<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1997
Registration No. 33-_____
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
US AIRWAYS GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 4512 54-1194634
(State or other jurisdiction (Primary standard industrial I.R.S. employer
of incorporation or organization) classification code number) identification no.)
</TABLE>
--------------------------
US Airways Group, Inc.
2345 Crystal Drive
Arlington, Virginia 22227
(703) 872-5306
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Lawrence M. Nagin, Esq.
Executive Vice President - Corporate Affairs
and General Counsel
US Airways Group, Inc.
2345 Crystal Drive
Arlington, Virginia 22227
(703) 872-5306
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies of all communications to:
<TABLE>
<CAPTION>
<S> <C> <C>
Peter Allan Atkins, Esq. Dennis C. Sullivan, Esq. [Underwriters' Counsel to be named]
Skadden, Arps, Slate, Meagher & Flom LLP Sullivan & Cromwell
919 Third Avenue 1701 Pennsylvania Ave., N.W.
New York, New York 10022-3897 Washington, D.C. 20006
C. Kevin Barnette, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Avenue, N.W.
New York, New York 20005
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=====================================================================================================
Proposed Proposed
Number of Maximum Maximum
Title of Each Class Shares Offering Aggregate Amount of
of Shares to be to be Price Offering Registration
Registered Registered Per Share(1) Price Fee
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value 19,290,546 (2) $27.50 $530,490,015 $160,755
Series F Preferred Stock 30,000 (3) (3) (3)
Series T-1 Preferred Stock 152.1 (3) (3) (3)
Series T-2 Preferred Stock 9,919.8 (3) (3) (3)
Series F Depositary Shares 6,000,000 (3) (3) (3)
Series T-1 Depositary Shares 30,420 (3) (3) (3)
Series T-2 Depositary Shares 1,983,960 (3) (3) (3)
=====================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457 promulgated under the
Securities Act of 1933, as amended, and based on the average of the
high and low prices on the New York Stock Exchange on April 21, 1997.
(2) Represents shares of Common Stock of the registrant issuable upon
conversion of the Series F, T-1 and T-2 Preferred Stock represented by
the Series F, T-1 and T-2 Depositary Shares respectively. There is also
being registered such indeterminate number of additional shares of
Common Stock as may become issuable upon or in connection with the
conversion of the Series F, T-1 and T-2 Preferred Stock as a
consequence of adjustments to their respective conversion ratios
pursuant to their respective antidilution and other terms.
(3) Pursuant to Rule 457 under the Securities Act, no additional
registration fee is required to be paid.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
<PAGE>
*******************************************************************************
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
********************************************************************************
Subject to Completion, April 28, 1997
8,014,380 Shares
US Airways Group, Inc.
6,000,000 Series F Depositary Shares, Each Representing 1/200 of a Share
of Series F Cumulative Convertible Senior Preferred Stock
30,420 Series T-1 Depositary Shares, Each Representing 1/200 of a Share
of Series T-1 Cumulative Convertible Exchangeable Senior
Preferred Stock
1,983,960 Series T-2 Depositary Shares, Each Representing 1/200 of a Share
of Series T-2 Cumulative Convertible Exchangeable Senior
Preferred Stock
-----------------------
All of the Depositary Shares (as defined below) offered hereby (or, in the
case of the Series T-2 Depositary Shares (as defined below), which may be
offered hereby) are being sold by BritAir Acquisition Corp. Inc. ("BritAir"), a
wholly-owned subsidiary of British Airways Plc ("British Airways"). See "Selling
Security Holder." None of the proceeds from the sale of the Depositary Shares
will be received by the Company (as defined below).
Each of the 6,000,000 Series F Depositary Shares offered hereby (the "Series
F Depositary Shares") represents ownership of a 1/200 interest in a share of
Series F Cumulative Convertible Senior Preferred Stock, no par value (the
"Series F Preferred Stock"), of US Airways Group, Inc. ("US Airways Group" or
the "Company"), to be deposited with _____________, as Depositary (the
"Depositary"), and entitles the holder, proportionately, to all rights and
preferences of the Series F Preferred Stock represented thereby. Each of the
30,420 Series T-1 Depositary Shares offered hereby (the "Series T-1 Depositary
Shares") represents ownership of a 1/200 interest in a share of Series T-1
Cumulative Convertible Exchangeable Senior Preferred Stock, no par value (the
"Series T-1 Preferred Stock"), of US Airways Group, to be deposited with the
Depositary, and entitles the holder, proportionately, to all rights and
preferences of the Series T-1 Preferred Stock represented thereby. Each of the
1,983,960 Series T-2 Depositary Shares which may be offered hereby (the "Series
T-2 Depositary Shares," and, with the Series T-1 Depositary Shares, the "Series
T Depositary Shares") represents ownership of a 1/200 interest in a share of
Series T-2 Cumulative Convertible Exchangeable Senior Preferred Stock, no par
value (the "Series T-2 Preferred Stock," and, with the Series T-1 Preferred
Stock, the "Series T Preferred Stock"), of US Airways Group, to be deposited
with the Depositary, and entitles the holder, proportionately, to all rights and
preferences of the Series T-2 Preferred Stock represented thereby. Cash
dividends on the Series F Preferred Stock and the Series T Preferred Stock
(collectively, the "BA Preferred Stock"), when and if declared, are cumulative
at the rate of $700 per annum and a rate of 50 basis points over the LIBOR rate,
respectively, per share ($3.50 per annum per Series F Depositary Share), payable
quarterly on the last business day of each February, May, August and November.
