EARNINGS (LOSS) PER
SHARE:
Before accounting
change................ $ (5.35) $ (8.21) $(13.88) $(7.62) $(10.89) $(1.73) $ 3.81
Effect of accounting
change(2)............. (.82) (13.37) (13.35) -- -- -- --
Income (Loss) Per
Share................. (6.17) (21.58) (27.23) (7.62) (10.89) (1.73) 3.81
CONSOLIDATED BALANCE
SHEET:
Total Assets........... $6,942 $ 6,707 $ 6,595 $6,454 $ 6,574 $6,069 $5,349
Long-Term Obligations
and Series A, F and T
Preferred Stock(3).... $4,080 $ 3,642 $ 3,714 $2,577 $ 2,743 $1,901 $1,419
Stockholders' Equity
(deficit)............. (48) 311 44 1,318 1,434 1,893 2,070
Book Value Per Common
Share at End of Period. (4.41) 2.08 (3.58) 23.69 31.50 42.86 47.28
Shares of Common Stock
Outstanding at End of
Period................. 59.2 47.1 47.2 46.6 45.5 44.2 43.8
</TABLE>
- --------
(1) The selected Consolidated Balance Sheet financial information at December
31, 1991 and 1992 (other than book value per share) and the selected Con-
solidated Statement of Operations financial information for the years 1990
through 1992 have been summarized from audited information contained in
USAir Group's Annual Report on Form 10-K for the year ended December 31,
1992. This information should be read in conjunction with the consolidated
financial statements, including the notes thereto, of USAir Group incorpo-
rated by reference herein. Numbers in the table may not add or calculate
due to rounding.
(2) Cumulative effect of changes in method of accounting for (i) postemployment
benefits for inactive employees was implemented in the third quarter of
1993, retroactive to January 1, 1993 and (ii) postretirement benefits other
than pensions (net of income tax benefit of $118 million) effective as of
January 1, 1992.
(3) Long-term obligations include long-term debt, capital leases,
postretirement benefits other than pensions, non-current and redeemable
preferred stock.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPETITIVE ENVIRONMENT/INDUSTRY TRENDS The economic recession in the United
States during much of the year and fare competition in the domestic airline in-
dustry continued to be major factors affecting the financial condition of USAir
and the airline industry during 1992. Industry capacity has failed to mirror
changes in reduced demand for domestic air transportation due primarily to the
continued delivery of new aircraft in the industry and, secondarily, to the
continued operation of certain major U.S. carriers under the protection of
Chapter 11 of the Bankruptcy Code. USAir competes with at least one major air-
line on most of its routes between major cities.
During the years since deregulation, the airline industry had developed in-
creasingly complex fare structures. During the second quarter of 1992, American
initiated, and the domestic airline industry and USAir were forced by competi-
tive measures to adopt, a simplified four-tier domestic fare structure, which
reduced first class and full coach fares by as much as 38% from previous lev-
els. USAir previously offered as many as 18 different fare categories for a
single flight. In addition to adopting the four-tier pricing structure, the in-
dustry, including USAir, implemented policies which make it possible for cus-
tomers traveling on discount fares to change their travel plans for an adminis-
trative fee. Previously, changes to a customer's travel plans were signifi-
cantly restricted on discount fares.
Although USAir and the industry initially matched American's four-tier pric-
ing structure, special fares and promotions which deviated from the basic
structure continued. The most significant of the special promotions was initi-
ated in late May 1992, and through competitive pressure resulted in major U.S.
airlines, including USAir, offering excursion fares for summer travel at a 50%
discount from their lowest advance purchase fares. The industry and USAir of-
fered a similar promotion for fall travel which offered excursion fares in most
markets at an approximate 30% discount.
Aggressive fare discounting throughout the airline industry had a negative
effect on the Company's revenue and yield until the fourth quarter of 1992 when
the industry largely abandoned the basic four-tier structure. The general trend
away from the four-tier pricing structure and several fare increases effected
in late 1992 have contributed to restoring fares for domestic air travel to
more compensatory levels. Although the economy generally has shown signs of im-
provement, the Company expects that the competitive environment in the airline
industry, including the entry or potential entry of low cost carriers in
USAir's markets and a resurgence in low-fare competition from such carriers,
and the excess capacity and recession in the domestic airline industry will
have an adverse effect on USAir's passenger revenue for the foreseeable future.
The extent or duration of these conditions cannot reasonably be determined at
this time. See "Risk Factors--Industry Conditions and Competition" and "--Entry
and Potential Entry of Low Cost Competitors."
During the economic recession, some observers of the travel industry have
speculated that the business traveler has become less reliant on air transpor-
tation as teleconferencing, telecopying and other technological developments
have gained wider acceptance. In addition, some observers also speculate that
corporate restructuring and furloughs in the U.S. have reduced the number of
business travelers and that the leisure traveler has become conditioned to
waiting for promotional fares before making travel plans. The Company is unable
to determine whether these structural changes have occurred in the air trans-
portation market or if these changes have occurred, how long-lived these trends
will be. However, the Company believes that for the foreseeable future business
demand will remain essentially flat and relatively inelastic while the leisure
travel market will continue to grow with the general economy.
Recently USAir has been examining various measures to restructure its opera-
tions to increase efficiency and lower costs in certain short-haul markets of
approximately 500 miles or less in distance. Certain carriers have a substan-
tial cost-advantage over USAir in these markets and consumers appear to be in-
creasingly price conscious, particularly in these markets. On February 16,
1994, USAir will implement certain scheduling adjustments to increase the uti-
lization and productivity of aircraft, personnel and ground facilities. See
"Recent Developments--Changes in Short-Haul Operations."
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<PAGE>
Financial circumstances have compelled bankrupt or financially weakened car-
riers to sell certain assets, including foreign routes, gates and take-off and
landing slots at capacity constrained airports. Asset sales provide cash
infusions to weaker carriers, but they also augment the route systems and mar-
ket strength of the largest carriers. These route and other asset purchases by
the strongest carriers illustrate a trend of consolidation of strategic assets
and financial strength within the industry which appears to benefit the three
largest U.S. carriers in the long-term. In the short-term, however, these car-
riers have suffered from the cost of integrating these assets into their sys-
tems and from the incremental capacity which has been exacerbated by declines
in passenger travel and "fare wars". As a result, these carriers have taken or
announced actions including reductions in workforce and salary and other em-
ployee benefits, concessions from unionized employees, deferral of new aircraft
deliveries, early retirement of inefficient aircraft types, and termination of
unprofitable service. USAir implemented similar measures during 1990-1993. See
"Business Strategy."
The trend toward globalization of the airline industry has accelerated in re-
cent years as the three largest U.S. carriers have initiated foreign service
and purchased the foreign routes of financially distressed or bankrupt U.S.
carriers. In addition, certain foreign carriers have made substantial invest-
ments in U.S. carriers which have frequently been tied to marketing alliances
or, less frequently, reciprocal investments by the U.S. carrier in its foreign
partner. In August 1993, Continental announced that it had reached agreement
with Air France on a joint marketing agreement. Earlier in the year, Air Canada
made a substantial equity investment in Continental in connection with Conti-
nental's bankruptcy reorganization. In October 1993, United and Lufthansa an-
nounced that they had reached an agreement to implement code sharing to link
some of their flights. Continuing privatization of sovereign carriers and for-
eign airline deregulation may encourage further foreign alliances or invest-
ment. Foreign investment in U.S. air carriers is restricted by statute and may
be subject to review by the DOT and, on antitrust grounds, by the DOJ.
U.S. law provides that foreign ownership or control of the voting interest in
a certificated U.S. air carrier may not exceed 25%, non-U.S. citizens may not
constitute more than a third of the board of directors and managing officers of
the air carrier and the president of the air carrier must be a U.S. citizen.
Over the years in the context of "fitness" reviews to determine whether air
carriers could be issued, or continue to hold, operating certificates, the DOT
has also issued interpretations regarding whether investments by, or other ar-
rangements with, foreign investors constitute de facto control over a U.S. air
carrier. See "Recent Developments--BA Investment Agreement."
Although the Company believes the policy has no basis in law, recently and
particularly during 1992 and 1993, the DOT has linked its review of foreign in-
vestment in, and foreign alliances with, U.S. air carriers to the status of the
bilateral air transportation agreement between the U.S. and the country of ori-
gin of the foreign airline. The willingness of the DOT to allow proposed for-
eign investments, code sharing, alliances and participation in corporate gover-
nance has become tied to its perception of the liberality of the relevant bi-
lateral agreement with respect to the right of U.S. air carriers to operate to,
from and beyond the foreign country. For example, the Netherlands entered into
a new bilateral agreement with the U.S. in 1992 which permits "open skies," or
unrestricted access to the Netherlands by U.S. air carriers. As a result, in
1992 the DOT approved Northwest's proposal to integrate its operations with
those of KLM Royal Dutch Airlines, an airline based in that nation. See "Recent
Developments--BA Investment Agreement--U.S.-U.K. Routes" and "--Code Sharing."
On the other hand, the DOT indicated that it would reject the application of
USAir to, among other things, integrate its operations with those of BA pursu-
ant to the 1992 Agreement because the U.K. declined to liberalize U.S. air car-
rier access to certain of its markets. Consequently, on December 22, 1992, BA
terminated the 1992 Agreement. If the transactions contemplated by the 1992
Agreement had been consummated, BA would have invested $750 million in certain
USAir Group preferred stock. See "Business Strategy--Expanded International
Presence" and "Recent Developments--BA Investment Agreement."
In 1993, Northwest, due primarily to substantial debt obligations incurred in
connection with a leveraged buyout consummated in 1989, and TWA, due to a de-
sire to emerge from bankruptcy, sought and obtained from unionized employees
substantial concessions and productivity improvements. In exchange, these em-
ployees have received substantial ownership interests in such air carriers.
Moreover, in December 1993,
S-31
<PAGE>
United announced that it had reached an agreement with certain of its unions to
trade concessions for a substantial ownership stake. At this time, it is uncer-
tain whether the United transaction will be consummated and whether these
events constitute isolated incidents or a trend in the airline industry.
STRATEGIC/TACTICAL DEVELOPMENTS On January 21, 1993, USAir Group and BA en-
tered into the Investment Agreement under which a wholly owned subsidiary of BA
purchased, on the same date, 30,000 shares of the Series F Preferred Stock for
$300 million, representing a voting interest in USAir Group equal to approxi-
mately 21.8% of the voting interest in USAir Group. In addition, BA has the op-
tion, subject to certain conditions, to make further investments in USAir
Group. If the DOT approves all the transactions and actions contemplated under
the Investment Agreement by January 21, 1998, under certain circumstances at
the option of USAir Group, BA may be compelled to make these additional invest-
ments. The transactions and acts contemplated by the Investment Agreement were
approved by the holders of voting stock of USAir Group on May 26, 1993. See
"Recent Developments--BA Investment Agreement".
Under the Investment Agreement, USAir and BA have entered into code sharing
arrangements under which certain domestic USAir flights, linked to certain BA
transatlantic flights, will be listed on computerized reservation systems ei-
ther under USAir's or BA's two letter designation code. See "Recent Develop-
ments--BA Investment Agreement--Code Sharing."
In April 1993, the Company reached an agreement with Boeing to, among other
things, exercise options to purchase additional B757-200 aircraft on an accel-
erated basis and to cancel and reschedule the delivery of certain Boeing 737
aircraft on order into the future. This agreement and USAir's July 1993 agree-
ment with Boeing to accelerate the delivery of three 757-200 aircraft from the
first quarter of 1994 to the fourth quarter of 1993 will reduce USAir's capital
expenditures by approximately $880 million between 1993 and 1996 and, in the
near term, better match USAir's capacity growth with expected demand. As dis-
cussed above, excess capacity is one of the most significant problems facing
the domestic air transportation industry. See "Business Strategy--Reduced Capi-
tal and Operating Costs."
USAir enhanced service in the intra-Florida market on February 1, 1993, by
initiating hourly shuttle service from Miami to Tampa and Miami to Orlando un-
der the USAir Florida Shuttle brand. This measure has added to USAir's presence
in the Florida travel market by focusing on the growing number of intrastate
business travelers.
On January 17, 1992, USAir acquired from Continental 62 jet takeoff and land-
ing slots and 46 commuter slots in New York LaGuardia Airport and six jet slots
at Washington National Airport, for $61 million. USAir also assumed Continen-
tal's leasehold obligations associated with the new East End Terminal at La-
Guardia, which opened on September 12, 1992. USAir assumed 24 jet and all 46
commuter slots at LaGuardia Airport effective February 1, 1992, and the balance
of the jet slots at LaGuardia Airport and the six jet slots at National Airport
effective May 1, 1992. As a result of the acquisition, USAir expanded its oper-
ations at LaGuardia including the initiation of non-stop service to eight addi-
tional cities, four of which are in Florida. The New York-Florida markets are
among the most heavily traveled in the nation. USAir Express used the commuter
slots primarily to expand service to other points in the northeast. Expansion
into these markets enhanced USAir's presence in the New York area and in the
northeast.
In 1992, USAir entered into a management agreement with Shuttle, Inc. ("Shut-
tle"), formerly the Trump Shuttle. USAir commenced operation of the Shuttle on
April 12, 1992 under the name USAir Shuttle. USAir will manage and operate the
Shuttle for a period of up to ten years. USAir Group has an option to purchase
the Shuttle operation on or after October 10, 1996. The USAir Shuttle provides
hourly service between New York LaGuardia Airport and Boston Logan and Washing-
ton National Airports. USAir Shuttle has become a participant in USAir's fre-
quent traveler program and, as a result, enrollment in USAir's program in-
creased during the year. USAir believes its operation of the Shuttle has
strengthened its presence in the northeast United States.
On May 1, 1992, USAir initiated service to London Gatwick Airport from both
BWI and Philadelphia International Airports utilizing the route authorities
purchased in April 1992 from TWA for $50 million. As
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<PAGE>
provided under the Investment Agreement, USAir Group has relinquished route au-
thorities between the U.S. and the U.K., including the route authorities pur-
chased from TWA. Under the Investment Agreement, BA will operate these routes
pursuant to a "wet lease" using USAir's flight equipment, pilots and cabin
crews. Under a "wet lease," an airline, in this case USAir, leases its aircraft
and cockpit and cabin crews to another airline, in this case BA, for the pur-
pose of operating certain routes or flights. The Company will receive rental
payments based on USAir's costs, and share, at the end of each fiscal year of
BA, the cumulative profits received by BA in respect of such routes. BA will
retain a percentage of the profits, equal to the percentage of its fully di-
luted investment basis in USAir Group, and distribute the remainder to the Com-
pany. If the contemplated profit sharing cannot be performed, BA will reimburse
the Company for a portion of any losses suffered by the Company in the sale or
relinquishment of the U.S.-U.K. route authorities in accordance with the In-
vestment Agreement, up to a maximum of $50 million. See "Recent Developments--
BA Investment Agreement--U.S.-U.K. Routes" and "--Code Sharing."
USAir leased 28 takeoff and landing slots at Washington National Airport from
Northwest effective August 1, 1992. USAir is using the slots to offer expanded
service from Washington to five Florida cities and New Orleans. In August 1993,
USAir purchased eight of these slots from Northwest. USAir continues to lease
the remaining slots from Northwest.
For information concerning changes to USAir's short-haul service in 1994, see
"Recent Developments--Changes to Short-Haul Operations."
EXPENSE REDUCTION DEVELOPMENTS For information on these developments, see
"Business Strategy--New Labor Agreements" and "--Reduced Capital and Operating
Costs."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1993 For the first nine months of 1993, USAir
recorded an operating loss of $90.4 million and a net loss, before accounting
change, of $255.2 million on revenue of $4.9 billion. This compares with a 1992
nine-month operating loss of $200.3 million and a $334.0 million net loss, be-
fore accounting change, on revenue of $4.7 billion. The year-over-year improve-
ment results from a $226.8 million increase in revenue offset by a $117.0 mil-
lion increase in total operating expense, which includes a $70.7 million one-
time charge related to the workforce reduction discussed in "Business Strate-
gy--Reduced Capital and Operating Costs."
The 1993 net results reflect the $43.7 million cumulative effect of an ac-
counting change, as required by FAS 112, which was adopted during the third
quarter, retroactive to January 1, 1993. The 1992 net results reflect the
$638.8 million cumulative effect of an accounting change, as required by FAS
106, which was adopted during the fourth quarter 1992, retroactive to January
1, 1992.
Revenues The $226.8 million, or 4.8%, increase in USAir's operating revenues
is attributable primarily to a $167.8 million, or 3.8%, increase in passenger
transportation revenue in the first nine months of 1993 versus the same period
in 1992. This improvement reflects a 7.0% increase in yield (revenue per RPM
and a 3.0% decrease in RPMs. The year-over-year improvement in yield is attrib-
utable to a lower level of discounting in 1993 versus 1992. Likewise, the drop
in RPMs is related to the 1992 discounting which inflated summer 1992 traffic
levels. Unit revenue (total revenue per available seat mile--"ASM") improved by
6.6%. Continued discounting and other promotions had a negative effect on yield
for the remainder of 1993.
USAir's other revenue increased $60.7 million, or 29.6%.
Expenses USAir's total operating expenses increased $117.0 million, or 2.4%.
USAir's personnel costs increased $91.0 million, or 4.8%, including the effect
of the one-time charge for the workforce reduction discussed above. Without the
effect of the one-time charge, personnel costs increased $23.5 million, or
1.2%. USAir began to experience a year-over-year increase in employee salary
expense during the third quarter as
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<PAGE>
the 12-month salary reduction program expired for certain employee groups and
contractual or general salary increases were implemented. The salaries for pi-
lots, non-contract employees and mechanic and related employees were restored
to their pre-reduction levels on June 1, 1993, June 21, 1993, and November 1,
1993, respectively. The salaries for flight attendants will be restored to
their pre-reduction levels during the second quarter of 1994. Consequently, the
negative trend is expected to continue and increase to the extent that the
workforce reductions and other possible measures discussed above do not offset
the increases. Excluding the one-time charge discussed above, USAir experienced
a $35.4 million decrease in postretirement benefit expense which resulted from
plan changes since January 1, 1992, offset by a $36.5 million increase in pen-
sion expense which resulted largely from the establishment of a defined contri-
bution pension plan for non-contract employees on January 1, 1993. The defined
benefit plan for these employees was frozen at December 31, 1991. The current
low interest rates on long-term, high quality corporate bonds has caused a re-
duction in the discount rate used by USAir to calculate the actuarial present
value of its pension and postretirement benefit obligations. The lower discount
rate will result in higher pension and other postretirement benefit expense be-
ginning in 1994. In addition, the equity reduction related to certain
underfunded pension plans, which is reflected on USAir's balance sheet, will
increase as USAir revises its discount rate downward at the end of 1993. See
"Capitalization."
USAir's aviation fuel expense decreased $34.4 million, or 6.3%, as a result
of decreased consumption and lower cost per gallon. Commissions increased $10.1
million, or 2.5%, as a result of the 3.8% increase in passenger transportation
revenue. USAir's aircraft rent expense increased $14.7 million, or 4.7%, due to
additional leased Boeing 757-200, Boeing 767-200, Fokker 100, and commuter air-
craft during 1993. USAir's other rent and landing fees increased $42.6 million,
or 14.9%, primarily due to an increase in facility rental expense following the
opening of the new terminal at Pittsburgh in October 1992. Aircraft maintenance
expense increased $15.6 million, or 7.3% due to the timing of aircraft mainte-
nance cycles, particularly engines. Other operating expense decreased by $24.7
million, or 2.4%.
USAir's interest capitalized decreased $6.9 million, or 32.8%, as a result of
a lower level of outstanding aircraft purchase deposits. Other non-operating
expense, net increased $2.3 million.
1992 COMPARED WITH 1991 USAir's 1992 results included a one-time, after-tax
cumulative charge of $638.8 million resulting from the adoption of FAS 106 ef-
fective January 1, 1992. The net increase in 1992 operating expense which re-
sulted from the adoption of FAS 106 was $102.7 million. This expense is in ad-
dition to the after-tax charge of $638.8 million recorded as a "catch-up" ad-
justment.
In addition to the effects of adopting FAS 106, USAir also recorded a $107.4
million charge for British Aerospace BAe-146 and Boeing 727-200 aircraft that
have been withdrawn from service and a $34.1 million loss related to the sale
of ten MD-82 aircraft which USAir had on order but eliminated from its fleet
plan.
On October 5, 1992, the IAM commenced a strike against USAir. At that time,
USAir implemented a reduced flight schedule equal to approximately 60% of the
normal flight schedule. On October 8, 1992, USAir reached agreement with the
IAM on a new collective bargaining agreement which becomes amendable in October
1995. See "Business Strategy--New Labor Agreements." Following ratification of
the agreement by the IAM-represented employees, USAir resumed full service on
October 12, 1992. USAir immediately offered various incentives including bonus
frequent traveler miles and relaxed advance purchase restrictions in an effort
to attract passengers following the disruption of service. USAir estimates that
the IAM strike had a negative effect on results of approximately $45 million
for the year.
Including the unusual charges and the effect of the strike discussed above,
USAir recorded 1992 operating and net losses of $375.5 million and $1.2 bil-
lion, respectively, on revenue of $6.2 billion.
USAir recorded 1991 operating and net losses of $215.8 million and $284.1
million, respectively, on revenue of $6.1 billion. Operating results for 1991
included a $107 million non-recurring pre-tax gain related to the freeze of the
fully funded pension plan for US Air's non-contract employees, a pre-charge of
$21 million related to USAir's parked BAe-146 fleet, and $21.6 million pre-tax
expense related to early retirement incentives.
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<PAGE>
After excluding the 1992 effect on USAir expenses of (a) the accounting
change for postretirement medical and death benefits (FAS 106) discussed above,
(b) the $107.4 million aircraft charge discussed above, (c) an estimated de-
crease in pension expenses of $40 million resulting from the 1991 pension
freeze for non-contract employees, (d) the $34.1 million loss on the sale of
ten MD-82 aircraft, and (e) $2.4 million of miscellaneous non-recurring
charges, USAir's adjusted 1992 loss, before taxes and cumulative effect of an
accounting change, was $383.1 million After adjusting 1991 actual results for
(a) the $21 million aircraft charge discussed above, (b) the $107 million pen-
sion gain discussed above, (c) a $21.6 million charge related to early retire-
ment incentives and (d) $18.5 million, net, in miscellaneous non-recurring
charges, the Company's 1991 adjusted pre-tax loss was $428.8 million. A discus-
sion of the year-over-year changes in revenue and expense follows.
Operating Revenue USAir's passenger transportation revenue increased $97.9
million in 1992, which was attributable to a 2.9% increase in RPMs that was
partially offset by a 1.1% decrease in yield. Although USAir's average 1992
yield was adversely affected by the widespread fare promotions discussed above,
yield for the fourth quarter of 1992 was 4.9% better than the fourth quarter of
1991, a trend that has continued into the first quarter of 1993. The increase
in USAir's RPMs reflects a 4.6% increase in the average miles traveled per pas-
senger, offset partially by a 1.7% decrease in the number of passengers.
USAir's unit revenue increased 0.5% in 1992 compared with 1991.
On March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a set-
tlement involving USAir and five other U.S. air carrier defendants in the Do-
mestic Air Transportation Antitrust Litigation class action lawsuit. The class
action suit, which was filed in July 1990, alleged that the airlines used ATPCo
to signal and communicate carrier pricing intentions and otherwise limit price
competition for travel to and from numerous hub airports. Under the terms of
the settlement, the six air carriers will pay $45 million in cash and issue
$396.5 million in certificates valid for purchase of domestic air travel on any
of the six airlines. USAir's share of the cash portion of the settlement, $5
million, was recorded in results of operations for the second quarter of 1992.
The certificates would provide a dollar-for-dollar discount against the cost of
a ticket generally of up to a maximum of 10% per ticket, depending on the cost
of the ticket. It is possible that this settlement could have a dilutive effect
on USAir's passenger transportation revenue and associated cash flow. However,
due to the interchangeability of the certificates among the six carriers in-
volved in the settlement, the possibility that carriers not party to the set-
tlement will honor the certificates, and the potential stimulative effect on
travel created by the certificates, USAir cannot reasonably estimate the impact
of this settlement on future passenger revenue and cash flows. USAir has em-
ployed the incremental cost method to estimate a range of costs attributable to
the exercise of the certificates, based on the assumption that the estimated
maximum number of certificates to be redeemed for travel on USAir will be re-
lated to USAir's market share relative to the total market share of the six
carriers involved in the settlement. USAir's estimated percentage of such mar-
ket share is less than 9%. Incremental costs include unit costs of passenger
food, beverages and supplies, fuel, liability insurance, and denied boarding
compensation expenses expected to be incurred on a per passenger basis. USAir
has estimated that its incremental cost will not be material based on the
equivalent free trips associated with the settlement.
USAir's cargo and other airline revenue increased $88.5 million, or 24.5%, in
1992 as compared with 1991, due to increases in revenue generated by passenger
cancellation and rebooking fees, fees received from commuter affiliates for
handling certain of their flights, revenue generated by the affinity credit
card program, and other miscellaneous sources.
Operating Expenses USAir's personnel costs increased $99.7 million, or 4.2%,
in 1992 compared with 1991. Personnel costs are comprised of two components:
(a) employee wages and salaries and (b) employee benefits. USAir's wage and
salary expense decreased $21.9 million, or 1.1%, during 1992 as a result of
partial-year wage concessions, which will continue into 1993, on the part of
pilots, non-contract employees and mechanics. USAir's employee benefit expense
increased $121.6 million, or 27.8%, in 1992, compared with 1991, resulting from
the adoption of FAS 106 in 1992 and the 1991 freeze of the fully-funded pension
plan for non-contract employees. The 1991 pension freeze resulted in a $107
million gain, which was recorded in the fourth quarter of 1991. USAir estimates
that its pension expense was approximately $40 million lower in 1992 than would
have been the case if the freeze had not occurred. Expense for postretirement
medical and
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<PAGE>
death benefits, calculated in accordance with FAS 106, was $114.7 million in
1992, compared with approximately $8 million cash-basis expense in 1991.
USAir's medical and dental benefit expense for active employees decreased $26.7
million, or 14.2%, in 1992 compared with 1991 as a result of a contributory
managed care program that was implemented during 1992 for most employee groups.
Excluding the effects of FAS 106 and the pension freeze, USAir employee benefit
expense decreased approximately $48 million, or 8.8%, in 1992 compared with
1991.
USAir's aviation fuel expense decreased $48.8 million, or 6.3%, during 1992
as compared with 1991. USAir's year-over-year decrease in expense reflects a
decrease in the average cost per gallon of jet fuel of 5.0c, or 7.5%, partially
offset by an increase in consumption of 15 million gallons, or 1.3%, compared
with 1991. The price of fuel was inflated during early 1991 as a result of the
Iraqi invasion of Kuwait and ensuing Desert Storm operation in August 1990-Jan-
uary 1991, and did not return to pre-invasion levels until the second quarter
of 1991.
USAir's travel agency commission expense increased $22.8 million, or 4.5%,
during 1992 as compared with 1991. This increase was attributable to the in-
crease in passenger transportation revenue and the mix of travel agency sales
versus total sales.
USAir's aircraft maintenance expense decreased $43.4 million, or 12.0%, dur-
ing 1992 as compared with 1991. The improvement in USAir's aircraft maintenance
expense was largely attributable to the grounding of its British Aerospace BAe-
146 fleet in May 1991, the shifting of certain aircraft engine repairs in-house
from outside vendors and the negotiation of a new vendor repair contract in
1991 for certain aircraft engines. Maintenance expense for 1992 and 1991 in-
cludes charges of $25.0 million and $25.5 million, respectively, related to
grounded aircraft. USAir expects that maintenance expense in 1993 will increase
over 1992 levels, net of the $25.0 million charge, as initial overhauls come
due on newer aircraft.
USAir's aircraft rent expense increased $144.2 million, or 41.0%, during 1992
versus 1991. A charge related to USAir's grounded BAe-146 fleet accounted for
$81 million of the increase. The remainder of the increase was caused by addi-
tional leased aircraft. USAir completed sale-leaseback transactions for 15
B737-300 aircraft in December 1991 and January 1992. In addition, USAir took
delivery of 11 leased B757-200 aircraft during 1992. USAir operated an average
of 191 jet aircraft leased under operating leases during 1992 versus an average
of 175 during 1991. USAir expects that 1993 aircraft rent expense levels will
exceed 1992, before the 1992 unusual charge, as it recognizes a full year's
rent expense for aircraft initially leased during 1992.
USAir's other rent and landing fees expense increased $55.1 million, or
16.4%, during 1992 as compared with 1991. This increase was largely due to in-
creased expense at New York LaGuardia Airport which resulted from USAir's as-
sumption of Continental's leasehold obligations associated with the East End
Terminal there in January 1992 and the increased operation at LaGuardia during
the year using the take-off and landing slots acquired from Continental. Also
contributing to the increase is the October 1992 opening of the new terminal at
the Pittsburgh International Airport, USAir's largest hub. The Company expects
that 1993 expense levels will show an increase over 1992 as USAir realizes a
full year of increased rental expense at Pittsburgh in 1993, versus three
months during 1992.
USAir's depreciation and amortization expense increased $13.7 million, or
5.0%, in 1992 compared with 1991 largely as a result of the capitalization of
aircraft improvement projects and a $4 million increase in depreciation related
to USAir's grounded BAe-146 aircraft. Any decrease in depreciation expense re-
sulting from sale-leaseback transactions was largely offset by depreciation ex-
pense for new aircraft entering USAir's fleet.
USAir's other airline operating expense, net increased $116.5 million in 1992
compared with 1991. Expense for 1992 includes $25 million related to an em-
ployee suggestion program which netted estimated savings of $22 million in 1992
and which is expected to save USAir approximately $110 million in 1993. The re-
mainder of the year-over-year increase in the other expense category is attrib-
utable to changes in various smaller expense categories.
S-36
<PAGE>
Non-Operating Income and Expense USAir's interest income decreased $15.0 mil-
lion, or 44.5%, during 1992 versus 1991 due to a lower average level of short-
term investments during 1992 coupled with lower interest rates in 1992.
USAir's interest expense increased $27.8 million, or 13.8%, during 1992 ver-
sus 1991 due primarily to additional interest associated with a higher level of
aircraft-related debt in 1992. Interest capitalized decreased $7.2 million, or
21.0%, as a result of a lower level of outstanding equipment deposits.
USAir's other non-operating expense, net increased $27.0 million, or 80.3%,
during 1992 versus 1991. Results for 1992 included a $34.1 million loss related
to the sale of ten MD-82 aircraft which USAir has eliminated from its fleet
plan. Results for 1991 include a $12.5 million loss incurred in conjunction
with the sale of nine Boeing B727-200 aircraft which had been previously re-
tired from service.
USAir's cumulative effect of change in method of accounting for
postretirement benefits other than pensions (FAS 106) was $745.5 million, less
an income tax benefit of $106.7 million. All of USAir's remaining available tax
credit was recognized upon the adoption of FAS 106 on January 1, 1992. There-
fore, USAir cannot currently recognize any tax credit associated with the 1992
results.
1991 COMPARED WITH 1990 USAir recorded 1991 operating and net losses of
$215.8 million and $284.1 million, respectively, on revenue of $6.1 billion.
This compares with the 1990 operating and net losses of $542.0 million and
$427.2 million, respectively, on revenue of $6.1 billion.
Operating results for 1991 include a $107 million non-recurring pre-tax gain
related to the freeze of the fully funded non-contract pension plan (discussed
below), a pre-tax charge of $21 million to establish an additional reserve for
USAir's grounded BAe-146 fleet and $21.6 million pre-tax expense related to
early retirement incentives offered to certain employees during 1991. Without
such non-recurring items, USAir's operating loss would have been $280.2 million
for 1991. The results for 1990 included a non-recurring charge of $14 million
for merger-related labor protective provision costs ("LPPs"), and $138 million
of special charges discussed below. Without such non-recurring and special
charges, USAir's 1990 operating loss would have been approximately $390.0 mil-
lion. A discussion of the year-over-year changes in revenue and expense fol-
lows.
Operating Revenue USAir's passenger transportation revenue decreased 1.1%, or
$65.5 million, in 1991. The decrease in USAir revenue is attributable to a 7.4%
decrease in passengers from 60.1 million to 55.6 million and a resulting 4.0%
decrease in RPMs, partially offset by a year-over-year 3.0% increase in yield
from 16.18c to 16.67c. The decrease in USAir's passengers can be attributed to
three major factors:
1. The Persian Gulf War and the resulting reduced demand for domestic
and international air travel early in 1991.
2. The recessionary economy in the United States.
3. The May 1991 Restructuring, which discontinued operations at eight
West Coast airports and reduced departures at Cleveland and BWI air-
ports.
The increase in yield was due partly to fare increases during the latter
months of 1990 and the operational cessation of Eastern in January 1991, which
eliminated the need for USAir to match the uneconomic fares that had been of-
fered by that carrier. The increase in commuter passenger revenue is a result
of increased capacity, as measured by ASMs, and improved yield.
USAir's cargo and freight revenue increased $4.6 million due partly to in-
creased international flying, including Charlotte-Frankfurt service commenced
in November 1991.
USAir's non-airline revenue decreased $33.0 million primarily due to discon-
tinuance of the operations of Pacific Southwest Airmotive ("Airmotive") during
1991.
S-37
<PAGE>
Operating Expenses USAir's personnel costs decreased 4.6%, or $116.7 million,
in 1991. This reduction includes the one-time pension gain of $107 million that
was recorded during the fourth quarter resulting from the freeze of the fully-
funded defined benefit pension plan for USAir non-contract personnel. Exclusive
of the pension gain, USAir employee benefits increased $86.3 million in 1991
due to increases in medical and pension costs of $24.9 million and $49.1 mil-
lion, respectively, over 1990 levels. The increased pension costs include a
$21.6 million expense relating to early retirement incentives offered to cer-
tain non-contract employees during 1991. The increase in benefits was more than
offset by a reduction of $96.1 million USAir wage and salary expense, a result
of the reductions in work force which began in late 1990 and continued into
1991. 1990 also included a $14 million non-recurring charge for LPPs, which was
reflected in personnel costs.
USAir's fuel expense decreased $200.1 million in 1991. The decrease was com-
prised of $88 million resulting from a decrease in gallons consumed and $112
million resulting from decreases in price per gallon of jet fuel. USAir con-
sumed 115 million, or 9.0%, fewer gallons in 1991 due to a combination of re-
duced flying, partially attributable to the May 1991 Restructuring and internal
conservation and efficiency programs. USAir's average cost of fuel increased
12.6%, or 9.6c, per gallon in 1991. The cost of fuel, which had increased
sharply during the last half of 1990 as a result of the Iraqi invasion of Ku-
wait in August 1990, returned to pre-invasion levels by the second quarter of
1991.
Aircraft maintenance increased 1.3%, or $4.6 million, during the year. Air-
craft maintenance expense for 1991 includes a $25.5 million charge related to
USAir's grounded BAe-146 aircraft. Excluding this charge, the Company's mainte-
nance expense decreased 5.8%, or $20.9 million in 1991 compared with 1990. Sev-
eral factors contributed to this decrease: the May 1991 Restructuring and the
associated grounding of the BAe-146 fleet; the parking of additional older,
non-advanced Boeing 727-200 aircraft; and the addition of 23 new jet aircraft
to USAir's fleet, which typically require an initial lower level of maintenance
than older aircraft.
Aircraft rent increased 12.3%, or $38.6 million, in 1991 due to the leasing
of additional aircraft, offset partially by a credit recognized in 1991 of $8.6
million related to USAir's grounded BAe-146 fleet which the Company was consid-
ering re-activating. The number of jet aircraft under operating lease was 174
at the end of 1991 versus 157 at the end of 1990 (excluding 17 BAe-146 air-
craft).
Other rent and landing fees increased 9.7%, or $29.6 million, over 1990 due
to higher rental expense at Philadelphia resulting from the acquisition of
gates from Midway Airlines in 1990; the rental of new maintenance facilities at
Charlotte, Indianapolis, and Pittsburgh; the addition of new cities to the
schedule; and general rate increases, only partially offset by savings realized
as a result of the May 1991 Restructuring discussed above. Landing fees re-
mained essentially unchanged in 1991.
Depreciation and amortization increased 4.8%, or $12.5 million, in 1991 as a
result of new aircraft deliveries throughout the year and a charge of $4.0 mil-
lion related to USAir's grounded BAe-146 fleet.
Special charges in 1990 consisted of (a) $36 million for additional deprecia-
tion recorded for 24 older, non-advanced Boeing 727-200 aircraft which USAir
phased out of service earlier than originally planned in order to reduce oper-
ating costs, (b) $12 million in employee separation costs for a work force re-
duction of approximately 3,600 positions in 1990, (c) $44 million for lease ob-
ligations on USAir's fleet of BAe-146 aircraft which was taken out of operation
in May 1991, and (d) $46 million for costs related to separation and relocation
of employees and other expenses associated with the May 1991 Restructuring.
Other operating expenses, net decreased 2.7%, or $35.6 million, in 1991, com-
prised of fluctuations in a variety of cost categories.
Non-Operating Income and Expenses Interest income increased $9.9 million in
1991, primarily as a result of higher average levels of cash and short-term in-
vestments at USAir throughout 1991 versus 1990.
USAir's interest expense, net of intercompany interest, increased $33.1 mil-
lion in 1991 primarily as a result of increased debt incurred to finance the
purchase of new aircraft. Interest capitalized decreased 46.8%, or $30.2 mil-
lion, in 1991 compared with 1990, primarily due to the deferral of certain air-
craft orders and the subsequent partial refunding of equipment deposits of
USAir in late 1990 and during 1991. In addition, there was a reduction in the
level of purchase deposits outstanding as a result of new aircraft deliveries
in 1991.
S-38
<PAGE>
Other non-operating expense, net increased $33.4 million in 1991. Results
for 1990 included approximately $25 million, net, non-recurring gains primar-
ily related to the sale of property and property rights. Results for 1991 in-
cluded a $12.5 million loss incurred in conjunction with the sale of nine
Boeing B727-200 aircraft that had been previously retired from service.
Income Taxes The tax benefits for USAir for 1991 and 1990 reflect effective
tax rates of 25.8% and 30.6%, respectively. The effective rates differ from
the statutory rate principally as a result of the tax effect of items related
to the acquisitions of Piedmont and PSA, both acquired by USAir Group in 1987,
that are expensed in determining net income for financial accounting purposes
but are not deductible in determining taxable income.
INFLATION AND CHANGING PRICES Inflation and changing prices do not have a
significant effect on USAir's operating revenues, operating expenses, and op-
erating income because such revenues and expenses other than depreciation and
amortization generally reflect current price levels.
Depreciation and amortization expense is based on historical cost. For as-
sets acquired through the purchase of PSA, USAir's historical cost is based on
fair market value of the assets on May 29, 1987. In the case of Piedmont,
USAir's historical cost is based on the fair market value of the assets on No-
vember 5, 1987, reduced by the tax effect of that portion of fair market value
not deductible for tax purposes in the form of depreciation and amortization.
Therefore, aggregate depreciation and amortization is lower than if this ex-
pense reflected today's replacement costs for existing productive assets. In
evaluating how inflation would increase depreciation expense, however, consid-
eration should also be given to the reduction in other operating expenses,
such as aircraft maintenance and aviation fuel, that would be achieved from
the operating efficiencies of newer, more technologically advanced productive
assets.