Each share of BA Preferred Stock has a liquidation preference of $10,000, plus
accrued and unpaid dividends. The BA Preferred Stock ranks senior to the
Company's $437.50 Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock") and to the Company's Common Stock, $1.00 par value per share
("Common Stock"), and pari passu with the Company's 9 1/4% Series A Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock"), with respect to
payment of dividends or upon distribution of assets in liquidation, dissolution
or winding up of the Company. The Series F Depositary Shares and the Series T
Depositary Shares are collectively referred to as the "Depositary Shares."
Prior to the offering hereby of the Series F Depositary Shares, the Series T-
1 Depositary Shares and, subject to the expiration without exercise of the
Company's right to purchase the Series T-2 Preferred Stock, the Series T-2
Depositary Shares, there has been no public market for the Depositary Shares or
for the BA Preferred Stock. For factors considered in determining the Offering
Price (as defined below), see "Underwriting."
The BA Preferred Stock represented by the Depositary Shares is convertible at
the option of the holder at any time unless previously redeemed, into Common
Stock at the respective rates of 515.2950 shares of Common Stock for each share
of Series F Preferred Stock (equivalent to a conversion price of approximately
$19.41 per share of Common Stock or a rate of 2.5765 shares of Common Stock for
each Series F Depositary Share), 487.8049 shares of Common Stock for each share
of Series T-1 Preferred Stock (equivalent to a conversion price of $20.50 per
share of Common Stock or a rate of 2.4390 shares of Common Stock for each Series
T-1 Depositary Share) and 378.7879 shares of Common Stock for each share of
Series T-2 Preferred Stock (equivalent to a conversion price of $26.40 per share
of Common Stock or a rate of 1.8939 shares of Common Stock for each Series T-2
Depositary Share). Such conversion rates are subject to adjustment in certain
events. On April 25, 1997, the reported last sale price of the Common Stock on
the New York Stock Exchange (symbol, "U") was $29.375 per share. The BA
Preferred Stock (and related Depositary Shares) may be redeemed at the option
of the Company, in whole or in part, at specified redemption prices plus accrued
and unpaid dividends through the redemption date. The Series F Preferred Stock
may be converted at the option of US Airways Group at any time after January 21,
1998 if the average closing market price of Common Stock during any 30-day
calendar period is at least 133% of the conversion price. The Series T Preferred
Stock may be converted at the option of US Airways Group at any time after
January 21, 1998, at the conversion prices stated above, upon the satisfaction
of certain conditions. The Series T Preferred Stock may also be exchanged for T
Notes (as defined below) at the option of the Company. The Series F Preferred
Stock must be redeemed by US Airways Group on January 21, 2008, and the Series T
Preferred Stock must be redeemed by US Airways Group on June 10, 2008. At any
time the BA Preferred Stock is redeemed, the Depositary Shares representing the
BA Preferred Stock will be redeemed at a price per Depositary Share equal to
1/200 of the applicable redemption price per share of BA Preferred Stock. See
"Description of Capital Stock."
<PAGE>
Until May 14, 1997, the Company has certain rights to purchase the Series T-2
Preferred Stock underlying the Series T-2 Depositary Shares which may be offered
hereby. Accordingly, unless and until the Company expressly declines to exercise
such rights, or such rights expire unexercised, no Series T-2 Depositary Shares
will be issued and no sales of Series T-2 Depositary Shares may be made pursuant
hereto.
For a discussion of certain federal income tax consequences to holders of
Depositary Shares and BA Preferred Stock, see "Certain Federal Income Tax
Considerations."
Application will be made to list the Depositary Shares on the New York Stock
Exchange.
------------------------
See "Risk Factors" beginning on page 8 for certain considerations relevant to
an investment in the Depositary Shares.
------------------------
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.
------------------------
<TABLE>
<CAPTION>
Underwriting
Discounts and
Commissions Proceeds to
Price Payable by the the Selling
to Selling Security Security
Public (1) Holder Holder (2)
---------- ---------------- ------------
<S> <C> <C> <C>
Per Series F Depositary Share............ $_______ $_______ $______
Per Series T-1 Depositary Share.......... $_______ $_______ $______
Per Series T-2 Depositary Share.......... $_______ $_______ $______
Total.................................... $_______ $_______ $______
</TABLE>
- ---------------------
(1) Plus accrued dividends on the related series of BA Preferred Stock from
________, 1997.
(2) Before deducting expenses of the Selling Security Holder. Proceeds of the
Offering will not be received by the Company. Expenses payable by the
Company are estimated to be $_____________.
The date of this Prospectus is _________, 1997
[Underwriters to be named]
2
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or make any representations, other than those contained in this
Prospectus, in connection with the Offering made hereby, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any other person. This Prospectus does not
constitute an offer to sell or solicitation of an offer to buy any securities
other than those to which it relates or an offer to any person in any
jurisdiction in which it is unlawful to make such an offer or solicitation.
Neither the delivery of this Prospectus nor any offer or sale made hereunder
shall, under any circumstances, create any implication that the information set
forth herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION........................................................... 4
PROSPECTUS SUMMARY.............................................................. 5
RISK FACTORS.................................................................... 8
USE OF PROCEEDS................................................................. 17
SELLING SECURITY HOLDER......................................................... 17
THE COMPANY..................................................................... 18
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS......................................... 33
SELECTED HISTORICAL FINANCIAL DATA.............................................. 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 35
MANAGEMENT...................................................................... 54
BENEFICIAL SECURITY OWNERSHIP................................................... 65
MARKET FOR US AIRWAYS GROUP'S COMMON STOCK...................................... 68
DESCRIPTION OF CAPITAL STOCK.................................................... 68
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS....................................... 98
UNDERWRITING.................................................................... 102
LEGAL MATTERS................................................................... 104
EXPERTS......................................................................... 104
</TABLE>
Index to Consolidated Financial Statements
3
<PAGE>
AVAILABLE INFORMATION
The Company complies with the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, as well as (i) at the Regional
Offices of the Commission at 7 World Trade Center, 13th Floor, New York, New
York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and (ii) the Commission's site on the World Wide Web,
located at http://www.sec.gov. Copies can be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Company's Common Stock and Series B Depositary
Shares are traded on the New York Stock Exchange. Such reports, proxy material
and other information concerning the Company may also be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
This Prospectus, which constitutes a part of a Registration Statement
filed by the Company with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"), omits certain information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits thereto for further information with respect to
the Company and the securities offered hereby. Statements contained herein
concerning provisions of any document are not necessarily complete, and each
such statement is qualified in its entirety by reference to the copy of such
document filed with the Commission.