LIQUIDITY AND CAPITAL RESOURCES Cash used for operations was approximately
$55 million in the first nine months of 1993. At September 30, 1993, cash and
cash equivalents totaled approximately $376 million, excluding approximately
$145 million which was on deposit to either collateralize or replace expiring
letters of credit and classified as "Other Assets" on the Company's balance
sheet. In addition, at September 30, 1993, USAir Group had $300 million in
commitments available for borrowing under its revolving credit agreement with
a group of banks (the "Credit Agreement"). At September 30, 1993, USAir had
approximately $211 million in additional funds available under its revolving
accounts receivable sale program (the "Receivables Agreement").
USAir's committed capital expenditures for new aircraft for the fourth quar-
ter of 1993 and the four years thereafter are approximately $111 million--
fourth quarter 1993, $284 million--1994, $325 million--1995, $388 million--
1996, $435 million--1997, and $904 million--thereafter. These projections re-
flect the April 1993 agreement between USAir and Boeing, in which USAir, among
other things, exercised its option to purchase 15 additional 757-200 aircraft,
which will be delivered on an accelerated basis and the July 1993 agreement
between USAir and Boeing to accelerate the delivery of three 757-200 aircraft
from the first quarter of 1994 to the fourth quarter of 1993. In addition,
both parties agreed to cancel and reschedule the delivery of certain Boeing
737 aircraft on order into the future. These agreements will reduce USAir's
capital expenditures by approximately $880 million between 1993 and 1996 and,
in the near term, better match USAir's growth with expected demand for domes-
tic air transportation. As discussed in "Risk Factors--Industry Conditions and
Competition," excess capacity is one of the most significant problems facing
the domestic air transportation industry today. The projections also reflect
the July 1993 agreement between USAir and Boeing to accelerate the delivery of
three 757-200 aircraft to the fourth quarter of 1993 from the first quarter of
1994. USAir's acquisition of these three aircraft was financed in connection
with the issuance of the Series 1993-A Certificates.
The following schedule of the Company's new aircraft on firm order, options
for new aircraft and scheduled payments for new aircraft orders (including
progress payments, buyer furnished equipment, spares and capitalized inter-
est), net of deposits to be refunded as of September 30, 1993, reflects
USAir's July 1993 agreement with Boeing which modified the delivery schedule.
S-39
<PAGE>
<TABLE>
<CAPTION>
DELIVERY PERIOD--FIRM ORDERS
--------------------------------------
THERE-
1993 1994 1995 1996 1997 AFTER TOTAL OPTIONS
---- ---- ---- ---- ---- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Boeing 767-200ER................. -- -- -- -- -- -- -- 3
Boeing 757-200................... 3 5 7 8 -- -- 23 12
Boeing 737 Series................ -- -- -- -- 12 28 40 66
---- ---- ---- ---- ---- ---- ------ ---
3 5 7 8 12 28 63 81
==== ==== ==== ==== ==== ==== ====== ===
Payments (millions).............. $111 $284 $325 $388 $435 $904 $2,447
==== ==== ==== ==== ==== ==== ======
</TABLE>
USAir may elect, under certain circumstances, to convert Boeing 737 Series
and Boeing 767 Series firm order and option deliveries to Boeing 757-200 deliv-
eries. If USAir were to elect such a substitution, the payments presented in
the table would change.
During the first nine months of 1993, the Company's investments in new air-
craft acquisitions and purchase deposits totaled $385 million. The Company took
delivery of one B767-200, eight B757-200 and six MD-82 aircraft during the
first nine months of 1993. The MD-82 aircraft were immediately sold to a third
party. In addition, the Company sold in the first quarter of 1993 two other MD-
82 aircraft which had been delivered in the fourth quarter of 1992. Proceeds
from the sale of the MD-82 aircraft approximated $168 million. The Company rec-
ognized a loss in 1992 related to the sale of MD-82 aircraft.
As of December 31, 1993, USAir had arranged financing for, or internally
funded, all of its capital expenditures, including payments for deliveries of
new aircraft, in the fourth quarter of 1993.
In May 1993, USAir entered into an agreement to purchase hushkits for a sub-
stantial portion of its Boeing 737-200 fleet. The installation of these
hushkits will bring the aircraft into compliance with federally mandated Stage
3 noise level requirements. This agreement is in addition to a previously ex-
isting agreement to purchase hushkits for 24 of USAir's McDonnell Douglas DC-9-
30 aircraft. The remaining combined projected payments associated with the pur-
chase and installation of these hushkits are: $1.4 million--1993; $22.5 mil-
lion--1994; $12.2 million--1995; $43.6 million--1996; $45.0 million--1997; and
$77.9 million thereafter.
On October 29, 1992, a Sixth Amendment ("Sixth Amendment") to the Credit
Agreement became effective. The Sixth Amendment relaxed the following financial
covenants required to be maintained in connection with the Credit Agreement and
stipulates that additional interest may be payable on borrowings if the cover-
age ratio, as discussed below, falls below a specified level.
The Sixth Amendment provided that the consolidated net worth of USAir Group
shall not be less than $1 billion. For purposes of this covenant, the calcula-
tion of net worth, as defined under the Credit Agreement, may be increased by
50% of net income of USAir Group at the end of any fiscal year commencing with
the year ended December 31, 1991, any increases as the result of extraordinary
items beginning from December 31, 1990, and 50% of the net proceeds of certain
sales by USAir Group and certain subsidiaries of equity interests. In addition,
the calculation of net worth under the Credit Agreement is adjusted to exclude
the cumulative effect of adoption of FAS 106.
With respect to the ratio of total liabilities to net worth, as such terms
are defined under the Credit Agreement which includes an adjustment for the cu-
mulative impact of adopting FAS 106, the following table sets forth the amended
maximum ratios that USAir Group is permitted to maintain, on a consolidated ba-
sis, under the Sixth Amendment:
<TABLE>
<CAPTION>
PERIOD APPLICABLE RATIO
------ ----------------
<S> <C>
October 1, 1992 through December 31, 1992................. 4.15:1
January 1, 1993 through March 31, 1993.................... 4.75:1
April 1, 1993 and thereafter.............................. 4.50:1
</TABLE>
S-40
<PAGE>
With respect to the coverage ratio, as such term is defined under the Sixth
Amendment, the following table sets forth the minimum ratios of (x) the sum of
(i) pre-tax income, as defined in the Credit Agreement, (ii) depreciation,
(iii) amortization, (iv) interest expense, (v) operating lease expense and (vi)
severance expense to (y) the sum of (i) interest expense, (ii) operating lease
expense and (iii) dividends that USAir Group must maintain, on a consolidated
basis, under the Sixth Amendment for each of the twelve-month periods ending on
the dates set forth below:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED APPLICABLE RATIO
-------------------- ----------------
<S> <C>
December 31, 1992......................................... 0.70:1
March 31, 1993............................................ 0.75:1
June 30, 1993............................................. 0.85:1
September 30, 1993........................................ 0.95:1
December 31, 1993 and thereafter.......................... 1.00:1
</TABLE>
In addition, to the extent that the coverage ratio for any twelve-month pe-
riod ending on the last day of a fiscal quarter, beginning with the twelve-
month period ended December 31, 1992, shall be less than 1.00:1, USAir Group
will be obligated to pay under the Sixth Amendment additional interest in an
amount equal to .15 of 1% per annum on the average daily outstanding principal
amount of the loans under the Credit Agreement during such fiscal quarter.
In conjunction with the Sixth Amendment, the composition of the collateral
pool that secures the borrowings changed. USAir Group is required to maintain a
collateral pool of aircraft and spare engines with an aggregate fair market
value of at least 140% of the maximum available commitment under the Credit
Agreement. Further, a minimum of 30% of the fair market value of the collateral
pool must be composed of aircraft and engines that conform with FAA Stage 3
noise level requirements. Certain USAir and other subsidiary aircraft and en-
gines with a net book value of $582 million at December 31, 1992 secured the
Credit Agreement. On September 29, 1993, the maximum commitment available under
the Credit Agreement decreased to $300 million from $600 million in accordance
with the terms of the agreement. On September 30, 1994, the Credit Agreement
will expire and any loans then outstanding will be required to be repaid. At
December 31, 1993, USAir Group had no loans outstanding under the Credit Agree-
ment.
In January 1993, USAir Group obtained a waiver under the Credit Agreement,
exempting USAir Group from compliance, for the quarter ended December 31, 1992,
with the total liabilities to net worth test which must be maintained as part
of the agreement. USAir Group would not otherwise have complied with this test
as of December 31, 1992 but was in compliance with the other financial cove-
nants under the Credit Agreement.
In September 1993, USAir Group obtained a further waiver under the Credit
Agreement of compliance, during the period July 1 through September 30, 1993
with the coverage ratio test discussed above. Without this waiver, because rev-
enues had been lower than projected, USAir Group would have violated this test
on September 30, 1993. As of September 30, 1993, USAir Group was in compliance
with the other financial covenants, and had no loans outstanding, under the
Credit Agreement. Moreover, in December 1993, USAir Group obtained an addi-
tional waiver under the Credit Agreement of compliance during the period Octo-
ber 1 through December 31, 1993 with the coverage ratio test discussed above.
Without this waiver, USAir Group would have violated this test on December 31,
1993. USAir Group is currently able to borrow under the Credit Agreement; how-
ever, based on current projections of its results for the first quarter of
1994, USAir Group expects that it will not be in compliance with the coverage
ratio test as of March 31, 1994. Prior to such a default, USAir Group believes
that it would be able to obtain an additional waiver of compliance. Alterna-
tively, if USAir Group cannot, or elects not to, obtain such additional waiver,
USAir Group believes it could negotiate an amendment to the Credit Agreement,
which would relax the covenant, or enter into an alternative bank facility with
covenants less restrictive than those provided for in the Credit Agreement.
USAir Group is currently engaged in discussions with the banks under the Credit
Agreement regarding certain of these alternatives. There can be no assurance,
however, that USAir Group would be able to pursue successfully any of these al-
ternatives.
S-41
<PAGE>
USAir may sell on a revolving basis up to $265 million of designated accounts
receivable under the Receivables Agreement. On January 29, 1993, the Receiv-
ables Agreement was amended so that the financial covenants required to be
maintained in connection with the Receivables Agreement are the same as the fi-
nancial covenants under the Credit Agreement. USAir obtained a waiver from the
purchaser of the receivables and its operating agent, exempting USAir from com-
pliance with the financial covenants in the Receivables Agreement for the quar-
ter ended December 31, 1992. In September and December 1993, USAir obtained
further waivers of the coverage ratio test under the Receivables Agreement on
the same terms as described in the preceding paragraph with respect to the
Credit Agreement. At December 31, 1993, USAir was in compliance with the other
financial covenants, and had no amounts outstanding, under the Receivables
Agreements. The January 1993 amendment also reduces the maximum amount of re-
ceivables to be sold from $265 million at September 30, 1993, to $190 million
on June 30, 1994 if USAir Group's consolidated net worth does not exceed $1.5
billion. For purposes of this net worth comparison, USAir Group's actual net
worth is adjusted to add back the initial and ongoing impact of adopting cer-
tain accounting changes, including the effect of FAS 106. If, at any time,
USAir Group's consolidated net worth equals or exceeds $1.5 billion, the level
of receivables the purchaser will be obligated to purchase will be reduced to
70% of those receivables in which the purchaser holds an ownership interest.
The Receivables Agreement expires on December 21, 1994. USAir is currently able
to sell receivables under the Receivables Agreement; however, based on current
projections of its results for the first quarter of 1994, USAir expects that it
will not be in compliance with the coverage ratio test as of March 31, 1994.
Prior to such a default, USAir believes it would be able to obtain an addi-
tional waiver of compliance. Alternatively, if USAir cannot, or elects not to,
obtain such additional waiver, USAir believes it could negotiate an amendment
to the Receivables Agreement, which would relax the covenant, or enter into an
alternative receivables sale agreement with covenants less restrictive than
those provided for in the Receivables Agreement. USAir is currently engaged in
discussions with the operating agent under the Receivables Agreement regarding
certain of these alternatives. There can be no assurance, however, that USAir
would be able to pursue successfully any of these alternatives.
On January 21, 1993, USAir Group and BA entered into the Investment Agreement
under which a wholly-owned subsidiary of BA purchased, on the same date, 30,000
shares of the Series F Preferred Stock for $300 million. Substantially all of
the $300 million received by USAir Group from the sale of the Series F Pre-
ferred Stock was used to pay down debt under the Credit Agreement. The Series F
Preferred Stock is subject to mandatory redemption on January 15, 2008. If the
DOT approves all the transactions and actions contemplated under the Investment
Agreement by January 21, 1998, under certain circumstances at the option of
USAir Group, BA may be compelled to make additional investments contemplated in
the Investment Agreement. The holders of the voting stock of USAir Group rati-
fied the sale of the Series F Preferred Stock and approved the transactions and
acts contemplated by the Investment Agreement on May 26, 1993. See "Recent De-
velopments--BA Investment Agreement."
On May 4, 1993, pursuant to an underwritten public offering, USAir Group sold
11.5 million shares of Common Stock at $20.75 per share which netted proceeds
of approximately $231 million. Additionally, BA partially exercised its preemp-
tive right under the Investment Agreement to maintain its proportionate owner-
ship percentage in USAir Group by purchasing 9,919.8 shares of Series T-2 Pre-
ferred Stock on June 10, 1993 for $99.2 million.
On July 8, 1993, pursuant to an underwritten public offering, USAir sold $300
million aggregate principal amount of 10% Senior Notes due July 1, 2003 ("10%
Senior Notes"). On November 1, 1993, USAir sold to a pass through trustee ap-
proximately $337.7 million of the equipment notes related to the Series 1993-A
Certificates.
All net proceeds received by USAir Group from the Common Stock offering and
from the sale to BA of the Series T-2 Preferred Stock were added to the working
capital of USAir Group and are available for general corporate purposes, in-
cluding loans to USAir. Net proceeds of approximately $294 million received
from the sale of the 10% Senior Notes were added to the working capital of
USAir. The net proceeds of the sale of the Series 1993-A Certificates were used
by the pass through trustee to purchase the equipment notes related to such
Certificates.
S-42
<PAGE>
In September 1993, USAir Group and USAir filed with the Commission a shelf
registration statement for $700 million of various debt and equity securities.
Following consummation of the sale on November 1, 1993 of the Series 1993-A
Certificates, $362.3 million of such securities were available for issuance.
Following consummation of the sale of the Notes offered hereby, $187.3 million
of such securities will be available for issuance. These securities may be sold
from time to time depending on market conditions. USAir will continue to evalu-
ate opportunities in the financial markets.
USAir has filed a registration statement with the Commission for $200 million
of secured equipment notes (the "Secured Notes") which would be collateralized
by, among other things, flight equipment presently owned by USAir. The Secured
Notes would be issued in connection with a lease transaction entered into by
USAir. USAir Group would guarantee USAir's obligations under the lease. If con-
summated, the issuance of the Secured Notes would improve liquidity and reduce
reliance on the Credit Agreement and the Receivables Agreement; however, the
number of USAir's unencumbered aircraft available for further lease or secured
debt financings would be reduced. At this time, USAir has no present intent to
issue the Secured Notes.
During the second quarter of 1992, Standard and Poor's Corporation ("S&P")
and Moody's Investors Service, Inc. ("Moody's") lowered the ratings of both
USAir Group and USAir issues. Following the January 21, 1993 transaction in
which a subsidiary of BA purchased $300 million of the Company's Series F Pre-
ferred Stock, Moody's placed the ratings on watch for possible upgrade. On
March 19, 1993, Moody's confirmed its ratings of USAir Group and USAir securi-
ties. Following DOT approval of a code-sharing and wet-lease relationship be-
tween USAir and BA, S&P affirmed its ratings of USAir Group and USAir securi-
ties, stating its ratings outlook was positive. In December 1993, S&P affirmed
its ratings of USAir Group and USAir securities; however, the agency revised
the ratings outlook to negative, citing, among other considerations, the status
of the negotiations on a revised U.S.-U.K. bilateral air services agreement and
the expansion and possible additional expansion of the operations of low fare,
low cost air carriers into USAir's markets. See "Risk Factors--Entry and Poten-
tial Entry of Low Cost Competitors." "--No Assurance as to Further BA Invest-
ment" and "Recent Developments--BA Investment Agreement--Code Sharing."
At September 30, 1993, USAir Group's ratio of current assets to current lia-
bilities was .55 to 1, and the debt component of USAir Group's capitalization
structure was approximately 77% (100% if the Series A Preferred Stock, Series F
Preferred Stock and Series T Preferred Stock are considered to be debt).
DESCRIPTION OF THE NOTES AND GUARANTEES
The Notes are a part of the $700 million aggregate principal amount of Debt
Securities of the Company registered under the Securities Act of 1933, as
amended. The Notes will be issued under an Indenture to be entered into among
USAir, USAir Group and Shawmut Bank, N.A., as Trustee, as supplemented by an
Officer's Certificate (as so supplemented, the "Indenture"). A copy of the In-
denture substantially in execution form is filed as an exhibit to the Registra-
tion Statement of which the accompanying Prospectus is a part. The statements
herein are summaries of certain provisions of the Indenture and of the Notes
(referred to in the accompanying Prospectus as the "Senior Debt Securities")
and supplement the summaries of certain provisions of the Senior Debt Securi-
ties set forth in the accompanying Prospectus, to which reference is hereby
made. Such statements do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all the provisions of the Inden-
ture, including the definitions therein of certain terms. Whenever particular
defined terms of the Indenture are referred to, such defined terms are incorpo-
rated herein by reference.
GENERAL
The Notes offered hereby will be designated as "9 5/8% Senior Notes due Feb-
ruary 1, 2001," will be limited to $175 million aggregate principal amount and
will mature on February 1, 2001.
Each Note will bear interest (calculated on the basis of a 360-day year con-
sisting of twelve 30-day months) from the date of issuance thereof at the rate
per annum shown on the cover page hereof payable semiannually on February 1 and
August 1 in each year, commencing August 1, 1994. The Notes are to be issued
only in registered form without coupons in denominations of $1,000 and any mul-
tiple of $1,000.
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The Indenture does not contain any covenant or provision which may afford
Noteholders protection in the event of a highly leveraged transaction which may
or may not result in a change of control of USAir or USAir Group. Although the
instruments and agreements evidencing certain other indebtedness of USAir con-
tain certain financial covenants, no instruments or agreements evidencing other
indebtedness of USAir contain covenants or provisions affording holders of such
indebtedness protection in the event of a change of control of USAir.
The Notes will be denominated in United States dollars and all amounts of
principal thereof and interest thereon will be payable in such currency. The
Company will not pay any Additional Amounts as contemplated by the Indenture.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will be issued in the form of one or more fully registered Global
Notes (the "Global Notes") which will be deposited with, or on behalf of, The
Depository Trust Company, New York, New York (the "Depository") and registered
in the name of Cede & Co., the Depository's nominee. Except as set forth below,
the Global Notes may be transferred, in whole and not in part, only to another
nominee of the Depository or to a successor of the Depository or its nominee.
The Depository has advised as follows: it is a limited-purpose trust company
which holds securities for its participating organizations (the "Participants")
and facilitates the settlement among Participants of securities transactions in
such securities through electronic book-entry changes in its Participant's ac-
counts. Participants include securities brokers and dealers (including the Un-
derwriter), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depository's system is also available to others
such as banks, brokers, dealers and trust companies that clear through or main-
tain a custodial relationship with a Participant, either directly or indirectly
("indirect participants"). Persons who are not Participants may beneficially
own securities held by the Depository only through Participants or indirect
participants.
The Depository advises that its established procedures provide that (i) upon
issuance of the Notes by the Company the Depository will credit the accounts of
the Participants designated by the Underwriter with the principal amounts of
the Notes purchased by the Underwriter, and (ii) ownership of interests in the
Global Notes will be shown on, and the transfer of that ownership will be ef-
fected only through, records maintained by the Depository, the Participants and
the indirect participants. The laws of some states require that certain persons
take physical delivery in definitive form of securities which they own. Conse-
quently, the ability to transfer beneficial interests in the Global Notes is
limited to such extent.
So long as a nominee of the Depository is the registered owner of the Global
Notes, such nominee for all purposes will be considered the sole owner or
holder of such Notes under the Indenture. Except as provided below, owners of
beneficial interests in the Global Notes will not be entitled to have Notes
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in definitive form, and will not be considered the owners or
holders thereof under the Indenture.
None of the Company, the Trustee, or any agent of the Company will have any
responsibility or liability for any aspect of the records relating to or pay-
ments made on account of beneficial ownership interests in the Global Notes, or
for maintaining, supervising or reviewing any records relating to such benefi-
cial ownership interests.
Principal and interest payments on the Notes registered in the name of the
Depository's nominee will be made by the Trustee to the Depository. Under the
terms of the Indenture, the Company and the Trustee will treat the persons in
whose names the Notes are registered as the owners of such Notes for the pur-
pose of receiving payment of principal and interest on the Notes for all other
purposes whatsoever. Therefore, neither the Company, the Trustee nor any Paying
Agent has any direct responsibility or liability for the payment of principal
or interest on the Notes to owners of beneficial interests in the Global Notes.
The Depository has advised the Company and the Trustee that its present prac-
tice is to credit the accounts of the Participants on
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the appropriate payment date in accordance with their respective holdings in
principal amount of beneficial interest in the Global Notes as shown on the
records of the Depository, unless the Depository has reason to believe that it
will not receive payment on such payment date. Payments by Participants and in-
direct participants to owners of beneficial interests in the Global Notes will
be governed by standing instructions and customary practices, as is now the
case with securities held for the accounts of customers in bearer form or reg-
istered in "street name," and will be the responsibility of the Participants or
indirect participants.
If the Depository is at any time unwilling or unable to continue as deposi-
tory and a successor depository is not appointed by the Company within 90 days,
the Company will issue Notes in definitive form in exchange for the Global
Notes. In addition, the Company may at any time determine not to have the Notes
represented by Global Notes and, in such event, will issue Notes in definitive
form in exchange for the Global Notes. In either instance, an owner of a bene-
ficial interest in the Global Notes will be entitled to have Notes equal in
principal amount to such beneficial interest registered in its name and will be
entitled to physical delivery of such Notes in definitive form. Notes so issued
in definitive form will be issued in denominations of $5,000 and integral mul-
tiples thereof and will be issued in registered form only, without coupons.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriter in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, the Notes
will trade in the Depository's Same-Day Funds Settlement System until maturity,
and secondary market trading activity in the Notes will therefore be required
by the Depository to settle in immediately available funds. No assurance can be
given as to the effect, if any, of settlement in immediately available funds on
trading activity in the Notes.
THE GUARANTEES
The due and punctual payment of principal of, premium, if any, and interest
on the Notes is unconditionally guaranteed by USAir Group. This guarantee is
unsecured and will rank pari passu with all other unsecured and unsubordinated
guarantees and indebtedness of USAir Group.
RANKING
The indebtedness evidenced by the Notes will be unsecured unsubordinated ob-
ligations of the Company, and will rank pari passu in right of payment with
other unsubordinated indebtedness of the Company, including, without limita-
tion, the Company's obligations under loans from the Guarantor, the Company's
10% Senior Notes due 2003, 12 7/8% Senior Debentures due 2000 and secured debt
obligations (including capital lease obligations). As of September 30, 1993,
the total amount of the Company's unsubordinated indebtedness was $2.6 billion,
including $147 million in secured loans outstanding from the Guarantor, $84
million aggregate principal amount of 12 7/8% Senior Debentures due 2000 out-
standing, $300 million aggregate principal amount of 10% Senior Notes due 2003
outstanding and $2.2 billion aggregate principal amount of secured debt obliga-
tions outstanding (including capital lease obligations and intercompany loans
payable to USAir Group, but excluding guarantees of certain debt and operating
lease obligations of certain wholly owned commuter airline subsidiaries of
USAir Group and certain debt obligations of the Galileo International Partner-
ship, which operates a computerized reservations system). There is currently no
outstanding indebtedness of the Company that is subordinate in right of payment
to the Notes.
The guarantees of the Notes will be unsecured unsubordinated obligations of
the Guarantor, and will rank pari passu with all other unsecured and
unsubordinated guarantees and indebtedness of the Guarantor, including, without
limitation, the Guarantor's obligations under the Credit Agreement. As of De-
cember 31, 1993, the Guarantor had no unconsolidated unsubordinated indebted-
ness. As of December 31, 1993, the Guarantor had no loans outstanding under the
Credit Agreement.
The maximum commitment available to the Guarantor under the Credit Agreement
is currently $300 million. Such maximum commitment is subject to mandatory re-
duction to zero on September 30, 1994, and any loans then outstanding must be
repaid at that time. As of December 31, 1993, $162 million of the Company's as-
sets had been pledged to secure available commitments under the Credit Agree-
ment.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the cov-
enants and other provisions of the Indenture. Reference is made to the Inden-
ture for the full definition of all such terms as well as any other capitalized
terms used herein for which no definition is provided. (Section 1.1)
"Adjusted Consolidated Net Income" is defined to mean, for any period, the
aggregate net income (or loss) of any Person and its consolidated Subsidiaries
for such period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of such Person (other than a Subsid-
iary of such Person) in which any other Person (other than such Person or any
of its Subsidiaries) has a joint interest, except to the extent of the amount
of dividends or other distributions actually paid to such Person or any of its
Subsidiaries by such other Person during such period, (ii) the net income (or
loss) of such Person accrued prior to the date it becomes a Subsidiary of any
other Person or is merged into or consolidated with such other Person or any of
its Subsidiaries or all or substantially all of the property and assets of such
Person are acquired by such other Person or any of its Subsidiaries, (iii) the
net income (or loss) of any Subsidiary of any Person to the extent that the
declaration or payment of dividends or similar distributions by such Subsidiary
of such net income is not at the time permitted by the operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to such Subsidiary; (iv) any gains
or losses (on an after-tax basis) attributable to Asset Sales; and (v) all ex-
traordinary gains and extraordinary losses.
"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the di-
rection of the management and policies of such Person, whether through the own-
ership of voting securities, by contract or otherwise. For purposes of this
definition, none of BA, any affiliate of BA, Shuttle, Inc., any of the airlines
owned or franchised by the Guarantor or any of its Subsidiaries, or Covia Part-
nership or any successor thereto shall be deemed to be an Affiliate of the Com-
pany, the Guarantor or any Restricted Subsidiary.
"Asset Sale" is defined to mean, with respect to any Person, any sale, trans-
fer or other disposition (including by way of merger, consolidation or sale-
leaseback transactions) in one transaction or a series of related transactions
by such Person or any of its Subsidiaries to any Person other than the Company
or any of its Subsidiaries of (i) all or any of the Capital Stock of any Sub-
sidiary of such Person, (ii) all or substantially all of the property and as-
sets of an operating unit or business of such Person or any of its Subsidiaries
or (iii) any other property and assets of such Person or any of its Subsidiar-
ies outside the ordinary course of business of such Person or such Subsidiary
and, in each case, that is not governed by the provisions of the Indenture ap-
plicable to mergers, consolidations and transfers of all or substantially all
of the property and assets of the Company; provided that none of (A) sales or
other dispositions of inventory, receivables and other current assets, (B)
sales or other dispositions of surplus equipment, furniture or fixtures in an
aggregate amount not to exceed $5 million in any fiscal year of the Company,
(C) sale leasebacks of aircraft and engines, or (D) sales or other dispositions
of turboprop aircraft and engines by the Company to any Subsidiary, the Voting
Stock of which is owned by USAir Group shall be included within the meaning of
"Asset Sale."
"Board of Directors" is defined to mean the Board of Directors of the Company
or any committee of such Board of Directors duly authorized to act under the
Indenture.
"Business Day" is defined to mean any day except a Saturday, Sunday or other
day on which commercial banks in The City of New York, or in the city of the
Corporate Trust Office of the Trustee, are authorized by law to close.
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's capital stock, whether now out-
standing or issued after the date of the Indenture, including, without limita-
tion, all Common Stock and Preferred Stock.
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<PAGE>
"Capitalized Lease" is defined to mean, as applied to any Person, any lease
of any property (whether real, personal or mixed) the discounted present value
of the rental obligations of such Person as lessee of which, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Closing Date" is defined to mean the date on which the Notes are originally
issued under the Indenture.
"Commodity Agreement" is defined to mean any agreement or arrangement de-
signed to protect the Company or any of its Subsidiaries against fluctuations
in the prices of commodities used by the Company or any of its Subsidiaries in
the ordinary course of its business.
"Common Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's common stock, whether now out-
standing or issued after the date of the Indenture, including, without limita-
tion, all series and classes of such common stock.
"Consolidated Net Tangible Assets" is defined to mean the total amount of as-
sets of the Company and its Subsidiaries (less applicable depreciation, amorti-
zation and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its consolidated Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recently available consolidated balance sheet of the Company
and its consolidated Subsidiaries, prepared in conformity with GAAP.
"Consolidated Net Worth" is defined to mean, at any date of determination,
shareholders' equity as set forth on the most recently available consolidated
balance sheet of the Company and its consolidated Subsidiaries (which shall be
as of a date not more than 60 days prior to the date of such computation), less
any amounts attributable to Redeemable Stock or any equity security convertible
into or exchangeable for Indebtedness, the cost of treasury stock and the prin-
cipal amount of any promissory notes receivable from the sale of Capital Stock
of the Company or any Subsidiary of the Company, each item to be determined in
accordance with GAAP (excluding the effects of foreign currency exchange ad-
justments under Financial Accounting Standards Board Statement of Financial Ac-
counting Standards No. 52).
"Currency Agreement" is defined to mean any foreign exchange contract, cur-
rency swap agreement or other similar agreement or arrangement designed to pro-
tect the Company or any of its Subsidiaries against fluctuations in currency
values to or under which the Company or any of its Subsidiaries is a party or a
beneficiary on the date of the Indenture or becomes a party or a beneficiary
thereafter.
"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect as of the date of the Indenture, includ-
ing, without limitation, those set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting Stan-
dards Board or in such other statements by such other entity as approved by a
significant segment of the accounting profession.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other obli-
gation of any other Person and, without limiting the generality of the forego-
ing, any obligation, direct or indirect, contingent or otherwise, of such Per-
son (i) to purchase or pay (or advance or supply funds for the purchase or pay-
ment of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other obli-
gation of the payment thereof or to protect such obligee against loss in re-
spect thereof (in whole or in part); provided that the term "Guarantee" shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
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<PAGE>
"Holder" or "Securityholder" is defined to mean the registered holder of any
Note.
"Indebtedness" is defined to mean, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds, deben-
tures, notes or other similar instruments, (iii) all obligations of such Person
in respect of letters of credit or other similar instruments (including reim-
bursement obligations with respect thereto), (iv) all obligations of such Per-
son to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is as-
sumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of determi-
nation and (B) the stated principal amount of such Indebtedness, (vii) all In-
debtedness of other Persons Guaranteed by such Person to the extent such In-
debtedness is Guaranteed by such Person, (viii) to the extent not otherwise in-
cluded in this definition, obligations under Currency Agreements, Interest Rate
Agreements and Commodity Agreements. The amount of Indebtedness of any Person
at any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence
of the contingency giving rise to the obligation, of any contingent obligations
at such date; provided that the amount outstanding at any time of any Indebted-
ness issued with original issue discount is the face amount of such Indebted-
ness less the remaining unamortized portion of the original issue discount of
such Indebtedness at such time as determined in conformity with GAAP.
"Interest Rate Agreement" is defined to mean any interest rate future agree-
ment, interest rate option agreement, interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement, interest rate hedge agree-
ment or other similar agreement or arrangement designed to protect the Company
or any of its Subsidiaries against fluctuations in interest rates to or under
which the Company or any of its Subsidiaries is a party or a beneficiary on the
date of the Indenture or becomes a party or a beneficiary thereafter.
"Investment" is defined to mean any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of any Person or its Subsidiaries)
or other extension of credit or capital contribution to (by means of any trans-
fer of a cash or other property to others or any payment for property or serv-
ices for the account or use of others; provided, that any transfer of aircraft
to a limited partnership or other entity in connection with a transaction in
which the aircraft are leased to the Company shall not be an Investment), or
any purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by any other Person. For purposes of the definition
of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments" cove-
nant described below, (i) "Investment" shall include the fair market value of
the net assets of any Subsidiary of the Company at the time that such Subsidi-
ary of the Company is designated an Unrestricted Subsidiary and shall exclude
the fair market value of the assets net of liabilities of any Unrestricted Sub-
sidiary at the time that such Unrestricted Subsidiary is designated a Re-
stricted Subsidiary of the Company and (ii) any property transferred to or from
an Unrestricted Subsidiary shall be valued at its fair market value at the time
of such transfer, in each case as determined by the Board of Directors in good
faith.
"Investment Grade" is defined to mean BBB- or higher by S&P or Baa3 or higher
by Moody's or the equivalent of such ratings by S&P or Moody's. In the event
that the Company shall select any other rating agency, the equivalent of such
ratings by such rating agency shall be used.
"Lien" is defined to mean any mortgage, pledge, security interest, encum-
brance, lien or charge of any kind (including, without limitation, any condi-
tional sale or other title retention agreement or lease in the nature thereof,
any sale with recourse against the seller or any Affiliate of the seller, or
any agreement to give any security interest).
"Moody's" is defined to mean Moody's Investors Service, Inc. and its succes-
sors.
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"Net Cash Proceeds" is defined to mean, with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent correspond-
ing to the principal, but not interest, component thereof) when received in
the form of cash or cash equivalents (except to the extent such obligations
are financed or sold with recourse to the Company or any subsidiary of the
Company) and proceeds from the conversion of other property received when con-
verted to cash or cash equivalents, net of (i) brokerage commissions and other
fees and expenses (including fees and expenses of counsel and investment bank-
ers) related to such Asset Sale, (ii) provisions for all taxes (whether or not
such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Company
and its Subsidiaries, taken as a whole, (iii) payments made to repay Indebted-
ness or any other obligation outstanding at the time of such Asset Sale that
either (A) is secured by a Lien on the property or assets sold or (B) is re-
quired to be paid as a result of such sale, and (iv) appropriate amounts to be
provided by the Company or any Subsidiary of the Company as a reserve against
any liabilities associated with such Asset Sale, including, without limita-
tion, pension and other post-employment benefit liabilities, liabilities re-
lated to environmental matters and liabilities under any indemnification obli-
gations associated with such Asset Sale, all as determined in conformity with
GAAP.
"Person" is defined to mean an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a govern-
ment or political subdivision or an agency or instrumentality thereof.
"Plans" is defined to mean any employee benefit plans, pension plans, stock
option plans or similar plans or arrangements of the Company or any Subsidiary
of the Company, or any successor plans thereof.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however designat-
ed, whether voting or non-voting) of such Person's preferred or preference
stock, whether now outstanding or issued after the date of the Indenture, in-
cluding, without limitation, all series and classes of such preferred or pref-
erence stock.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of the Notes, (ii) required to be redeemed at the
option of the holder of such class or series of Capital Stock at any time
prior to the Stated Maturity of the Notes or (iii) convertible into or ex-
changeable for Capital Stock referred to in clause (i) or (ii) above or In-
debtedness having a scheduled maturity prior to the Stated Maturity of the
Notes; provided that any Capital Stock that would not constitute Redeemable
Stock but for provisions thereof offering holders thereof the right to require
the Company to repurchase or redeem such Capital Stock upon the occurrence of
an "asset sale" occurring prior to the Stated Maturity of the Notes shall not
constitute Redeemable Stock if the asset sale provisions applicable to such
Capital Stock are no more favorable to the holders of such Capital Stock than
the provisions contained in the "Limitations on Asset Sales" covenant de-
scribed below and such Capital Stock specifically provides that the Company
will not repurchase or redeem any such stock pursuant to such provisions prior
to the Company's repurchase of such Notes as are required to be repurchased
pursuant to the provisions of the "Limitation on Asset Sales" covenant de-
scribed below.
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"S&P" is defined to mean Standard & Poor's Corporation and its successors.
"Stated Maturity" is defined to mean, (i) with respect to any debt security,
the date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" is defined to mean, with respect to any Person, any corpora-
tion, association or other business entity of which more than 50% of the out-
standing Voting Stock is owned, directly or indirectly, by such Person or by
one or more other Subsidiaries of such Person, or by such Person and one or
more other
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Subsidiaries of such Person; provided that, except as the term "Subsidiary" is
used in the definition of "Unrestricted Subsidiary" described below, an Unre-
stricted Subsidiary shall not be deemed to be a Subsidiary of the Company for
purposes of the Indenture.
"Trade Payables" is defined to mean, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries aris-
ing in the ordinary course of business in connection with the acquisition of
goods or services.
"Transaction Date" is defined to mean, with respect to any Restricted Pay-
ment, the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the Com-
pany that at the time of determination shall be designated an Unrestricted Sub-
sidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary of the Company (including any newly acquired or newly
formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any other Subsidiary of the Company that is not a Subsidiary
of the Subsidiary to be so designated: provided that either (A) the Subsidiary
to be so designated has total assets of $1,000 or less or if such Subsidiary
has assets greater than $1,000, that such designation would be permitted under
the "Limitation on Restricted Payments" covenant described below. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidi-
ary of the Company; provided that, immediately after giving effect to such des-
ignation, no Event of Default, or event or condition that after notice or pas-
sage of time or both would become an Event of Default, shall have occurred and
be continuing. Any such designation by the Board of Directors shall be evi-
denced to the Trustees by promptly filing with each of the Trustees a copy of
the Board Resolution giving effect to such designation and an Officers' Certif-
icate certifying that such designation complied with the foregoing provisions.
"Voting Stock" is defined to mean Capital Stock of any class or kind ordinar-
ily having the power to vote for the election of directors.
"Wholly Owned" is defined to mean, with respect to any Person, any Subsidiary
or Restricted Subsidiary of such Person if all of the Common Stock or other
similar equity ownership interests (but not including Preferred Stock) in such
Subsidiary or Restricted Subsidiary (other than any director's qualifying
shares or Investments by foreign nationals mandated by applicable law) is owned
directly or indirectly by such Person.
CERTAIN COVENANTS OF THE COMPANY
Limitation on Restricted Payments
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any
dividend or make any distribution on the Capital Stock of the Company or of any
Restricted Subsidiary (other than dividends or distributions payable solely in
shares of its or such Restricted Subsidiary's Capital Stock (other than Redeem-
able Stock) of the same class or in options, warrants or other rights to ac-
quire such shares of Capital Stock) held by persons other than the Company or
another Restricted Subsidiary, (ii) purchase, redeem, retire or otherwise ac-
quire for value any shares of Capital Stock of the Company, any Restricted Sub-
sidiary or any Unrestricted Subsidiary (including warrants, rights or options
to repurchase shares of Capital Stock) held by Persons other than the Company
or another Restricted Subsidiary, or (iii) make any Investment in any Affiliate
(other than the Guarantor or a Wholly Owned Subsidiary of the Guarantor, the
Company or a Wholly Owned Restricted Subsidiary of the Company) or any Unre-
stricted Subsidiary (such payments or any other actions described in clauses
(i) through (iii) being collectively "Restricted Payments") if, at the time of,
and after giving effect to, the proposed Restricted Payment: (A) an Event of
Default or event that, after notice or passage of time or both would become an
Event of Default, shall have occurred and be continuing, or (B) the aggregate
amount expended for all Restricted Payments (the amount so expended, if other
than in cash, to be determined in
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good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) after the date of the Indenture shall ex-
ceed the sum of (1) 50% (or, if the Notes at the time of the proposed Re-
stricted Payment are rated Investment Grade by both Moody's and S&P, 75%) of
Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income
is a loss, minus 100% of such amount) of the Company (determined by excluding
income resulting from the transfers of assets received by the Company or a Re-
stricted Subsidiary from an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning on the first
day of the month immediately following the Closing Date and ending on the last
day of the last fiscal quarter preceding the Transaction Date plus (2) the ag-
gregate net proceeds (including the fair market value of non-cash proceeds as
determined in good faith by the Board of Directors) received by the Company
from the issuance and sale permitted by the Indenture of its Capital Stock to a
Person who is not a Subsidiary of the Company (not including Redeemable Stock),
including an issuance or sale permitted by the Indenture for cash or other
property upon the conversion of any Indebtedness of the Company subsequent to
the Closing Date, or from the issuance of any options, warrants or other rights
to acquire Capital Stock of the Company (in each case, exclusive of any Redeem-
able Stock or any options, warrants or other rights that are redeemable at the
option of the holder, or are required to be redeemed, prior to the Stated Matu-
rity of the Notes) plus (3) $25 million.