---------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEPOSITARY SHARES AND
THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
The Company
US Airways Group, Inc. ("US Airways Group" or the "Company") is a holding
company whose principal operating subsidiary is US Airways, Inc. ("US Airways").
For the fiscal year ended December 31, 1996, US Airways Group had consolidated
operating revenue of $8.1 billion and net income of $263 million. US Airways
accounted for approximately 92% of such operating revenue and is the fifth
largest United States air carrier ranked by revenue passenger miles ("RPMs")
flown. A substantial portion of US Airways' operations are located in the
Eastern United States (that region of the United States east of the Mississippi
River). The Company's senior management is focusing on addressing US Airways'
high cost structure, particularly personnel costs, and has embarked on other
measures to improve US Airways' competitive position, including improving and
standardizing US Airways' product, revamping US Airways' market image and focus,
increasing international service and rationalizing US Airways' operating
aircraft fleet. The Company's senior management recently engaged in a series of
presentations to the Company's employees to explain and emphasize its view that
the Company must obtain a competitive cost structure in order to implement the
strategy of becoming an effective global competitor. See "The Company -
Strategy" for additional information concerning this strategy and the Company's
alternatives if such strategy cannot be implemented.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Securities Offered ............ (i) 6,000,000 Series F Depositary Shares, each
representing 1/200 of a share of Series F
Preferred Stock, (ii) 30,420 Series T-1
Depositary Shares, each representing 1/200 of a
share of Series T-1 Preferred Stock and (iii)
1,983,960 Series T-2 Depositary Shares, each
representing 1/200 of a share of Series T-2
Preferred Stock, all to be deposited with the
Depositary, and entitling the holder,
proportionately, to all the rights, preferences
and privileges of the BA Preferred Stock
represented thereby. See "Description of
Capital Stock." Until May 14, 1997, the Company
has certain rights to purchase the Series T-2
Preferred Stock underlying the Series T-2
Depositary Shares which may be offered hereby.
Accordingly, unless and until the Company
expressly declines to exercise such rights, or
such rights expire unexercised, no Series T-2
Depositary Shares will be issued and no sales
of Series T-2 Depositary Shares may be made
pursuant hereto.
Rank .......................... The BA Preferred Stock ranks, with respect to
the payment of dividends and upon distribution
of assets in liquidation, dissolution or
winding up, pari passu with the Company's
Series A Preferred Stock and senior to the
Company's Series B Preferred Stock and Common
Stock. See "Description of Capital Stock."
Dividends ..................... Cumulative at an annual rate of $3.50 per
Series F Depositary Share (equivalent to $700
per share of Series F Preferred Stock), and a
floating rate of 50 basis points over the LIBOR
rate for the Series T Depositary Shares,
payable in quarterly installments on the last
business day of February, May, August and
November of each year. See "Description of
Capital Stock."
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Conversion Rights ............ Each share of the BA Preferred Stock is
convertible at the option of the holder at any
time, unless previously redeemed, at the
respective rates of 515.2950 shares of Common
Stock for each share of Series F Preferred
Stock (equivalent to a conversion price of
approximately $19.41 per share of Common Stock
or a rate of 2.5765 shares of Common Stock
for each Series F Depositary Share), 487.8049
shares of Common Stock for each share of Series
T-1 Preferred Stock (equivalent to a conversion
price of $20.50 per share of Common Stock or a
rate of 2.4390 shares of Common Stock for each
Series T-1 Depositary Share) and 378.7879
shares of Common Stock for each share of Series
T-2 Preferred Stock (equivalent to a conversion
price of $26.40 per share of Common Stock or a
rate of 1.8939 shares of Common Stock for
each Series T-2 Depositary Share). The
conversion price with respect to the BA
Preferred Stock is subject to adjustment from
time to time upon the occurrence of certain
events. See "Description of Capital Stock." On
April 25, 1997, the reported last sale price of
the Common Stock on the New York Stock Exchange
was $29.375 per share.
Voting Rights ................. Subject to Foreign Ownership Restrictions (as
defined below), each share of BA Preferred
Stock is entitled to one vote for each share of
Common Stock into which it is convertible,
subject to adjustment in the manner set forth
in the applicable Certificate of Designation.
Except as otherwise provided in the applicable
Certificate of Designation, or by the
Certificate of Incorporation, or by law, the
shares of Common Stock, Series A Preferred
Stock, Series F Preferred Stock, Series T
Preferred Stock and any other shares of capital
stock of the Company at the time entitled
thereto shall vote together as one class on all
matters submitted to a vote of stockholders of
the Company. In addition, each series of the BA
Preferred Stock has the right to approve by a
two-thirds vote certain actions proposed to be
taken by the Company. Each holder of Depositary
Shares will be entitled to instruct the
Depositary as to the exercise of any voting
rights pertaining to the BA Preferred Stock
represented by such holder's Depositary Shares.