The foregoing provision shall not take into account and shall not be violated
by reason of: (i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would comply
with the foregoing provision: (ii) the declaration or payment of dividends on
the Capital Stock of the Company, following any issuance of the Capital Stock
of the Company, of up to 6% per annum of the net proceeds received by the Com-
pany in such issuance of the Capital Stock of the Company; (iii) the declara-
tion and payment of any dividend in an amount not in excess of that required
for the purchase, redemption, acquisition, cancellation or other retirement for
value of shares of Capital Stock of the Guarantor, options on any such shares
or related stock appreciation rights or similar securities held by officers or
employees or former officers or employees (or their estates or beneficiaries
under their estates) or by any Plan, upon death, disability, retirement, termi-
nation of employment or pursuant to the terms of such Plan or any other agree-
ment under which such shares of stock or related rights were issued; (iv) loans
or advances to employees of the Company or the Guarantor in the ordinary course
of business; (v) the repurchase, redemption or other acquisition of Capital
Stock of the Company in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock of the Company (other than Re-
deemable Stock); and (vi) payments or distributions pursuant to or in connec-
tion with a consolidation, merger or transfer of assets that complies with the
provisions of the Indenture applicable to mergers, consolidations and transfers
of all or substantially all of the property and assets of the Company; provided
that, in the case of each of the foregoing clauses of this paragraph, other
than clause (i), no Event of Default, or event that after notice or passage of
time or both would become an Event of Default, shall have occurred and be con-
tinuing or shall occur as a consequence thereof. (Section 3.13)
Notwithstanding the foregoing, in the event of an issuance of Capital Stock
of the Company and the repurchase, redemption or other acquisition of Capital
Stock out of the proceeds of such issuance, as permitted by clause (v) above,
then, in calculating whether the conditions of clause (B) of the first para-
graph of this "Limitation on Restricted Payments" covenant have been met with
respect to any subsequent Restricted Payments, both the proceeds of such issu-
ance and the application of such proceeds shall be included under clause (B).
Limitation on Transactions with Shareholders and Affiliates
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary of the Company to, directly or indirectly, enter in-
to, renew or extend any transaction (including, without limitation, the pur-
chase, sale, lease or exchange of property or assets, or the rendering of any
service) with any holder (other than BA or any other airline) or any Affiliate
of such holder (other than an affiliate of BA or any other airline) of 5% or
more of any class of Capital Stock of the Guarantor, the Company or any Subsid-
iary of the Company or with any Affiliate of the Guarantor, the Company or any
Subsidiary of the Company, except upon fair and reasonable terms no less favor-
able to the Company or such Restricted
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Subsidiary of the Company than could be obtained in a comparable arm's length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i) transac-
tions (A) approved by a majority of the disinterested members of the Board of
Directors or (B) for which the Company or a Restricted Subsidiary delivers to
the Trustee a written opinion of a nationally recognized investment banking
firm stating that the transaction is fair to the Company or such Restricted
Subsidiary of the Company from a financial point of view; (ii) any transaction
between the Company and the Guarantor or any Wholly Owned Subsidiary of the
Guarantor, between the Company and any Wholly Owned Restricted Subsidiary or
between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable
and customary regular fees to directors of the Company who are not employees
of the Company; (iv) any payments or other transactions pursuant to any tax-
sharing agreement between the Company and any other Person with which the Com-
pany is required or permitted to file a consolidated tax return or with which
the Company is or could be part of a consolidated group for tax purposes; and
(v) any Restricted Payments not prohibited by the "Limitation on Restricted
Payments" covenant. (Section 3.14)
Limitation on Asset Sales
Under the terms of the Indenture, in the event and to the extent that the
Net Cash Proceeds received by the Company or any of its Restricted Subsidiar-
ies from one or more Asset Sales occurring on or after the Closing Date in any
period of 12 consecutive months (other than Asset Sales by the Company or any
Restricted Subsidiary to the Company or another Restricted Subsidiary) exceeds
15% of Consolidated Net Tangible Assets in any one fiscal year (determined as
of the date closest to the commencement of such 12-month period for which a
balance sheet of the Company and its Subsidiaries has been prepared), then the
Company shall, or shall cause such Restricted Subsidiary to, (i) within 12
months after the date Net Cash Proceeds so received exceeds 15% of the Consol-
idated Net Tangible Assets in any one fiscal year (determined as of the date
closest to the commencement of such 12-month period for which a balance sheet
of the Company and its Subsidiaries has been prepared) (A) apply an amount
equal to such excess Net Cash Proceeds to repay Indebtedness of the Company or
Indebtedness of any Restricted Subsidiary, in each case owing to a Person
other than the Company or any of its Subsidiaries or (B) invest an equal
amount, or the amount not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months after the date
of such agreement), in property or assets of a nature or type or that are used
in a business (or in a Person having property and assets of a nature or type,
or engaged in a business) similar or related to the nature or type of the
property and assets of, or the business of, the Company and its Subsidiaries
existing on the date thereof (as determined in good faith by the Board of Di-
rectors, whose determination shall be conclusive and evidenced by a Board Res-
olution) and (ii) apply such excess Net Cash Proceeds (to the extent not ap-
plied pursuant to clause (i)) as provided in the following paragraphs of this
"Limitation on Asset Sales" covenant. The amount of such excess Net Cash Pro-
ceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (A) or (B) of the preceding sentence
and not applied as so required by the end of such period shall constitute "Ex-
cess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of Ex-
cess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $5 million, the Company must, not later than the fif-
teenth Business Day of such month, make an offer (an "Excess Proceeds Offer")
to purchase from the Holders on a pro rata basis an aggregate principal amount
of Notes equal to the Excess Proceeds on such date, at a purchase price equal
to 101% of the principal amount of the Notes plus accrued interest (if any) to
the date of purchase (the "Excess Proceeds Payment").
The Company shall commence an Excess Proceeds Offer by mailing a notice to
the Trustee and each Holder stating: (i) that the Excess Proceeds Offer is be-
ing made pursuant to this "Limitation on Asset Sales" covenant and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Excess Proceeds Payment Date"); (iii) that any Note not tendered
will continue to accrue interest pursuant to its terms; (iv) that, unless the
Company defaults in the payment
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of the Excess Proceeds Payment, any Note accepted for payment pursuant to the
Excess Proceeds Offer shall cease to accrue interest after the Excess Proceeds
Payment Date; (v) that Holders electing to have a Note purchased pursuant to
the Excess Proceeds Offer will be required to surrender the Note, together with
the form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the Note completed, to the Paying Agent at the address specified in the no-
tice prior to the close of business on the Business Day immediately preceding
the Excess Proceeds Payment Date; (vi) that Holders will be entitled to with-
draw their election if the Paying Agent receives, not later than the close of
business on the third Business Day immediately preceding the Excess Proceeds
Payment Date, a telegram, telex, facsimile transmission or letter setting forth
the name of such Holder, the principal amount of Notes delivered for purchase
and a statement that such Holder is withdrawing his election to have such Notes
purchased; and (vii) that Holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount at maturity of $1,000 or integral multi-
ples thereof.
On the Excess Proceeds Payment Date, the Company shall (i) accept for payment
on a pro rata basis Notes or portions thereof tendered pursuant to the Excess
Proceeds Offer, (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof so accepted; and (iii) deliver,
or cause to be delivered, to the Trustee all Notes or portions thereof so ac-
cepted together with an Officers' Certificate specifying the Notes or portions
thereof accepted for payment by the Company. The Paying Agent shall promptly
mail to the Holders of Notes so accepted payment in an amount equal to the pur-
chase price, and the Trustee shall promptly authenticate and mail to such Hold-
ers a new Note equal in principal amount to any unpurchased portion of the Note
surrendered; provided that each Note purchased and each new Note issued shall
be in an original principal amount at maturity of $1,000 or integral multiples
thereof. The Company will publicly announce the results of the Excess Proceeds
Offer as soon as practicable after the Excess Proceeds Payment Date. For pur-
poses of this "Limitation on Asset Sales" covenant, the Trustee shall act as
the Paying Agent.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and regula-
tions are applicable, in the event that such Excess Proceeds are received by
the Company under this "Limitation on Asset Sales" covenant and the Company is
required to repurchase Notes as described above. (Section 3.15)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its prop-
erty and assets (as an entirety or substantially an entirety in one transaction
or a series of related transactions) to, any Person or permit any Person to
merge with or into the Company unless: (i) the Company shall be the continuing
Person, or the Person (if other than the Company) formed by such consolidation
or into which the Company is merged or that acquired or leased such property
and assets of the Company shall be a corporation organized and validly existing
under the laws of the United States of America or any jurisdiction thereof and
shall expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all of the obligations of the
Company under the Notes and the Indenture; (ii) immediately after giving effect
to such transaction no Event of Default and no event that, after notice or pas-
sage of time or both will become an Event of Default, shall have occurred and
be continuing; (iii) immediately after giving effect to such transaction on a
pro forma basis, the Company (or any Person that becomes the successor obligor
of the Notes) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction;
and (iv) the Company delivers to the Trustee an Officers' Certificate (attach-
ing the arithmetic computations to demonstrate compliance with clause (iii) and
an Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture comply with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; provided, however, that clause (iii) above does not apply
if, in the good faith determination of the Board of Directors, whose determina-
tion shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of the Company; and pro-
vided further that any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations. (Section 9.1)
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EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the Indenture:
(a) default in the payment of the principal of (or premium, if any, on) any
Note when the same becomes due and payable at maturity, upon acceleration, re-
demption or otherwise; (b) default in the payment of interest on any Note when
the same becomes due and payable, and such default continues for a period of 30
days; (c) the Company or the Guarantor defaults in the performance of or
breaches any other covenant or agreement of the Company or the Guarantor, as
the case may be, in the Indenture or under the Notes and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (d) there occurs with respect to any issue or issues of Indebtedness of
the Company and/or one or more Restricted Subsidiaries having an outstanding
principal amount of $50 million or more in the aggregate for all such issues of
all such Persons, whether such Indebtedness now exists or shall hereafter be
created, an event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such In-
debtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 60 days of such acceleration; (e) any final judg-
ment or order (not covered by insurance) for the payment of money in excess of
$50 million in the aggregate for all such final judgments or orders against all
such Persons (treating any deductibles, self-insurance or retention as not so
covered) shall be rendered against the Company or any Restricted Subsidiary and
shall not be discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding against all such Persons to
exceed $50 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (f)
a court having jurisdiction in the premises enters a decree or order for (i)
relief in respect of the Company, the Guarantor or any Restricted Subsidiary in
an involuntary case under any applicable bankruptcy, insolvency or other simi-
lar law now or hereafter in effect, (ii) appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company,
the Guarantor or any Restricted Subsidiary or for all or substantially all of
the property and assets of the Company, the Guarantor or any Restricted Subsid-
iary or (iii) the winding up or liquidation of the affairs of the Company, the
Guarantor or any Restricted Subsidiary and, in each case, such decree or order
shall remain unstayed and in effect for a period of 60 consecutive days; (g)
the Company, the Guarantor or any Restricted Subsidiary (i) commences a volun-
tary case under any applicable bankruptcy, insolvency or other similar law now
or hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (ii) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee, se-
questrator or similar official of the Company, the Guarantor or any Restricted
Subsidiary or for all or substantially all of the property and assets of the
Company, the Guarantor or any Restricted Subsidiary or (iii) effects any gen-
eral assignment for the benefit of creditors of the Company, the Guarantor or
any Restricted Subsidiary; or (h) the Company and/or one or more Restricted
Subsidiaries fail to make at the final (but not any interim) fixed maturity of
one or more issues of Indebtedness a principal payment or principal payments
aggregating $50 million or more and all such defaulted payments shall not have
been made, waived or extended within 30 days of the payment default that causes
the aggregate amount of such Indebtedness to exceed $50 million. (Section 5.1)
If an Event of Default (other than an Event of Default specified in clause
(f) or (g) above that occurs with respect to the Company or the Guarantor) oc-
curs and is continuing under the Indenture, the Trustee thereunder or the Hold-
ers of at least 25% of the aggregate principal amount of the Notes then Out-
standing, by written notice to the Company and the Guarantor (and to the
Trustee if such notice is given by the Holders (the "Acceleration Notice")),
may, and the Trustee at the request of the Holders shall, declare the entire
unpaid principal, premium, if any, and accrued interest on the Notes to be im-
mediately due and payable. Upon a declaration of acceleration, such principal
of, premium, if any, and accrued interest shall be immediately due and payable.
In the event of a declaration of acceleration because an Event of Default set
forth in clause (d) or (h) above has occurred and is continuing, such declara-
tion of acceleration shall be automatically rescinded and annulled if the event
of default triggering such Event of Default pursuant to clause (d) or (h) shall
be remedied, cured by the Company or the Guarantor or waived by the Holders of
the relevant Indebtedness within 60 days after the declaration of acceleration
with respect thereto. If an Event of Default specified in clause (f) or (g)
above occurs with respect to the Company or the Guarantor, all unpaid principal
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of, premium, if any, and accrued interest on the Notes then outstanding shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder. The Holders of at least a
majority in principal amount of the outstanding Notes, by written notice to the
Company, the Guarantor and the Trustee, may waive all past defaults and rescind
and annul a declaration of acceleration and its consequences if (i) all exist-
ing Events of Default, other than the non-payment of the principal of, premium,
if any, and interest on Notes that have become due solely by such declaration
of acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction.
(Section 5.10) For information as to the waiver of defaults, see "--Modifica-
tion and Waiver."
The Holders of at least a majority in aggregate principal amount of the out-
standing Notes may direct the time, method and place of conducting any proceed-
ing for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee with respect to the Notes. However, the Trustee may
refuse to follow any direction that conflicts with law or the Indenture, that
may involve the Trustee in personal liability, or that the Trustee determines
in good faith may be unduly prejudicial to the rights of the Holders of Notes
not joining in the giving of such direction. (Section 5.9) A Holder may not
pursue any remedy with respect to the Indenture or the Notes unless: (i) the
Holder gives to the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of indem-
nity; and (v) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding Notes do not give the Trustee a direction
that is inconsistent with the request. (Section 5.6) However, such limitations
do not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on such Note or to bring suit for
the enforcement of any such payment, on or after the respective due dates ex-
pressed in the Notes, which right shall not be impaired or affected without the
consent of the Holder. (Section 5.7)
DEFEASANCE
Defeasance and Discharge
The Indenture will provide that the Company and the Guarantor will be deemed
to have paid and will be discharged from any and all obligations in respect of
the Notes and the provisions of the Indenture will no longer be in effect with
respect to the Notes or the Guarantor's Guarantee on the 123rd day after the
deposit described below (except for, among other matters, certain obligations
to register the transfer or exchange of the Notes, to replace stolen, lost or
mutilated Notes, to maintain paying agencies and to hold monies for payment in
trust) if, among other things, (A) the Company has deposited with the Trustee,
in trust, money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, (B) the Company or
the Guarantor has delivered to the Trustee (i) either an Opinion of Counsel to
the effect that Holders will not recognize income, gain or loss for federal in-
come tax purposes as a result of the Company's exercise of its option under
this "Defeasance" provision and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be accompanied by a ruling of the Internal Revenue Service (the
"IRS") to the same effect unless there has been a change in applicable federal
income tax law after the date of the Indenture such that a ruling is no longer
required or a ruling directed to the Trustee received from the IRS to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both
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would become an Event of Default, shall have occurred and be continuing on the
date of such deposit or during the period ending on the 123rd day after the
date of such deposit, and such deposit shall not result in a breach or viola-
tion of, or constitute a default under, any other agreement or instrument to
which the Company or the Guarantor is a party or by which the Company or the
Guarantor is bound, and (D) if at such time the Notes are listed on a national
securities exchange, the Company has delivered to the Trustee an Opinion of
Counsel to the effect that the Notes will not be delisted as a result of such
deposit, defeasance and discharge. (Section 10.1)
Defeasance of Certain Covenants and Certain Events of Default
The Indenture further will provide that the provisions of the Indenture will
no longer be in effect with respect to clause (iii) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under "Cer-
tain Covenants of the Company" and clause (c) under "Events of Default" with
respect to such covenants and clauses (d), (e) and (h) under "Events of De-
fault" shall be deemed not to be Events of Default upon, among other things,
the deposit with the Trustee, in trust, of money and/or U.S. Government Obliga-
tions that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the Notes on the
Stated Maturity of such payments in accordance with the terms of the Indenture
and the Notes, the satisfaction of the provisions described in clauses (B)
(ii), (C) and (D) of the preceding paragraph and the delivery by the Company to
the Trustee of an Opinion of Counsel to the effect that, among other things,
the Holders will not recognize income, gain or loss for federal income tax pur-
poses as a result of such deposit and the defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if
such deposit and defeasance had not occurred. (Section 10.1)
Defeasance and Certain Other Events of Default
In the event the Company exercises its option to omit compliance with certain
covenants and provisions of the Indenture with respect to the Notes, as de-
scribed in the immediately preceding paragraph, and the Notes are declared due
and payable because of the occurrence of an Event of Default that remains ap-
plicable, the amount of money and/or U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on the Notes at the time
of their Stated Maturity but may not be sufficient to pay amounts due on the
Notes at the time of the acceleration resulting from such Event of Default.
However, the Company shall remain liable for such payments and the Guarantor's
Guarantee with respect to such payments will remain in effect.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture which affect the Notes may be
made by the Company, the Guarantor and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the out-
standing Notes; provided, however, that no such modification or amendment may,
without the consent of each Holder affected thereby, (i) change the Stated Ma-
turity of the principal of, or any installment of interest on, any Note, (ii)
reduce the principal amount of, premium, if any, or interest on, any Note,
(iii) change the place or currency of payment of principal, premium, if any, or
interest on, any Note, (iv) impair the right to institute suit for the enforce-
ment of any payment on or after the Stated Maturity (or, in the case of a re-
demption, on or after the Redemption Date) of any Note, (v), reduce the above-
stated percentage of outstanding Notes the consent of whose Holders is neces-
sary to modify or amend the Indenture, (vi) waive a default in the payment of
principal of, premium, if any, or interest on the Notes, (vii) reduce the per-
centage of aggregate principal amount of outstanding Notes the consent of whose
Holders is necessary for waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults or (viii) modify the obligation of
the Guarantor to make payment under the Guarantee. (Section 8.2)
REGARDING THE TRUSTEE
Shawmut Bank, N.A. is Trustee under the Indenture. The Trustee has normal
banking relationships with the Company and the Guarantor.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement dated Janu-
ary 26, 1994 among the Company, USAir Group and Lehman Brothers Inc. (the "Un-
derwriter"), the Underwriter has agreed to purchase the entire principal amount
of the Notes. The Underwriter is committed to purchase all of the Notes if any
are purchased.
The Underwriter proposes initially to offer the Notes to the public at the
public offering price set forth on the cover page of this Prospectus Supplement
and to certain dealers at such price less a concession not in excess of 0.50%
of such price. The Underwriter may allow, and such dealers may reallow, conces-
sions not in excess of 0.25% of such public offering price. After the initial
public offering, the public offering price and such concessions may be changed.
All secondary trading in the Notes will settle in immediately available
funds. See "Description of the Notes and Guarantees--Same-Day Settlement and
Payment."
The Company and USAir Group have agreed to indemnify the Underwriter against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or to contribute to payments the Underwriter may be required
to make in respect thereof.
The Company does not intend to apply for listing of the Notes on a national
securities exchange, but has been advised by the Underwriter that it presently
intends to make a market in the Notes, as permitted by applicable laws and reg-
ulations. The Underwriter is not obligated, however, to make a market in the
Notes and any such market making may be discontinued at any time at the sole
discretion of the Underwriter. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Notes.
LEGAL OPINIONS
Certain legal matters relating to the Notes and Guarantees are being passed
upon for USAir and USAir Group by James T. Lloyd, Executive Vice President and
General Counsel of USAir and USAir Group, and for the Underwriter by Shearman &
Sterling, 599 Lexington Avenue, New York, New York 10022. Mr. Lloyd owns 27,500
shares of common stock of USAir Group (5,000 of which are subject to restric-
tions on disposition), and options to purchase 163,992 additional shares of
common stock.
EXPERTS
The consolidated financial statements and related consolidated financial
statement schedules of USAir and USAir Group as of December 31, 1992 and 1991,
and for each of the years in the three-year period ended December 31, 1992,
which are included in the combined Annual Reports of USAir and USAir Group on
Form 10-K for the year ended December 31, 1992, have been incorporated by ref-
erence herein in reliance upon the reports of KPMG Peat Marwick, independent
certified public accountants, which reports are incorporated by reference here-
in, and upon the authority of said firm as experts in accounting and auditing.
The reports of KPMG Peat Marwick covering the December 31, 1992 consolidated
financial statements of USAir and USAir Group refer to a change in the method
of accounting for postretirement benefits other than pensions.
S-57
<PAGE>
PROSPECTUS
USAIR, INC.
DEBT SECURITIES
UNCONDITIONALLY GUARANTEED BY USAIR GROUP, INC.
WARRANTS TO PURCHASE DEBT SECURITIES
USAir, Inc. ("USAir") may from time to time offer, together or separately,
its debt securities, consisting of debentures, notes and/or other evidences of
indebtedness representing unsecured obligations of USAir (the "Debt
Securities"), and warrants (the "Warrants") to purchase Debt Securities
(collectively, the "Securities"), in amounts, at prices and on terms to be
determined at the time of offering. The Debt Securities offered pursuant to
this Prospectus may be issued as unsecured and unsubordinated Debt Securities
("Senior Debt Securities") or as unsecured and subordinated Debt Securities
("Subordinated Debt Securities"), in one or more series and will be limited to
$700,000,000 aggregate principal amount (or (i) its equivalent (based on the
applicable exchange rate at the time of sale), if Debt Securities are issued
with principal amounts denominated in one or more foreign currencies or
currency units as shall be designated by USAir, or (ii) such greater amount, if
Debt Securities are issued at an original issue discount, as shall result in
aggregate proceeds of up to $700,000,000). The Debt Securities will be
unconditionally guaranteed by USAir Group, Inc. ("USAir Group"), parent of
USAir, as to payment of principal, premium, if any, and additional amounts, if
any, when and as the same shall become due and payable, whether at maturity,
upon redemption or otherwise, according to the terms of the Debt Securities
(the "Guarantees"). Certain specific terms of the particular Securities in
respect of which this Prospectus is being delivered (the "Offered Securities")
are set forth in the accompanying Prospectus Supplement (the "Prospectus
Supplement"), including, where applicable, in the case of Debt Securities, the
specific designation (including whether the Offered Securities are Senior Debt
Securities or Subordinated Debt Securities), aggregate principal amount, the
denomination, maturity, premium, if any, the rate (which may be fixed or
variable) at which such Debt Securities will bear interest or the method of
calculating such rate, if any, and the time of payment of interest, if any, the
place or places where principal of, premium, if any, and interest, if any, on
such Debt Securities will be payable, the currency in which principal of,
premium, if any, and interest, if any, on such Debt Securities will be payable,
any terms of redemption at the option of USAir or the holder, any sinking fund
provisions, the terms of the Guarantees, the initial public offering price and
other special terms and, in the case of Warrants, the specific designation,
aggregate number, duration, initial public offering price, exercise price,
currency in which the exercise price is payable, detachability of any Warrants,
description of the Debt Securities for which such Warrants are exercisable,
terms of any mandatory or optional call and other special terms, together with
any other terms in connection with the offering and sale of the Offered
Securities, and the net proceeds to USAir from such offering. The Securities
may be denominated in United States dollars or, at the option of USAir if so
specified in the applicable Prospectus Supplement, in one or more foreign
currencies or currency units. The Debt Securities may be issued in registered
form or bearer form, or both. If so specified in the applicable Prospectus
Supplement, Debt Securities of a series may be issued in whole or in part in
the form of one or more temporary or permanent global securities.
The Senior Debt Securities will rank on a parity with all unsecured and
unsubordinated indebtedness of USAir, and the Subordinated Debt Securities will
be subordinated in right of payment to all Senior Debt (as hereinafter
defined). See "Description of Securities--Subordination of Subordinated Debt
Securities".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------
USAir may sell the Securities to or through underwriters, through dealers or
agents or directly to purchasers. See "Plan of Distribution". The accompanying
Prospectus Supplement sets forth the names of any underwriters, dealers or
agents involved in the sale of the Offered Securities in respect of which this
Prospectus is being delivered and any applicable fee, commission or discount
arrangements with them.
This Prospectus may not be used to consummate sales of Debt Securities or
Warrants unless accompanied by a Prospectus Supplement.
The date of this Prospectus is September 30, 1993.
<PAGE>
AVAILABLE INFORMATION
Each of USAir and USAir Group is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
concerning USAir and USAir Group can be inspected and copied at the public ref-
erence facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, Room 1024, and at the following Regional
Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center,
500 West Madison Street, Chicago, Illinois 60661, Suite 1400; and New York Re-
gional Office, Seven World Trade Center, New York, New York 10048, 13th Floor.
Copies of such material can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such material filed by USAir and USAir Group may be in-
spected and copied at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement") filed
by USAir and USAir Group with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"). This Prospectus does not contain all of the
information included in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. Refer-
ence is made to such Registration Statement and to the exhibits relating
thereto for further information with respect to USAir, USAir Group and the Se-
curities offered hereby.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission pursuant to the
Exchange Act and are incorporated into this Prospectus by reference and made a
part hereof:
(1) USAir's and USAir Group's Annual Report on Form 10-K for the year
ended December 31, 1992 filed with the Commission on March 8, 1993,
as amended by Amendment No. 1 on Form 8 filed with the Commission on
April 2, 1993;
(2) USAir's and USAir Group's Quarterly Reports on Form 10-Q for the
quarters ended March 31, and June 30, 1993;
(3) The Current Reports on Form 8-K of USAir Group filed with the
Commission on January 28, 1993 (as amended by Amendment No. 1 on Form
8 filed with the Commission on April 13, 1993), April 20, 1993 and
April 26, 1993, and the Current Reports on Form 8-K of USAir Group
and USAir filed with the Commission on June 18, 1993, July 1, 1993,
July 2, 1993 (as amended by Amendment No. 1 on Form 8 filed with the
Commission on July 9, 1993) and September 23, 1993;
(4) The material under the caption "BA Investment Agreement" in the
Prospectus dated April 28, 1993 of USAir Group (Commission File No.
33-61106); and
(5) The Proxy Statement dated April 26, 1993 of USAir Group.
All documents filed by USAir and USAir Group pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospec-
tus and prior to the termination of the offering of the Securities offered
hereby shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated herein by
reference, or contained in this Prospectus, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement con-
tained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified and superseded, to constitute a part of this Prospectus.
2
<PAGE>
USAir and USAir Group will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all documents incorporated herein by reference, other than ex-
hibits to such documents (unless such exhibits are specifically incorporated by
reference into such documents). Requests for such documents should be directed
to Investor Relations, USAir Group, Inc., 2345 Crystal Drive, Arlington, Vir-
ginia 22227, telephone (703) 418-5306.
USAIR AND USAIR GROUP
USAir, a wholly owned subsidiary of USAir Group, is a corporation organized
under the laws of the State of Delaware and a certificated air carrier princi-
pally engaged in the business of transporting passengers, property and mail.
Its principal operating hubs are located in Pittsburgh, Pennsylvania; Char-
lotte, North Carolina; Philadelphia, Pennsylvania; and Baltimore, Maryland.
USAir is one of eight passenger carriers classified as "major" airlines (those
with annual revenues greater than $1 billion) by the U.S. Department of Trans-
portation (the "DOT"). USAir enplaned more than 54.6 million passengers in
1992, and is the sixth largest United States air carrier ranked by revenue pas-
senger miles ("RPMs", one RPM representing the transportation of one fare pay-
ing passenger for one mile) flown. As of June 30, 1993, USAir provided regu-
larly scheduled air service through 120 airports to 156 cities in the United
States, Puerto Rico, Canada, the Bahamas, Bermuda, France, Germany and the
United Kingdom, with an operating fleet of 441 jet aircraft comprised of 12
Boeing 767-200, 18 Boeing 757-200, 8 Boeing 727-200, 54 Boeing 737-400, 31 Mc-
Donnell Douglas MD-80, 101 Boeing 737-300, 81 Boeing 737-200, 73 McDonnell
Douglas DC-9-30, 40 Fokker 100, 22 Fokker F28-4000 and 1 Fokker F28-1000 air-
craft. USAir's executive offices are located at 2345 Crystal Drive, Arlington,
Virginia 22227 and its telephone number is (703) 418-7000.
USAir Group is a corporation organized under the laws of the State of Dela-
ware. USAir Group's primary business activity is ownership of all the common
stock of USAir, Piedmont Airlines, Inc. (formerly Henson Aviation, Inc.),
Jetstream International Airlines, Inc., Pennsylvania Commuter Airlines, Inc.,
USAir Fuel Corporation, USAir Leasing and Services, Inc., and Material Services
Company, Inc. USAir accounted for approximately 93% of USAir Group's operating
revenues during the year ended December 31, 1992. The executive offices of
USAir Group are located at 2345 Crystal Drive, Arlington, Virginia 22227 and
its telephone number is (703) 418-5306.
USE OF PROCEEDS
Unless otherwise indicated in the accompanying Prospectus Supplement, the net
proceeds to USAir from the sale of the Securities and the exercise of any War-
rants offered hereby will be added to the working capital of USAir and will be
available for general corporate purposes, among which may be repayment of out-
standing indebtedness and the financing of capital expenditures by USAir.
3
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
USAIR The following table sets forth the ratio of earnings to fixed charges
for USAir for the periods indicated. Earnings represent earnings before income
taxes and fixed charges (excluding interest capitalized). Fixed charges consist
of interest and the portion of rental expense deemed representative of the in-
terest factor.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ------------------------
ENDED JUNE 30, 1993 1992 1991 1990 1989 1988
------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio......................... * * * * * 1.5
</TABLE>
- --------
* For the six months ended June 30, 1993 and the years ended December 31, 1992,
1991, 1990 and 1989, earnings were not sufficient to cover fixed charges. Ad-
ditional earnings of approximately $80 million, $610 million, $411 million,
$674 million and $287 million, respectively, would have been required to
achieve ratios of 1.0.
USAIR GROUP The following table sets forth the ratio of earnings to fixed
charges for USAir Group for the periods indicated. Earnings represent earnings
before income taxes and fixed charges (excluding interest capitalized). Fixed
charges consist of interest and the portion of rental expense deemed represen-
tative of the interest factor.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ------------------------
ENDED JUNE 30, 1993 1992 1991 1990 1989 1988
------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio......................... * * * * * 1.6
</TABLE>
- --------
** For the six months ended June 30, 1993 and the years ended December 31,
1992, 1991, 1990 and 1989, earnings were not sufficient to cover fixed
charges. Additional earnings of approximately $63 million, $622 million,
$444 million, $716 million and $137 million, respectively, would have been
required to achieve ratios of 1.0.
DESCRIPTION OF DEBT SECURITIES
The Senior Debt Securities are to be issued under an Indenture among US Air,
as issuer, USAir Group, as Guarantor, and Shawmut Bank, N.A., as Trustee (the
"Senior Debt Securities Indenture"). The Subordinated Debt Securities are to be
issued under an Indenture among USAir, as issuer, USAir Group, as Guarantor,
and Shawmut Bank, N.A., as Trustee (the "Subordinated Debt Securities Inden-
ture"). The Senior Debt Securities Indenture and the Subordinated Debt Securi-
ties Indenture are referred to herein individually as the "Indenture" and col-
lectively as the "Indentures." A copy of each Indenture is filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The following
descriptions are summaries, subject to and qualified in their entirety by ref-
erence to, the detailed provisions of the Indentures. Capitalized terms used
but not defined below under "Description of Debt Securities" are used as de-
fined in the Indentures.
The Debt Securities offered pursuant to this Prospectus will be limited to
$700,000,000 aggregate principal amount (or (i) its equivalent (based on the
applicable exchange rate at the time of sale), if Debt Securities are issued
with principal amounts denominated in one or more foreign currencies or cur-
rency units as shall be designated by USAir, or (ii) such greater amount, if
Debt Securities are issued at an original issue discount, as shall result in
aggregate proceeds of up to $700,000,000). A series of Debt Securities may be
offered contemporaneously with an offering of Warrants to purchase an addi-
tional portion of such or another series of Debt Securities. Warrants to pur-
chase a series of Debt Securities may also be offered independently of any of-
fering of Debt Securities. See "Description of Warrants". The statements herein
relating to the Debt Securities and the Indentures are summaries and reference
is made to the detailed provisions of the Indentures, including the definitions
therein of certain terms capitalized in this Prospectus. Where no distinction
is made between the Senior Debt Securities and the Subordinated Debt Securities
or between the Senior Debt Securities Indenture and the Subordinated Debt Secu-
rities Indenture, such summaries refer to any Debt Securities and either Inden-
ture. Whenever particular Sections or defined terms of the Indentures are re-
ferred
4
<PAGE>
to herein or in a Prospectus Supplement, such Sections or defined terms are in-
corporated herein or therein by reference. A glossary of certain defined terms
used herein with respect to the Debt Securities is set forth under the heading
"Glossary" below.
GENERAL
The Indentures do not limit the aggregate principal amount of Debt Securities
which may be issued thereunder and provide that Debt Securities may be issued
from time to time in one or more series. The Senior Debt Securities will be
unsecured and unsubordinated obligations of USAir and will rank on a parity
with all other unsecured and unsubordinated indebtedness of USAir. The Subordi-
nated Debt Securities will be unsecured obligations of USAir and, as set forth
below under "--Subordination of Subordinated Debt Securities", will be subordi-
nate in right of payment to all Senior Debt. As of July 8, 1993, USAir had out-
standing $2.7 billion aggregate principal amount of debt securities which rank
pari passu with the Senior Debt Securities offered hereby and no debt securi-
ties which rank pari passu with the Subordinated Debt Securities offered here-
by. The Indentures do not limit USAir's right to incur additional Senior Debt.
If this Prospectus is being delivered in connection with a series of Subordi-
nated Debt Securities, the accompanying Prospectus Supplement or the informa-
tion incorporated herein by reference will set forth the amount of Senior Debt
outstanding.
Reference is made to the Prospectus Supplement which accompanies this Pro-
spectus for a description of the specific series of Debt Securities being of-
fered thereby or, if Warrants are being offered thereby, the Debt Securities to
be issued upon exercise of such Warrants, including: (1) the specific designa-
tion of such Debt Securities, including whether the Debt Securities are Senior
Debt Securities or Senior Subordinated Debt Securities; (2) any limit upon the
aggregate principal amount of such Debt Securities; (3) the date or dates on
which the principal of such Debt Securities will mature or the method of deter-
mining such date or dates; (4) the rate or rates (which may be fixed or vari-
able) at which such Debt Securities will bear interest, if any, or the method
of calculating such rate or rates; (5) the date or dates from which interest,
if any, will accrue or the method by which such date or dates will be deter-
mined; (6) the date or dates on which interest, if any, will be payable and the
record date or dates therefor; (7) the place or places where principal of, pre-
mium, if any, and interest, if any, on such Debt Securities will be payable;
(8) the period or periods within which, the price or prices at which, the cur-
rency or currencies (including currency units) in which, and the terms and con-
ditions upon which, such Debt Securities may be redeemed, in whole or in part,
at the option of USAir; (9) the obligation, if any, of USAir to redeem or pur-
chase such Debt Securities pursuant to any sinking fund or analogous provi-
sions, upon the happening of a specified event, or at the option of a holder
thereof and the period or periods within which, the price or prices at which
and the terms and conditions upon which, such Debt Securities shall be redeemed
or purchased, in whole or in part, pursuant to such obligations; (10) the terms
of the Guarantees; (11) the denominations in which such Debt Securities are au-
thorized to be issued; (12) the currency or currency units for which Debt Secu-
rities may be purchased or in which Debt Securities may be denominated and/or
the currency or currency units in which principal of, premium, if any, and/or
interest, if any, on such Debt Securities will be payable and whether USAir or
the holders of any such Debt Securities may elect to receive payments in re-
spect of such Debt Securities in a currency or currency units other than that
in which such Debt Securities are stated to be payable; (13) if other than the
principal amount thereof, the portion of the principal amount of such Debt Se-
curities which will be payable upon declaration of the acceleration of the ma-
turity thereof or the method by which such portion shall be determined; (14)
the person to whom any interest on any such Debt Security shall be payable if
other than the person in whose name such Debt Security is registered on the ap-
plicable record date; (15) any addition to, or modification or deletion of, any
Event of Default or any covenant of USAir specified in the Indenture with re-
spect to such Debt Securities; (16) the application, if any, of such means of
defeasance or covenant defeasance as may be specified for such Debt Securities
and coupons; (17) whether such Debt Securities are to be issued in whole or in
part in the form of one or more temporary or permanent global securities and,
if so, the identity of the depositary for such global security or securities;
(18) the terms and conditions relating to warrants issued by USAir and USAir
Group in connection with or for the purchase of such Debt Securities; and (19)
any other
5
<PAGE>
special terms pertaining to such Debt Securities, including any modification of
the terms set forth herein. Unless otherwise specified in the applicable Pro-
spectus Supplement, the Debt Securities will not be listed on any securities
exchange. (Section 3.1 of the Indentures.)
Unless otherwise specified in the applicable Prospectus Supplement, Debt Se-
curities will be issued in fully registered form without coupons. Where Debt
Securities of any series are issued in bearer form, the special restrictions
and considerations, including special offering restrictions and special Federal
income tax considerations, applicable to any such Debt Securities and to pay-
ment on and transfer and exchange of such Debt Securities will be described in
the applicable Prospectus Supplement. Bearer Debt Securities will be transfer-
able by delivery. (Section 3.5 of the Indentures.)
Debt Securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time
of issuance is below market rates. Certain Federal income tax consequences and
special considerations applicable to any such Debt Securities will be described
in the applicable Prospectus Supplement.
If the purchase price of any Debt Securities is payable in one or more for-
eign currencies or currency units or if any Debt Securities are denominated in
one or more foreign currencies or currency units or if the principal of, premi-
um, if any, or interest, if any, on any Debt Securities is payable in one or
more foreign currencies or currency units, the restrictions, elections, certain
Federal income tax considerations, specific terms and other information with
respect to such issue of Debt Securities and such foreign currency or currency
units will be set forth in the applicable Prospectus Supplement.
The Indentures do not contain any covenant or provision which may afford
holders of the Debt Securities protection in the event of a highly leveraged
transaction which may or may not result in a change of control of USAir or
USAir Group.