See "Description of Capital Stock."
Liquidation Preference ........ $50 per Depositary Share (equivalent to
$10,000 per share of BA Preferred Stock), plus
accrued and accumulated but unpaid dividends.
See "Description of Capital Stock."
Mandatory Redemption........... The Series F Preferred Stock must be redeemed
by the Company on January 21, 2008. The Series
T Preferred Stock must be redeemed by the
Company on June 10, 2008. Upon any such
mandatory redemption, the related Depositary
Shares will also be redeemed.
Redemption at the Option
of the Company ............... The BA Preferred Stock (and related Depositary
Shares) may be redeemed at the option of the
Company, in whole or in part, at specified
redemption prices plus accrued and unpaid
dividends at any time through the redemption
date. See "Description of Capital Stock. "
Proposed Listing .............. Application will be made to list the Depositary
Shares on the New York Stock Exchange.
Use of Proceeds ............... BritAir, a wholly-owned subsidiary of British
Airways, will receive all of the proceeds from
the sale of the Depositary Shares pursuant
hereto. The Company will not receive any of the
proceeds from the sale of the Depositary Shares
pursuant hereto. See "Use of Proceeds." The
Company will pay all filing fees required by
the Commission in connection with the
Offering.
</TABLE>
6
<PAGE>
Risk Factors ................. An investment in the BA Preferred Stock
involves certain risks. See "Risk Factors."
Summary Financial and Operating Data
Set forth below are certain selected historical financial and operating
data:(1)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in millions, except per share data and where
cents are indicated)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 8,142 $ 7,474 $ 6,997 $ 7,083 $ 6,686
Operating Income (Loss) $ 437 $ 322 $ (491) $ (96) $ (347)
Net Income (Loss) $ 263 $ 119 $ (685) $ (393) $(1,229)
Total Assets $ 7,531 $ 6,955 $ 6,808 $ 6,878 $ 6,595
Total Stockholders'
Equity (Deficit) (2) $ (584) $ (836) $ (897) $ (213) $ 44
Income (Loss) Per Common
Share - Primary $ 2.69 $ 0.55 $(12.73) $ (8.48) $(27.23)
Income (Loss) Per Common
Share - Fully Diluted $ 2.33 $ 0.55 $(12.73) $ (8.48) $(27.23)
Total Available Seat
Miles ("ASMs") 57,208 58,678 61,540 59,841 60,052
Total Revenue Passenger
Miles ("RPMs") 39,220 38,079 38,395 35,529 35,436
Total Revenue Per ASM(3)(4) 13.19c 11.80c 10.59c 11.04c 10.38c
Cost per ASM(3)(4)(5) 12.69c 11.40c 11.02c 11.12c 10.85c
Yield (Revenue Per RPM)(6) 17.46c 16.66c 15.61c 17.27c 16.49c
</TABLE>
c = cents
(1) Financial data has been summarized from the financial statements of US
Airways Group and should be read in conjunction with the Company's
Consolidated Financial Statements contained elsewhere in this Prospectus.
Operating and financial statistics, which include free frequent travelers
and the related miles flown, are based on US Airways' operations only.
(2) 1996, 1995 and 1994 do not include deferred dividends on preferred stock.
See Note 7(d) to the Company's Consolidated Financial Statements.
(3) Adjusted to exclude non-recurring and unusual items.
(4) Financial statistics for 1996, 1995, 1994 and 1993 exclude revenues and
expenses generated under the British Airways wet lease arrangement. See
Note 12 to the Company's Consolidated Financial Statements contained
elsewhere in this Prospectus. Financial statistics for 1996 also exclude
revenues and expenses generated under the US Airways Express capacity
purchase program (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information).
(5) Certain statistics have been recalculated to reflect expense
reclassifications.
(6) Scheduled service only (excludes charter flights).
7
<PAGE>
RISK FACTORS
Prospective purchasers of the Depositary Shares offered hereby should consider
carefully all of the information set forth in this Prospectus and, in
particular, should evaluate the following factors:
Company Related Considerations
Substantial Leverage; Limited Access to New Capital; Liquidity
US Airways Group is highly leveraged and, as of December 31, 1996, had long-
term debt and capital lease obligations of approximately $2.62 billion. In
addition, as of December 31, 1996, US Airways Group's minimum lease payment
obligations under noncancelable operating leases totaled approximately $3.52
billion for the years 1997 through 2001 and $5.84 billion thereafter. The
ability of US Airways Group to fulfill these payment obligations will depend
upon a variety of factors, including domestic and international pricing
environments, general economic conditions, regulatory changes, operating costs
and the ability of US Airways Group to attract new capital. However, there can
be no assurances that any of these factors will produce an outcome favorable to
US Airways Group. For US Airways, continued cost reductions (particularly in
personnel costs) are especially critical in order to enable US Airways to remain
competitive with airlines with lower operating costs and those with greater
financial strength.
At December 31, 1996, US Airways Group's unrestricted cash, cash equivalents
and short-term investments totaled approximately $1.59 billion. Factors beyond
US Airways Group's control, such as a downturn in the economy, adverse
regulatory changes, intensified industry fare wars, substantial increases in
aviation fuel prices or fuel taxes, adverse weather conditions, negative public
perception regarding safety or further incursions by low cost, low fare carriers
into US Airways' markets, could have a material adverse effect on US Airways
Group's prospects, liquidity, financial condition and results of operations.