Any covenants or other provisions included in a supplement or amendment to
the Indentures for the benefit of the holders of any particular series of Debt
Securities will be described in the applicable Prospectus Supplement.
GLOSSARY
Set forth below is a glossary of certain of the defined terms used in this
Prospectus with respect to the Debt Securities. Reference is made to the Inden-
tures for the full definition of such terms, as well as any capitalized terms
used herein for which no definition is provided.
"Debt" shall have the meaning set forth on page 8 herein.
"Debt Securities" shall have the meaning set forth on the cover page.
"Default" shall have the meaning set forth on page 11 herein.
"Depositary" shall have the meaning set forth on page 9 herein.
"Event of Default" shall have the meaning set forth on page 11 herein.
"Guarantee" shall have the meaning set forth on the cover page.
"Offered Securities" shall have the meaning set forth on the cover page.
"Payment Block" shall have the meaning set forth on page 8 herein.
"Payment Notice" shall have the meaning set forth on page 8 herein.
"Registered Global Security" shall have the meaning set forth on page 9
herein.
6
<PAGE>
"Senior Debt" shall have the meaning set forth on page 7 herein.
"Senior Debt Securities" shall have the meaning set forth on the cover
page.
"Subordinated Debt Securities" shall have the meaning set forth on the
cover page.
"Warrants" shall have the meaning set forth on the cover page.
"Warrant Agent" shall have the meaning set forth on page 14 herein.
"Warrant Agreements" shall have the meaning set forth on page 14 herein.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus Supplement, payments
in respect of the Debt Securities will be made in the designated currency at
the office or agency of USAir maintained for that purpose as USAir may desig-
nate from time to time, except that, at the option of USAir, interest payments,
if any, on Debt Securities in registered form may be made (i) by checks mailed
by the Trustee to the holders of Debt Securities entitled thereto at their reg-
istered addresses or (ii) by wire transfer to an account maintained by the Per-
son entitled thereto as specified in the Register. (Sections 3.7(a) and 9.2 of
the Indentures.) Unless otherwise indicated in an applicable Prospectus Supple-
ment, payment of any installment of interest on Debt Securities in registered
form will be made to the Person in whose name such Debt Security is registered
at the close of business on the regular record date for such interest. (Section
3.7(a) of the Indentures.)
Payment in respect of Debt Securities in bearer form will be payable in the
currency and in the manner designated in the Prospectus Supplement, subject to
any applicable laws and regulations, at such paying agencies outside the United
States as USAir may appoint from time to time. The paying agents outside the
United States initially appointed by USAir for a series of Debt Securities will
be named in the Prospectus Supplement. USAir may at any time designate addi-
tional Paying Agents or rescind the designation of any paying agents, except
that, if Debt Securities of a series are issuable as Registered Securities,
USAir will be required to maintain at least one paying agent in each Place of
Payment for such series and, if Debt Securities of a series are issuable as
Bearer Securities, USAir will be required to maintain a Paying Agent in a Place
of Payment outside the United States where Debt Securities of such series and
any coupons appertaining thereto may be presented and surrendered for payment.
(Section 9.2 of the Indentures.)
Unless otherwise provided in the applicable Prospectus Supplement, Debt Secu-
rities in registered form will be transferable or exchangeable at the agency of
USAir maintained for such purpose as designated by USAir from time to time.
(Sections 3.5 and 9.2 of the Indentures.) Debt Securities may be transferred or
exchanged without service charge, other than any tax or other governmental
charge imposed in connection therewith. (Section 3.5 of the Indentures.)
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
The obligation of USAir to make payment on account of the principal of, pre-
mium, if any, and interest on the Subordinated Debt Securities will be subordi-
nated and junior in right of payment, as set forth in the Subordinated Debt Se-
curities Indenture, to the prior payment in full of all Senior Debt of USAir.
The Subordinated Debt Securities will rank pari passu with any future Indebted-
ness of USAir which by its terms states that it will rank pari passu with the
Subordinated Debt Securities.
"Senior Debt" means all Indebtedness of USAir (other than the Subordinated
Debt Securities) unless such Indebtedness, by its terms or the terms of the in-
strument creating or evidencing it, is subordinate in right of payment to or
pari passu with the Subordinated Debt Securities. (Section 1.1 of the Subordi-
nated Debt Securities Indenture.) "Indebtedness" of USAir means at any date of
determination (without duplication), (i) all indebtedness of USAir for borrowed
money, (ii) all obligations of USAir evidenced by bonds, debentures, notes or
other similar instruments, (iii) all obligations of USAir in respect of letters
of credit or
7
<PAGE>
other similar instruments (including reimbursement obligations with respect
thereto), (iv) all obligations of USAir to pay the deferred and unpaid purchase
price of property or services, which purchase price is due more than six months
after the date of placing such property in service or taking delivery and title
thereto or the completion of such services, except Trade Payables, (v) all ob-
ligations of USAir as lessee under Capital Leases, (vi) all Indebtedness of
USAir secured by a Lien on any asset of USAir, whether or not such Indebtedness
is assumed by USAir; provided that the amount of such Indebtedness shall be the
lesser of (A) the fair market value of such asset at such date of determination
and (B) the stated principal amount of such Indebtedness, (vii) all Indebted-
ness of other persons guaranteed by USAir to the extent such Indebtedness is
guaranteed by USAir, (viii) to the extent not otherwise included in this defi-
nition, obligations under currency agreements, interest rate agreements and
commodity agreements. The amount of Indebtedness of USAir at any date shall be
the outstanding balance at such date of all unconditional obligations as de-
scribed above and the maximum liability, upon the occurrence of the contingency
giving rise to the obligation, of any contingent obligations at such date; pro-
vided that the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the re-
maining unamortized portion of the original issue discount of such Indebtedness
at such time as determined in conformity with generally accepted accounting
principles consistently applied as in effect on the date of the Indentures.
No payment on account of principal of, premium, if any, or interest on the
Subordinated Debt Securities (except payment of the Subordinated Debt Securi-
ties from funds previously deposited to defease USAir's obligations under the
Subordinated Debt Securities Indenture at any time such deposit was not prohib-
ited by the Subordinated Debt Securities Indenture) may be made if (i) any Se-
nior Debt is not paid when due or (ii) the maturity of any Senior Debt is ac-
celerated unless, in either case, (a) such failure to pay or acceleration re-
lates to Senior Debt in an aggregate amount equal to or less than $20 million,
(b) the default has been cured or waived or has ceased to exist, (c) such ac-
celeration has been rescinded, or (d) such Senior Debt has been paid in full.
During the continuance of any default (other than a default described in the
preceding sentence) on Senior Debt pursuant to which the maturity thereof may
be accelerated immediately (i.e., without further notice and after the expira-
tion of any applicable grace periods) and upon notice by the Representatives of
holders of in excess of $25 million of Senior Debt to USAir and the Trustee (a
"Payment Notice"), USAir may not make any payments (except payment of the Sub-
ordinated Debt Securities from funds previously deposited to defease the obli-
gations of USAir and USAir Group under the Subordinated Debt Securities Inden-
ture at any time such deposit was not prohibited by the Subordinated Debt Secu-
rities Indenture) (a "Payment Block") on the Subordinated Debt Securities until
120 days have elapsed following the receipt of such Payment Notice. After 120
days USAir may resume payment on the Subordinated Debt Securities unless pay-
ment is prohibited by the first sentence of this paragraph. No more than one
Payment Block is permitted for any one default on Senior Debt (which shall not
bar subsequent Payment Notices for other such defaults). All defaults on Senior
Debt occurring within a 30 day period shall be treated as one default on Senior
Debt for purposes of the preceding sentence. No more than two Payment Blocks
are permitted within any 12 month period. Except as provided in the next para-
graph, a failure to make any payment with respect to the Subordinated Debt Se-
curities as a result of the foregoing provisions will not limit the right of
the holders of the Subordinated Debt Securities to accelerate the maturity
thereof as a result of such payment default. (Section 12.2 of the Subordinated
Debt Securities Indenture.)
Upon any distribution of the assets of USAir upon any dissolution, total or
partial liquidation or reorganization of or similar proceeding relating to
USAir, the holders of Senior Debt will be entitled to receive payment in full
before the holders of the Subordinated Debt Securities are entitled to receive
any payment. Upon any Event of Default (as described below) with respect to the
Subordinated Debt Securities, the Trustee or holders of 25% of the Subordinated
Debt Securities must give notice of such Event of Default and the intention to
accelerate to USAir and any other holders of Senior Debt which have theretofore
requested such notice, and such acceleration shall not become effective unless
and until such Event of Default is continuing on the sixtieth day after the
date of delivery of such notice of intention to accelerate; provided, however,
that such Subordinated Debt Securities shall become immediately due and payable
without prior notice upon a bankruptcy or insolvency of USAir. (Section 12.3 of
the Subordinated Debt Securities Indenture.) By reason
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of such subordination, in the event of insolvency, creditors of USAir who are
holders of Senior Debt or of other unsubordinated Debt may recover more, rata-
bly, than the holders of the Subordinated Debt Securities.
GUARANTEES OF DEBT SECURITIES
USAir Group will unconditionally guarantee on a subordinated basis to the
holders of Debt Securities the full and prompt payment of principal, premium,
if any, and interest when and as the same shall become due and payable, whether
at maturity, upon redemption or otherwise. Any such Guarantee will be an
unsecured obligation of USAir Group. Any right of payment of the holders of Se-
nior Debt Securities under the related Guarantee will be prior to the right of
payment of the holders of Subordinated Debt Securities under the related Guar-
antee.
The consolidated financial statements of USAir Group are incorporated by ref-
erence herein. See "Incorporation of Certain Documents by Reference". As indi-
cated by comparison of such consolidated financial statements with those of
USAir, the aggregate net assets and revenues of USAir Group are substantially
equivalent to the net assets and revenues of USAir on a consolidated basis.
GLOBAL DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the form
of one or more fully registered global securities (a "Registered Global Securi-
ty") that will be deposited with a depositary (the "Depositary") or with a nom-
inee or custodian for the Depositary identified in the applicable Prospectus
Supplement. In such a case, one or more Registered Global Securities will be
issued in a denomination or aggregate denominations equal to the portion of the
aggregate principal amount of outstanding Debt Securities of the series to be
represented by such Registered Global Security or Securities. Unless and until
it is exchanged in whole or in part for Debt Securities in definitive certifi-
cated form, a Registered Global Security may not be registered for transfer or
exchange except as a whole by the Depositary for such Registered Global Secu-
rity to a nominee of such Depositary or by a nominee of such Depositary to such
Depositary or another nominee of such Depositary or by such Depositary or any
such nominee to a successor Depositary for such series or a nominee of such
successor Depositary and except in the circumstances described in the applica-
ble Prospectus Supplement. (Section 3.5 of the Indentures.)
The specific terms of the depositary arrangement with respect to any portion
of a series of Debt Securities to be represented by a Registered Global Secu-
rity will be described in the applicable Prospectus Supplement. USAir expects
that the following provisions will apply to depositary arrangements.
Upon the issuance of any Registered Global Security, and the deposit of such
Registered Global Security with or on behalf of the Depositary for such Regis-
tered Global Security, the Depositary will credit, on its book-entry registra-
tion and transfer system, the respective principal amounts of the Debt Securi-
ties represented by such Registered Global Security to the accounts of institu-
tions ("participants") that have accounts with the Depositary or its nominee.
The accounts to be credited will be designated by the underwriters or agents
engaging in the distribution of such Debt Securities or by USAir, if such Debt
Securities are offered and sold directly by USAir. Ownership of beneficial in-
terests in a Registered Global Security will be limited to participants or per-
sons that may hold interests through participants. Ownership of beneficial in-
terests by participants in such Registered Global Security will be shown on,
and the transfer of that ownership interest will be effected only through, rec-
ords maintained by the Depositary for such Registered Global Security or by its
nominee. Ownership of beneficial interests in such Registered Global Security
by persons that hold through participants will be shown on, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in certificated form. The foregoing limitations and such laws may impair the
ability to transfer beneficial interests in such Registered Global Securities.
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So long as the Depositary for a Registered Global Security, or its nominee,
is the registered owner of such Registered Global Security, such Depositary or
such nominee, as the case may be, will be considered the sole owner or holder
of the Debt Securities represented by such Registered Global Security for all
purposes under the Indentures. Unless otherwise specified in the applicable
Prospectus Supplement and except as specified below, owners of beneficial in-
terests in such Registered Global Security will not be entitled to have Debt
Securities of the series represented by such Registered Global Security regis-
tered in their names, will not receive or be entitled to receive physical de-
livery of Debt Securities of such series in certificated form and will not be
considered the holders thereof for any purposes under the Indentures. (Section
3.8 of the Indentures.) Accordingly, each person owning a beneficial interest
in such Registered Global Security must rely on the procedures of the Deposi-
tary and, if such person is not a participant, on the procedures of the partic-
ipant through which such person owns its interest, to exercise any rights of a
holder under the Indentures. The Depositary may grant proxies and otherwise au-
thorize participants to give or take any request, demand, authorization, direc-
tion, notice, consent, waiver or other action which a holder is entitled to
give or take under the Indentures. USAir understands that, under existing in-
dustry practices, if USAir requests any action of holders or an owner of a ben-
eficial interest in such Registered Global Security desires to give any notice
or take any action a holder is entitled to give or take under the Indentures,
the Depositary would authorize the participants to give such notice or take
such action, and participants would authorize beneficial owners owning through
such participants to give such notice or take such action or would otherwise
act upon the instructions of beneficial owners owning through them.
Unless otherwise specified in the applicable Prospectus Supplement, payments
with respect to principal, premium, if any, and interest, if any, on Debt Secu-
rities represented by a Registered Global Security registered in the name of a
Depositary or its nominee will be made to such Depositary or its nominee, as
the case may be, as the registered owner of such Registered Global Security.
USAir expects that the Depositary for any Debt Securities represented by a
Registered Global Security, upon receipt of any payment of principal, premium
or interest, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Registered Global Security as shown on the records of such De-
positary. USAir also expects that payments by participants to owners of benefi-
cial interests in such Registered Global Security held through such partici-
pants will be governed by standing instructions and customary practices, as is
now the case with the securities held for the accounts of customers registered
in "street name", and will be the responsibility of such participants. None of
USAir, USAir Group, the Trustee or any agent of USAir or USAir Group shall have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of a Registered
Global Security, or for maintaining, supervising or reviewing any records re-
lating to such beneficial ownership interests. (Section 3.8 of the Indentures.)
Unless otherwise specified in the applicable Prospectus Supplement, if the
Depositary for any Debt Securities represented by a Registered Global Security
is at any time unwilling or unable to continue as Depositary and a successor
Depositary is not appointed by USAir within ninety days, USAir will issue such
Debt Securities in definitive certificated form in exchange for such Registered
Global Security. In addition, USAir may at any time and in its sole discretion
determine not to have any of the Debt Securities of a series represented by one
or more Registered Global Securities and, in such event, will issue Debt Secu-
rities of such series in definitive certificated form in exchange for all of
the Registered Global Securities representing such Debt Securities. (Section
3.5 of the Indentures.)
CONSOLIDATION, MERGER OR SALE BY USAIR
Each Indenture provides that USAir may merge or consolidate with or into any
other corporation or sell, convey, transfer or otherwise dispose of all or sub-
stantially all of its assets to any person, firm or corporation, if (i) (a) in
the case of a merger or consolidation, USAir is the surviving corporation or
(b) in the case of a merger or consolidation where USAir is not the surviving
corporation and in the case of such a sale, conveyance or other disposition,
the successor or acquiring corporation is a corporation organized and
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existing under the laws of the United States of America or a State thereof and
such corporation expressly assumes by supplemental indenture all the obliga-
tions of USAir under the Debt Securities and any coupons appertaining thereto
and under the Indenture, (ii) no Default or Event of Default shall arise as a
result of such merger or consolidation, or such sale, conveyance, transfer or
other disposition and (iii) certain other conditions are met. In the event a
successor corporation assumes the obligations of USAir, such successor corpora-
tion shall succeed to and be substituted for USAir under the Indenture and un-
der the Debt Securities and any coupons appertaining thereto and all obliga-
tions of USAir shall terminate. (Section 7.1 of the Indentures.)
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
The Indentures provide that, if an Event of Default specified therein occurs
with respect to the Debt Securities of any series issued thereunder and is con-
tinuing, the Trustee for such series or the holders of 25% in aggregate princi-
pal amount of all of the outstanding Debt Securities of that series, by written
notice to USAir and USAir Group (and to the Trustee for such series, if notice
is given by such holders of Debt Securities), may declare the principal (or, if
the Debt Securities of that series are original issue discount Debt Securities
or indexed Debt Securities, such portion of the principal amount specified in
the Prospectus Supplement) of all the Debt Securities of that series to be due
and payable; subject, in the case of a default under the Subordinated Debt Se-
curities Indenture, to the 60-day prior notice requirement described above un-
der "Subordination of Subordinated Debt Securities", provided, that Subordi-
nated Debt Securities shall become immediately due and payable without prior
notice upon a bankruptcy or insolvency of USAir or USAir Group. (Section 5.2 of
the Indentures.)
Events of Default with respect to Debt Securities of any series issued there-
under are defined in the Indentures as being: default for thirty days in pay-
ment of any interest on any Debt Security of that series or any coupon apper-
taining thereto or any additional amount payable with respect to Debt Securi-
ties of such series as specified in the applicable Prospectus Supplement when
due; default for ten days in payment of principal, premium, if any, or on re-
demption or otherwise, or in the making of a mandatory sinking fund payment of
any Debt Securities of that series when due; default for thirty days after no-
tice to USAir by the Trustee for such series, or by the holders of 25% in ag-
gregate principal amount of the Debt Securities of such series then outstand-
ing, in the performance of any other agreement in the Debt Securities of that
series, in the Indenture or in any supplemental indenture or board resolution
referred to therein under which the Debt Securities of that series may have
been issued; default resulting in acceleration of other indebtedness of USAir
for borrowed money where the aggregate principal amount so accelerated exceeds
$50 million and such acceleration is not rescinded or annulled within ten days
after the written notice thereof to USAir by the Trustee or to USAir and the
Trustee by the holders of 25% in aggregate principal amount of the Debt Securi-
ties of such series then outstanding, provided that such Event of Default will
be cured or waived if the default that resulted in the acceleration of such
other indebtedness is cured or waived; and certain events of bankruptcy, insol-
vency or reorganization of USAir. (Section 5.1 of the Indentures.) Events of
Default with respect to a specified series of Debt Securities may be added to
the Indenture under which the series is issued and, if so added, will be de-
scribed in the applicable Prospectus Supplement. (Sections 3.1 and 5.1(7) of
the Indentures.)
The Indentures provide that the Trustee for any series of Debt Securities
shall, within ninety days after the occurrence of a Default with respect to
Debt Securities of that series, give to the holder of the Debt Securities of
that series notice of all uncured Defaults known to it; provided that, except
in the case of default in payment on the Debt Securities of that series, the
Trustee may withhold the notice if and so long as a committee of its Responsi-
ble Officers (as defined therein) in good faith determines that withholding
such notice is in the interest of the holders of the Debt Securities of that
series. (Section 6.5 of the Indentures.) "Default" means any event which is,
or, after notice or passage of time or both, would be, an Event of Default.
(Section 1.1 of the Indentures.)
The Indentures provide that the holders of a majority in aggregate principal
amount of the Debt Securities of each series affected (with each such series
voting as a class) may direct the time, method and
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place of conducting any proceeding for any remedy available to the Trustee for
such series, or exercising any trust or power conferred on such Trustee. (Sec-
tion 5.8 of the Indentures.)
The Indentures include a covenant that USAir and USAir Group will file annu-
ally with the Trustee a certificate as to USAir's and USAir Group's compliance
with all conditions and covenants of the applicable Indenture. (Section 9.7 of
the Indentures.)
The holders of a majority in aggregate principal amount of any series of Debt
Securities by notice to the Trustee for such series may waive, on behalf of the
holders of all Debt Securities of such series, any past Default or Event of De-
fault with respect to that series and its consequences except a Default or
Event of Default in the payment of the principal of, premium, if any, or inter-
est, if any, on any Debt Security and certain other defaults. (Section 5.7 of
the Indentures.)
MODIFICATION OF THE INDENTURES
The Indentures contain provisions permitting USAir, USAir Group and the
Trustee to enter into one or more supplemental indentures without the consent
of the holders of any of the Debt Securities in order (i) to evidence the suc-
cession of another corporation to USAir or USAir Group and the assumption of
the covenants of USAir or USAir Group by a successor to USAir or USAir Group;
(ii) to add to the covenants of USAir or USAir Group or surrender any right or
power of USAir or USAir Group; (iii) to add additional Events of Default with
respect to any series; (iv) to add or change any provisions to such extent as
necessary to permit or facilitate the issuance of Debt Securities in bearer
form or in global form; (v) to add to, change or eliminate any provision af-
fecting Debt Securities not yet issued; (vi) to secure the Debt Securities or
Guarantees; (vii) to establish the form or terms of Debt Securities or Guaran-
tees; (viii) to evidence and provide for successor Trustees; (ix) if allowed
without penalty under applicable laws and regulations, to permit payment in re-
spect of Debt Securities in bearer form in the United States; or (x) to cure
any ambiguity or correct any mistake and to correct or supplement any inconsis-
tent provisions or to make any other provisions as USAir may deem necessary or
desirable with respect to matters or questions arising under the Indentures,
provided that such action does not adversely affect the interests of any holder
of Debt Securities of any series issued under such Indenture. (Section 8.1 of
the Indentures.)
The Indentures also contain provisions permitting USAir or USAir Group and
the Trustee, with the consent of the holders of a majority in aggregate princi-
pal amount of the outstanding Debt Securities of each series affected by such
supplemental indenture, to execute supplemental indentures adding any provi-
sions to or changing or eliminating any of the provisions of the Indentures or
any supplemental indenture or modifying the rights of the holders of Debt Secu-
rities of such series, except that no such supplemental indenture may, without
the consent of the holder of each Debt Security so affected, (i) change the
time for payment of principal or interest on any Debt Security; (ii) reduce the
principal of, or any installment of principal of, or interest on any Debt Secu-
rity; (iii) reduce the amount of premium, if any, payable upon the redemption
of any Debt Security; (iv) reduce the amount of principal payable upon acceler-
ation of the maturity of an Original Issue Discount Debt Security; (v) change
the coin or currency in which any Debt Security or any premium or interest
thereon is payable; (vi) impair the right to institute suit for the enforcement
of any payment on or with respect to any Debt Security; (vii) reduce the per-
centage in principal amount of the outstanding Debt Securities of any series
the consent of whose holders is required for modification or amendment of the
Indentures or for waiver of compliance with certain provisions of the Inden-
tures or for waiver of certain defaults; (viii) change the obligation of USAir
or USAir Group to maintain an office or agency in the places and for the pur-
poses specified in the Indentures; (ix) modify the provisions relating to
waiver of certain defaults or any of the foregoing provisions; or (x) modify
the obligation of USAir Group to make payment under the Guarantees. (Section
8.2 of the Indentures.)
DEFEASANCE AND COVENANT DEFEASANCE
If indicated in the Prospectus Supplement, USAir or USAir Group may elect ei-
ther (i) to defease and be discharged from any and all obligations with respect
to the Debt Securities of or within any series (except as
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described below) ("defeasance") or (ii) to be released from its obligations
with respect to certain covenants applicable to the Debt Securities of or
within any series ("covenant defeasance"), upon the deposit with the Trustee
for such series (or other qualifying trustee), in trust for such purpose, of
money and/or Government Obligations which through the payment of principal and
interest in accordance with their terms will provide money in the amount suffi-
cient to pay the principal of and any premium or interest on such Debt Securi-
ties to Maturity or redemption, as the case may be, and any mandatory sinking
fund or analogous payments thereon. Upon the occurrence of a defeasance, USAir
will be deemed to have paid and discharged the entire indebtedness represented
by such Debt Securities and any coupons appertaining thereto and to have satis-
fied all of its other obligations under such Debt Securities and any coupons
appertaining thereto (except for (i) the rights of holders of such Debt Securi-
ties to receive, solely from the trust funds deposited to defease such Debt Se-
curities, payments in respect of the principal of, premium, if any, and inter-
est, if any, on such Debt Securities or any coupons appertaining thereto when
such payments are due and (ii) certain other obligations as provided in the In-
dentures). Upon the occurrence of a covenant defeasance, USAir or USAir Group
will be released only from its obligations to comply with certain covenants
contained in the Indenture relating to such Debt Securities, will continue to
be obligated in all other respects under such Debt Securities and will continue
to be contingently liable with respect to the payment of principal, interest,
if any, and premium, if any, with respect to such Debt Securities.
Unless otherwise specified in the applicable Prospectus Supplement and except
as described below, the conditions to both defeasance and covenant defeasance
are as follows: (i) such defeasance or covenant defeasance must not result in a
breach or violation of, or constitute a Default or Event of Default under, the
applicable Indenture, or result in a breach or violation of, or constitute a
default under, any other material agreement or instrument of USAir or USAir
Group; (ii) certain bankruptcy-related Defaults or Events of Default with re-
spect to USAir must not have occurred and be continuing during the period com-
mencing on the date of the deposit of the trust funds to defease such Debt Se-
curities and ending on the 91st day after such date; (iii) USAir must deliver
to the Trustee an Opinion of Counsel to the effect that the holders of such
Debt Securities will not recognize income, gain or loss for Federal income tax
purposes as a result of such defeasance or covenant defeasance and will be sub-
ject to Federal income tax on the same amounts and in the same manner and at
all the same times as would have been the case if such defeasance or covenant
defeasance had not occurred (such Opinion of Counsel, in the case of defea-
sance, must refer to and be based upon a ruling of the Internal Revenue Service
or a change in applicable Federal income tax law occurring after the date of
the Indentures); (iv) USAir must deliver to the Trustee an Officers' Certifi-
cate and an Opinion of Counsel with respect to compliance with the conditions
precedent to such defeasance or covenant defeasance and with respect to certain
registration requirements under the Investment Company Act of 1940, as amended;
and (v) any additional conditions to such defeasance or covenant defeasance
which may be imposed on USAir or USAir Group pursuant to the applicable Inden-
ture. (Article 4 of the Indentures.) The Indentures require that a nationally
recognized firm of independent public accountants deliver to the Trustee a
written certification as to the sufficiency of the trust funds deposited for
the defeasance or covenant defeasance of such Debt Securities. The Indentures
do not provide the holders of such Debt Securities with recourse against such
firm. If indicated in the applicable Prospectus Supplement, in addition to ob-
ligations of the United States or an agency or instrumentality thereof, Govern-
ment Obligations may include obligations of the government or an agency or in-
strumentality of the government issuing the currency in which Debt Securities
of such series are payable. (Sections 1.1 and 3.1 of the Indentures.) In the
event that Government Obligations deposited with the Trustee for the defeasance
of such Debt Securities decrease in value or default subsequent to their being
deposited, USAir and USAir Group will have no further obligation, and the hold-
ers of such Debt Securities will have no additional recourse against USAir or
USAir Group, as a result of such decrease in value or default. As described
above, in the event of a covenant defeasance, USAir or USAir Group will remain
contingently liable with respect to the payment of principal, interest, if any,
and premium, if any, with respect to the Debt Securities.
USAir and USAir Group may exercise their defeasance option with respect to
such Debt Securities notwithstanding their prior exercise of their covenant de-
feasance option. If USAir or USAir Group exercises
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its defeasance option, payment of such Debt Securities may not be accelerated
because of a Default or an Event of Default. If USAir or USAir Group exercises
its covenant defeasance option, payment of such Debt Securities may not be ac-
celerated by reason of a Default or an Event of Default with respect to the
covenants to which such covenant defeasance is applicable. However, if such ac-
celeration were to occur, the realizable value at the acceleration date of the
money and Government Obligations in the defeasance trust could be less than the
principal and interest then due on such Debt Securities, in that the required
deposit in the defeasance trust is based upon scheduled cash flow rather than
market value, which will vary depending upon interest rates and other factors.
THE TRUSTEE
Shawmut Bank, N.A. is the Trustee under the Indentures. It is currently an-
ticipated that Shawmut Bank, N.A. will act as the Warrant Agent under the War-
rant Agreements described below. See "Description of Warrants". USAir and USAir
Group also maintain banking and other commercial relationships with Shawmut
Bank, N.A. and its affiliates in the ordinary course of business.
DESCRIPTION OF WARRANTS
USAir may issue Warrants for the purchase of Debt Securities. Warrants may be
issued together with or separately from any Debt Securities offered by any Pro-
spectus Supplement and, if issued together with Debt Securities, may be at-
tached to or separate from such Debt Securities. The Warrants are to be issued
under one or more separate Warrant Agreements (a "Warrant Agreement") to be en-
tered into among USAir, USAir Group and a bank or trust company, as Warrant
Agent, all as set forth in the Prospectus Supplement relating to the particular
issue of Warrants. The Warrant Agent will act solely as an agent of USAir and
USAir Group in connection with the Warrants and will not assume any obligation
or relationship of agency or trust for or with any holders of Warrants or bene-
ficial owners of Warrants. The statements herein relating to the Warrants and
the Warrant Agreements are summaries and reference is made to the detailed pro-
visions of the Warrant Agreements. A form of Warrant Agreement for Warrants
Sold Attached to Debt Securities and a form of Warrant Agreement for Warrants
Sold Alone have been incorporated by reference as exhibits to the Registration
Statement.
GENERAL
If Warrants are offered, reference is made to the Prospectus Supplement which
accompanies this Prospectus for a description of the specific terms of the War-
rants being offered thereby, including (i) the specific designation and aggre-
gate number of such Warrants, (ii) the offering price and the currency or com-
posite currencies for which Warrants may be purchased, (iii) the designation
(including whether the Debt Securities are Senior Debt Securities or Subordi-
nated Debt Securities), aggregate principal amount, currency or composite cur-
rencies and terms of the Debt Securities purchasable upon exercise of the War-
rants, (iv) if applicable, the designation and terms of the Debt Securities
with which the Warrants are issued and the number of Warrants issued with the
minimum denomination of each such Debt Security, (v) if applicable, the date on
and after which the Warrants and the related Debt Securities will be separately
transferable, (vi) the principal amount of Debt Securities purchasable upon ex-
ercise of one Warrant and the price or the manner of determining the price and
currency or composite currencies or other consideration (which may include Debt
Securities) for which such principal amount of Debt Securities may be purchased
upon such exercise, (vii) the date on which the right to exercise the Warrants
shall commence and the date on which such right shall expire (the "Expiration
Date"), (viii) the terms of any mandatory or optional redemption by USAir, (ix)
certain Federal income tax consequences, (x) whether the certificates for War-
rants will be issued in registered or unregistered form, and (xi) any other
special terms pertaining to such Warrants, including the modification of any
terms set forth herein. Unless otherwise specified in the applicable Prospectus
Supplement, the Warrants will not be listed on any securities exchange.
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Warrant certificates may be exchanged for new Warrant certificates of differ-
ent denominations, may (if in registered form) be presented for registration of
transfer and exchange and may be exercised at an office or agency of the War-
rant Agent maintained for that purpose (the "Warrant Agent Office"). No service
charge will be made for any transfer or exchange of Warrant certificates, but
USAir and USAir Group may require payment of a sum sufficient to cover any tax
or other governmental charge payable in connection therewith. (Sections 6 and
11 of the Warrant Agreements.) Prior to the exercise of their Warrants, holders
of Warrants will not have any of the rights of holders of the Debt Securities
purchasable upon such exercise, including the right to receive payments of
principal of, premium, if any, or interest, if any, on the Debt Securities pur-
chasable upon such exercise or to enforce covenants in the Indenture. (Section
24 of the Warrant Agreements.)
EXERCISE OF WARRANTS
Each Warrant will entitle the holder to purchase such principal amount of
Debt Securities at such exercise price, for such consideration and during such
period or periods as shall in each case be set forth in, or calculable from,
the Prospectus Supplement relating to the Warrants. Warrants may be exercised
at any time during such period up to 5:00 P.M. New York City time on the Expi-
ration Date set forth in the Prospectus Supplement relating to such Warrants.
After the close of business on the Expiration Date (or such later date to which
such Expiration Date may be extended by USAir and USAir Group), unexercised
Warrants will become void. (Section 8 of the Warrant Agreements.)
Warrants may be exercised by delivery to the Warrant Agent of payment as pro-
vided in the Prospectus Supplement of the applicable amount required to pur-
chase the Debt Securities purchasable upon such exercise together with certain
information set forth on the reverse side of the Warrant certificate. Unless
otherwise provided in the Prospectus Supplement, upon receipt of such payment
and the Warrant certificate properly completed and duly executed at the Warrant
Agent Office or any other office or agency indicated in the Prospectus Supple-
ment, USAir and USAir Group will, as soon as practicable, issue and deliver the
Debt Securities purchasable upon such exercise. If fewer than all of the War-
rants represented by such Warrant certificate are exercised, a new Warrant cer-
tificate will be issued for the amount of unexercised Warrants. (Section 9 of
the Warrant Agreements.)
MODIFICATION OF WARRANT AGREEMENTS
The Warrant Agreements contain a provision permitting USAir, USAir Group and
the Warrant Agent, without the consent of any Warrantholder, to supplement or
amend the Warrant Agreement in order to cure any ambiguity, and to correct or
supplement any provision contained therein which may be defective or inconsis-
tent with any other provisions or to make other provisions in regard to matters
or questions arising thereunder which USAir, USAir Group and the Warrant Agent
may deem necessary or desirable and which do not adversely affect the interests
of the Warrantholders. (Section 19 of the Warrant Agreements.)
INFORMATION TO BE PROVIDED BY PROSPECTUS SUPPLEMENT
The Prospectus Supplement which accompanies this Prospectus provides (i) more
detailed information on use of proceeds (including the interest rate and matu-
rity date of debt to be repaid, if any, with the proceeds of securities offered
by such Prospectus Supplement), (ii) the amount of debt ranking senior to or in
parity with the debt being offered by such Prospectus Supplement and (iii) the
anticipated market for the securities being offered by such Prospectus Supple-
ment.
PLAN OF DISTRIBUTION
USAir may sell Securities to one or more underwriters for public offering and
sale by them or may sell Securities to investors or other persons directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Offered Securities will be named in an applicable Prospectus Supplement.
15
<PAGE>
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, or from time to time at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. USAir also may, from time to time, authorize underwriters
acting as USAir's agents to offer and sell the Offered Securities upon the
terms and conditions as shall be set forth in any Prospectus Supplement. In
connection with the sale of Offered Securities, underwriters may be deemed to
have received compensation from USAir in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of Offered Securi-
ties for whom they may act as agent. Underwriters may sell Offered Securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
(which may be changed from time to time) from the purchasers for whom they may
act as agent.
Any underwriting compensation paid by USAir to underwriters or agents in con-
nection with the offering of Offered Securities, and any discounts, concessions
or commissions allowed by underwriters to participating dealers, will be set
forth in an applicable Prospectus Supplement. Underwriters, dealers and agents
participating in the distribution of the Offered Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Offered Securities may be deemed to be under-
writing discounts and commissions under the Securities Act. Underwriters, deal-
ers and agents may be entitled, under agreements with USAir and USAir Group, to
indemnification against and contribution toward certain civil liabilities, in-
cluding liabilities under the Securities Act, and to reimbursement by USAir and
USAir Group for certain expenses.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, USAir or USAir Group and its subsidiaries in the ordinary course
of business.
If so indicated in an applicable Prospectus Supplement, USAir will authorize
dealers acting as USAir's agents to solicit offers by certain institutions to
purchase Offered Securities from USAir at the public offering price set forth
in such Prospectus Supplement pursuant to Delayed Delivery Contracts ("Con-
tracts") providing for payment and delivery on the date or dates stated in such
Prospectus Supplement. Each Contract will be for an amount not less than, and
the aggregate principal amount of Offered Securities sold pursuant to Contracts
shall not be less nor more than, the respective amounts stated in such Prospec-
tus Supplement. Institutions with whom Contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds, in-
vestment companies, educational and charitable institutions and other institu-
tions, but will in all cases be subject to the approval of USAir. Contracts
will not be subject to any conditions except (i) the purchase by an institution
of the Offered Securities covered by its Contracts shall not at the time of de-
livery be prohibited under the laws of any jurisdiction in the United States to
which such institution is subject, and (ii) if the Offered Securities are being
sold to underwriters, USAir shall have sold to such underwriters the total
principal amount of the Offered Securities less the principal amount thereof
covered by Contracts. Agents and underwriters will have no responsibility in
respect of the delivery or performance of Contracts.
The Offered Securities may or may not be listed on a national securities ex-
change or a foreign securities exchange. No assurances can be given that there
will be a market for the Offered Securities.
LEGAL OPINIONS
Unless otherwise indicated in the applicable Prospectus Supplement, the va-
lidity of the Debt Securities, Warrants and Guarantees offered hereby will be
passed upon for USAir and USAir Group by James T. Lloyd, Executive Vice Presi-
dent and General Counsel of USAir and USAir Group and for any agents or under-
writers by Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022.
16
<PAGE>
EXPERTS
The consolidated financial statements and related consolidated financial
statement schedules of USAir and USAir Group as of December 31, 1992 and 1991,
and for each of the years in the three-year period ended December 31, 1992,
which are included in the combined Annual Reports of USAir and USAir Group on
Form 10-K for the year ended December 31, 1992, have been incorporated by ref-
erence herein in reliance upon the reports of KPMG Peat Marwick, independent
certified public accountants, which reports are incorporated by reference here-
in, and upon the authority of said firm as experts in accounting and auditing.
The reports of KPMG Peat Marwick covering the December 31, 1992 consolidated
financial statements of USAir and USAir Group refer to a change in the method
of accounting for postretirement benefits other than pensions.
17
<PAGE>
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in or incorporated by
reference in this Prospectus Supplement or in the accompanying Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by USAir, USAir Group or the underwriter. This
Prospectus Supplement and the accompanying Prospectus do not constitute an
offer to sell or the solicitation of an offer to buy securities in any
jurisdiction to any person where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus Supplement nor the
accompanying Prospectus nor any sale made hereunder or thereunder shall, under
any circumstances, create an implication that the information contained herein
or therein is correct as of any time subsequent to the date hereof.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Prospectus Supplement Summary............................................. S-3
Ratios of Earnings to Fixed Charges....................................... S-6
Risk Factors.............................................................. S-7
The Company............................................................... S-11
The Guarantor............................................................. S-11
Business Strategy......................................................... S-11
Recent Developments....................................................... S-17
Use of Proceeds........................................................... S-25
Capitalization............................................................ S-26
Selected Financial and Operating Information.............................. S-28
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-30
Description of the Notes and Guarantees................................... S-43
Underwriting.............................................................. S-57
Legal Opinions............................................................ S-57
Experts................................................................... S-57
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information....................................................... 2
Incorporation of Certain Documents by
Reference.................................................................. 2
USAir and USAir Group....................................................... 3
Use of Proceeds............................................................. 3
Ratios of Earnings to Fixed Charges......................................... 4
Description of Debt Securities.............................................. 4
Description of Warrants..................................................... 14
Information to be Provided by Prospectus Supplement......................... 15
Plan of Distribution........................................................ 15
Legal Opinions.............................................................. 16
Experts..................................................................... 17
</TABLE>
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$175,000,000
[LOGO OF USAIR APPEARS HERE]
9 5/8% SENIOR NOTES
DUE FEBRUARY 1, 2001
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PROSPECTUS SUPPLEMENT
JANUARY 26, 1994
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LEHMAN BROTHERS
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