Because US Airways Group is highly leveraged and currently has no bank credit or
receivables facilities in place and believes it has limited access to public
debt and equity markets, it is more vulnerable to these factors than are
financially stronger competitors or those with standby funding sources or better
access to such markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
Loss History
Although US Airways Group recorded net income of $263.4 million for the year
ended December 31, 1996 and $119.3 million for the year ended December 31, 1995,
it recorded net losses of $3.13 billion on revenues of $40.09 billion from 1989
through 1994.
US Airways Group's cumulative losses have resulted in a common stockholders'
deficit as of December 31, 1996 of $584.4 million. There may be investors and
lenders who have policies that limit or preclude their investment in or lending
to companies with a common stockholder's deficit and therefore US Airways
Group's common stockholder's deficit may affect its ability to obtain additional
financing in the future.
Deferral of Dividends by US Airways Group
The Company has not paid dividends on its Common Stock since the second
quarter of 1990. During August and October of 1996, the Company paid dividends
of $43.0 million and $40.0 million, respectively, on its outstanding senior
preferred stock (composed of the Company's outstanding Series A, Series F and
Series T preferred stock issuances; see "Description of Capital Stock" for a
description of each of the Company's outstanding preferred stock issuances).
Prior to these dividend payments, the Company had deferred the payment of
dividends on all of its outstanding preferred stock issuances effective with
dividend payments due September 30, 1994. At that time, the Company believed
that it was legally prohibited from paying dividends on or repurchasing or
redeeming its capital stock due to the provisions of Section 170 of the Delaware
General Corporation Law ("Delaware Law"). Delaware Law requires a company to
maintain a capital surplus in order to pay dividends on or repurchase or redeem
its capital stock. During 1996, the Company's capital
8
<PAGE>
surplus position, as calculated under Delaware Law and based on the Company's
Consolidated Balance Sheets, improved (became positive) and the Company made the
above-mentioned two dividend payments, totaling $83.0 million, to holders of its
senior preferred stock. On January 31, 1997, the Company made an additional
dividend payment of $50.0 million to holders of its senior preferred stock.
On March 26, 1997, the Company paid dividends of $34.8 million and $46.6
million, respectively, on its outstanding senior preferred stock and Series B
Preferred Stock. Following such payments, the Company was current with respect
to all dividends on its outstanding preferred stock. On March 31, 1997, the
Company paid its regular quarterly dividend on the Series A Preferred Stock.
The Company's Board of Directors has declared the regular quarterly dividend on
the Series B Preferred Stock and expects to pay such dividend on May 15, 1997.
Although the Company is no longer in arrears on any dividend payments with
respect to any of its outstanding preferred stock, there can be no assurance
that the Company will be able to maintain or further increase its capital
surplus or that the Company will continue to be current with respect to dividend
payments on its preferred stock or have the ability to redeem or repurchase its
stock. The creation of capital surplus, based on the Company's consolidated
balance sheet, is primarily dependent on the Company's financial results.
High Personnel Costs
Personnel costs represented 41.5% of US Airways' operating costs for 1996. US
Airways currently has the highest unit labor costs in the domestic airline
industry (see additional information regarding Personnel costs under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Personnel Costs - Continued Negotiations with Organized Labor
Groups"). The Company remains committed to obtaining a significant reduction in
US Airways' unit labor costs and believes that US Airways' long-term financial
viability depends on its success in further reducing its cost of operations.
Uncertain Status of Labor Agreements
During the Spring of 1995, the Company reached agreements-in-principle with
each of US Airways' major unions regarding concession agreements involving wage
and benefit reductions, improved productivity and other cost savings totaling
approximately $500 million annually. However, those tentative agreements were
conditioned on, among other things, ratification by the members of each labor
group and the approval of the Company's stockholders and the Company's and US
Airways' boards of directors. These agreements-in-principle provided for wage
and other concessions in exchange for equity participation in the Company,
profit sharing and representation on the Company's board of directors for US
Airways' labor groups. In July 1995, the membership of the Association of Flight
Attendants (the "AFA"), which represents US Airways' flight attendants, voted
not to ratify its agreement-in-principle. The Airline Pilots Association
("ALPA"), which represents US Airways' pilots, made significant additional
demands which were unacceptable and negotiations were thereafter terminated by
the Company.
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<PAGE>
The following table presents the status of US Airways' labor agreements as of
December 31, 1996:
<TABLE>
<CAPTION>
Approximate Date Expiration Date
Number of Contract of "No-Furlough"
Union Class or Craft Employees Amendable Clause
- ----- -------------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
AFA flight attendants 7,800 01/01/97 (2) 12/31/96
ALPA pilots 4,800 05/01/96 (2) 06/30/97
IAM mechanics and related employees 7,600 10/01/95 (2) 09/30/95
IAM fleet service employees 5,700 (1) N/A (3) N/A
TWU flight crew training instructors 50 10/10/96 (2) N/A
TWU flight simulator engineers 60 08/02/97 N/A
TWU dispatch employees 160 09/01/96 (2) N/A
</TABLE>
(1) Estimated number of employees who will be covered under this new contract.
(2) Currently in negotiations.
(3) Initial contract in negotiation.
The Company is unable to predict how long it will take to conclude
collective bargaining talks with respect to labor contracts that are currently
amendable or the eventual outcome of these discussions. Such negotiations
traditionally take one or more years from the time a contract becomes amendable,
as described in the following paragraph.
Under the Railway Labor Act (the "RLA"), a labor contract does not
"expire," but rather becomes amendable on a certain date. Thirty days prior to
that date, either party to the contract may give notice to the other of its
intention to amend the contract, at which point the collective bargaining
process begins. If, after a period of negotiations, the parties cannot reach an
agreement, a federal mediator from the National Mediation Board ("NMB") is
brought in to assist. The process of mediation continues until the NMB
determines, at its sole discretion, that the parties have reached an impasse. At
that point, the parties enter a thirty-day "cooling-off" period before either
party may employ so-called "self-help" (e.g., the imposition of contract changes
or a lockout by the company or a strike by the union). While in negotiations and
mediation, both parties must observe the status quo.
US Airways' current labor contract with ALPA provides that in the event
of a "change of control" of US Airways Group or US Airways, ALPA will have the
right to extend the duration of the contract for one, two or three years at its
option beyond the amendable date of the agreement with across-the-board wage
increases of 4.5% on each of the amendable dates through April 30, 1999. A
"change of control" is defined as a single transaction or multi-step related
transactions through which (i) securities which constitute and/or are then
currently exchangeable into, exercisable for or convertible into 50% or more of
the outstanding Common Stock (and Common Stock then currently issuable upon the
exchange, exercise or conversion of securities) and/or (ii) 50% or more of the
value of the assets of US Airways Group or US Airways, are acquired or held by a
single purchaser or a group of purchasers acting in concert.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for additional information related to the Company's
current negotiations with US Airways' organized labor groups.
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<PAGE>
Possibility of Further Unionization
During 1994, certain unions engaged in efforts to unionize US Airways'
fleet service employees. The RLA governs, and the NMB has jurisdiction over,
campaigns to unionize workers. After the International Association of Machinists
and Aerospace Workers (the "IAM") won a runoff election, on July 22, 1994 the
NMB certified the IAM to represent the fleet service employees. Under the RLA,
which governs labor relations in the airline industry, US Airways is obligated
to negotiate a collective bargaining agreement with the IAM governing the terms
and conditions of employment for the fleet service employees. This obligation
does not require US Airways to agree to any particular term or condition sought
by the IAM. As the table above indicates, US Airways and the IAM are currently
negotiating an initial contract covering US Airways' fleet service employees.
In April 1996, the IAM and the Communications Workers of America ("CWA")
filed applications with the NMB requesting that an election be held among US
Airways' passenger service employees. On November 12, 1996, the NMB issued a
decision holding that the CWA, but not the IAM, had submitted a sufficient
number of authorization cards to warrant an election. The NMB mailed ballots to
eligible passenger service employees and, after counting the ballots on January
30, 1997, found the CWA did not receive the majority vote required for
certification. The CWA filed a challenge to the election results on February 3,
1997. US Airways cannot predict the outcome of this challenge.
Proposed Alliance Between British Airways and American; Other British Airways
Developments
On June 11, 1996, British Airways and American Airlines, Inc.
("American") announced a proposed alliance to jointly market, price and manage
their North Atlantic airline services, effective April 1, 1997, subject to U.S.
and international approvals. The joint services would carry the designator codes
of both airlines and each would code-share beyond the other's gateways. The two
airlines have also indicated that they intend to act cooperatively in other
areas, such as marketing, sales, facilities use and cargo. British Airways and
American are seeking antitrust immunity in connection with approval of their
alliance. Certain competition authorities in the U.S. and Europe have made
inquiries into the proposed alliance and several airlines serving the North
Atlantic have raised very strong objections to the proposed alliance.
On July 30, 1996, the Company and US Airways initiated a lawsuit in the
U.S. District Court for the Southern District of New York against British
Airways, BritAir, American and American's parent company, AMR Corporation. The
Company and US Airways claim that British Airways, in pursuit of an alliance
with American, is responsible for breaches of fiduciary duty to the Company and
US Airways and violated certain provisions of the January 21, 1993 Investment
Agreement (the "Investment Agreement") between the Company and British Airways.
The lawsuit also claims that the defendants are in violation of U.S. antitrust
laws that prohibit conduct that harms competition. Although the defendants filed
motions to dismiss the lawsuit following the filing of the complaint, these
motions became superseded on March 5, 1997 when the Company filed an Amended
Complaint with the Court based on information gathered in the pre-trial
discovery process. The defendants filed new motions to dismiss the Amended
Complaint on March 28, 1997.
The Company is unable to predict at this time the ultimate outcome of
this lawsuit.
In light of the proposed alliance between British Airways and American
(the "BA/AA Alliance"), a critical element of US Airways' strategy to achieve
sustained financial health and growth in international and domestic markets is
the establishment of competitive service to London's Heathrow Airport
("Heathrow"). The BA/AA Alliance is currently being reviewed by regulatory
authorities in the United Kingdom, the United States and Europe. The Company
believes that it is likely that British Airways and American will be forced to
divest slots and ground facilities at Heathrow in order for regulatory
authorities to approve the BA/AA Alliance.
Based on US Airways' extensive route structure in the Eastern U.S., the
Company believes that it is uniquely situated to receive slots and ground
facilities at Heathrow which are divested by British Airways or American as part
of regulatory approval of the BA/AA Alliance. However, many airlines, including
competitors of US Airways, have appealed to the regulatory authorities to
receive such slots and ground facilities at Heathrow.
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<PAGE>
The Company is unable to determine whether or when (a) the BA/AA Alliance
will be approved or (b) it will receive any slots or ground facilities at
Heathrow. In the event (a) regulatory authorities do not approve the BA/AA
Alliance or (b) US Airways does not receive sufficient slots and ground
facilities at Heathrow in connection with the regulatory approval of the BA/AA
Alliance to support the Company's proposed level of service, the Company's
international strategy will be constrained by its lack of access to Heathrow.
However, the Company does not believe that US Airways' lack of an international
code share partner will have a material impact on its financial condition or
results of operations.
Geographical Concentration
A substantial portion of US Airways' operations are to and from or among
cities in the eastern United States. Approximately 85% of US Airways' flights
and 58% of its capacity (available seat miles or "ASMs") are represented by
intra-east coast flying. Accordingly, US Airways is particularly susceptible to
regional factors such as severe weather, regionalized downturns in the economy
and air traffic control problems. For example, US Airways' revenues were
adversely affected by approximately $55 million as a result of the severe winter
weather during January 1996 and the partial federal government shutdowns in the
first quarter of 1996.
Boeing
During October 1996, US Airways advised The Boeing Company ("Boeing") and
Rolls Royce Plc ("Rolls Royce") that it does not plan to accept delivery of the
eight Boeing 757-200 aircraft US Airways presently has on firm order. Consistent
with a written statement from Boeing extending the scheduled delivery dates of
the Boeing 757s from 1998 to 1999, US Airways did not make a progress payment to
Boeing of approximately $3 million which was, prior to such extension, scheduled
to be due on November 1, 1996. On November 7, 1996, Boeing alleged that US
Airways was in default of the 757 purchase agreement for failing to make the
November 1 payment. Boeing has further alleged, among other things, that US
Airways has repudiated a purchase agreement relating to 40 737-Series aircraft
scheduled for delivery commencing in 2003. Boeing has purported to terminate
both such 757-200 and 737-Series purchase agreements, an action which US Airways
believes is not supported by law or the facts, and has claimed almost $450
million as damages for US Airways' breach of such agreements. US Airways
subsequently advised Boeing, among other things, that US Airways rejects
Boeing's asserted legal basis for termination of such agreements. In addition,
US Airways stated that it would hold Boeing responsible for any damages incurred
as a result of Boeing's unlawful termination and demanded immediate return of
all payments made by US Airways in furtherance of the 737-Series purchase
agreement, together with interest from the date of payment. US Airways also
expressed its belief that Boeing is legally committed to pursue contract
resolutions in good faith. Notwithstanding the formal legal positions of the
parties, both sides have expressed a desire to resolve this dispute on a
mutually satisfactory basis. US Airways cannot predict whether Boeing will seek
to exercise remedies against US Airways and if so, whether the effect on US
Airways' financial condition or results of operations would be material. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Revenue Enhancement and Cost Reduction Initiatives" and "- Aircraft
Fleet and Related Matters" for additional information.
Airbus
As discussed below under "The Company - Strategy - Rationalizing US
Airways' Operating Aircraft Fleet," US Airways has entered into an agreement
with an affiliate of aircraft manufacturer Airbus Industrie ("Airbus") for the
acquisition of up to 400 Airbus aircraft; however, this agreement is contingent
upon the Company achieving a competitive cost structure. If an aircraft
acquisition agreement with Airbus is consummated, the Company's estimate of
short-term and long-term capital expenditures and/or lease commitments may be
materially affected. The Company has not yet determined whether consummation of
the Airbus transaction and the disposition of the aircraft intended to be
replaced with Airbus Aircraft would require the Company to recognize an
"impairment loss" in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of.
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<PAGE>
Industry Related Considerations
General Industry Conditions
Demand for air transportation historically has tended to mirror general
economic conditions. US Airways expects that the airline industry will remain
extremely competitive for the foreseeable future, primarily due to the dramatic
change which has occurred in industry pricing and has resulted in generally
lower fares.
Significant Impact of Low Cost, Low Fare Competition
Most of the Company's airline subsidiaries operate in competitive markets
and experience competition of varying degrees with other air carriers and with
all forms of surface transportation. US Airways competes with at least one major
airline on most of its routes between major cities. Vigorous price competition
exists in the airline industry, and competitors have frequently offered sharply
reduced discount fares in many of these markets. Airlines, including US Airways,
use discount fares and other promotions to stimulate traffic during normally
slack travel periods, to generate cash flow and to increase relative market
share in selected markets. Discount and promotional fares are often subject to
various restrictions such as minimum stay requirements, advance ticketing,
limited seating and refund penalties. US Airways has often elected to match
discount or promotional fares initiated by other air carriers in certain markets
in order to compete in those markets. For example, Continental Airlines, Inc.
("Continental") created a high frequency, low fare product called "Continental
Lite." By late 1994, US Airways competed with Continental in primary and
secondary markets from which US Airways then generated 46% of its passenger
revenue with fare reductions of up to 70% in certain markets. Continental
abandoned its Continental Lite strategy in 1995 and fare levels have somewhat
recovered. Nonetheless, US Airways Group does not believe that there has been a
reduction in the public demand for generally lower air fares.
The Company recorded net income of $263.4 million for 1996, net income of
$119.3 million for 1995 and a net loss of $684.9 million for 1994. This upward
trend is primarily attributable to favorable capacity and pricing trends in
markets served by the Company's airline subsidiaries, continued stable domestic
economic conditions and the positive influence of US Airways' revenue
enhancement and cost-reduction initiatives. The Company's results for 1996,
although the best in its history, were dampened by substantial year-over-year
increases in Personnel costs and Aviation fuel expenses. The factors
contributing to the Company's improved financial performance for 1996, as well
as changes in certain of the Company's operating expenses such as Personnel
costs and Aviation fuel, are discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Despite the Company's improved financial results for 1996, the
competitive threat posed by low cost, low fare competition presents a serious
challenge to the Company to lower US Airways' cost structure to ensure long-term
financial viability. US Airways currently has low cost, low fare competition
overlapping approximately 43% of its traffic base, up from approximately 40% in
early 1995.
As discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - US Airways' Current Competitive Position -
Low Cost, Low Fare Threat," "Delta Express," a low cost, low fare product
offered by Delta Air Lines Inc. ("Delta"), was introduced on October 1, 1996,
and Southwest Airlines, Inc. ("Southwest") began service to and from Providence,
Rhode Island on October 27, 1996. Delta Express currently operates between
Florida and 10 Northeast and Midwest cities. Southwest's service at Providence,
which is approximately 60 miles from Boston, has resulted in some passenger
traffic being drawn from Boston's Logan International Airport. US Airways and
its regional airline affiliates have substantial operations at Boston's Logan
International Airport. Southwest, an air carrier centered around low cost
operations and a low fare structure, first entered Northeast U.S. markets during
1993 by adding service to and from Baltimore/Washington International Airport
("BWI"). Since that time, Southwest has expanded service at BWI, initiated
service to Florida from BWI (among other locations), launched intra-Florida
service and, as mentioned above, added service to and from Providence. BWI is
one of US Airways' hub airports and Northeast-Florida service forms one of US
Airways' primary leisure markets. The Company estimates that US Airways' direct
route overlap with Delta Express and Southwest is currently
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<PAGE>
3.9% and 2.8%, respectively (as measured by ASMs). However, the Company
anticipates that US Airways' route overlap with both competitors, as well as the
intensity of the competitive pressure on US Airways, will increase if Delta
Express follows its planned doubling of operations in 1997 and Southwest
allocates additional resources to its new Northeast U.S. operations.
The Company views Southwest's continued expansion into the Eastern
U.S. and Delta's ability to establish a low cost, low fare operation as serious
competitive threats. Both Southwest and Delta Express have a significant cost
advantage over US Airways.
As mentioned under "Risk Factors - Company Related Considerations -
Geographical Concentration" above, Eastern U.S. operations comprise a
substantial portion of US Airways' current route structure. Although a
competitive strength in some regards, the regional concentration of significant
operations results in US Airways being susceptible to changes in certain
regional conditions that may adversely affect the Company's financial condition
and results of operations. The combination of a high cost structure and the
regional concentration of operations has also contributed to US Airways being
particularly vulnerable to competition from air carriers or operations centered
on low costs of operations and a low fare structure. US Airways has typically
responded to the entry of a low cost, low fare competitor into its markets by
matching fares and increasing the frequency of service in related markets,
generally with the result of diluting US Airways' yield (Passenger
transportation revenue per RPM) in these markets. In some cases US Airways has
responded by reducing service in affected markets.
Aviation Fuel
All petroleum product prices continue to be subject to unpredictable
economic, political and market factors. Also, the balance among supply, demand
and price has become more reactive to world market conditions. Accordingly, the
price and availability of aviation fuel, as well as other petroleum products,
continues to be unpredictable. Based on consumption for 1996, each one cent per
gallon increase in US Airways' cost of aviation fuel translates into an increase
of approximately $11 million in US Airways' annual aviation fuel expense.
Because aviation fuel costs constitute a major expenditure for US Airways,
significant increases in aviation fuel costs could materially and adversely
affect US Airways' financial condition and results of operations.
US Airways continues to adjust its aviation fuel purchasing strategy
to take advantage of the best available prices while attempting to ensure that
supplies are secure. In addition, US Airways has entered into agreements to
hedge the price of a portion of its aviation fuel needs, which may have the net
effect of increasing or decreasing US Airways' Aviation fuel expense (see Note 2
to the Company's Consolidated Financial Statements). See "Risk Factors -
Industry Related Considerations - Regulatory Matters" for information related to
Federal taxes on aviation fuel.
The following table sets forth statistics about US Airways' aviation
fuel consumption and cost for each of the last four fiscal years:
<TABLE>
<CAPTION>
Average Percentage
Fiscal Gallons Total Cost Per Of Operating
Year Consumed Cost (1) Gallon (1) Expenses (2)
---- -------- -------- ---------- ------------
(Millions) (Millions)
<S> <C> <C> <C> <C>
1996 1,107 $780.6 $0.71 10.8%
1995 1,137 $646.0 $0.57 9.6%
1994 1,205 $672.5 $0.56 9.9%
1993 1,161 $700.7 $0.60 10.5%
</TABLE>
(1) Cost includes the base cost of aviation fuel, fuel taxes and transportation
charges.
(2) Operating expenses have been adjusted to exclude non-recurring and unusual
items and expenses generated under the British Airways wet lease
arrangements and the US Airways Express capacity purchase program. See "The
Company - Operating Statistics" below for additional information.
14
<PAGE>
Regulatory Matters
US Airways operates under a certificate of public convenience and necessity
issued by the U.S. Department of Transportation ("DOT"). Such certificate may be
altered, amended, modified or suspended by the DOT if the public convenience and
necessity so require, or may be revoked for intentional failure to comply with
the terms and conditions of a certificate. Airlines are also regulated by the
United States Federal Aviation Administration ("FAA"), a division of the DOT,
under Subtitle VII of 49 U.S.C. 40101 et seq. (the "Act"), primarily in the
areas of flight operations, maintenance, ground facilities and other technical
matters. Pursuant to regulations promulgated under the Act, US Airways has
established an FAA-approved maintenance program for each type of aircraft
operated by US Airways that provides for the ongoing maintenance of such
aircraft, ranging from frequent routine inspections to major overhauls.
The DOT allows local airport authorities to implement procedures designed to
abate special noise problems, provided such procedures do not unreasonably
interfere with interstate or foreign commerce or the national transportation
system. Certain airports, including the major airports at Boston, Washington,
D.C. (National), Chicago, Los Angeles, San Diego and San Francisco, have
established airport restrictions to limit noise, including restrictions on
aircraft types to be used and limits on the number of hourly or daily operations
or the time of such operations. In some instances these restrictions have caused
curtailments in services or increases in operating costs and such restrictions
could limit the ability of US Airways to expand its operations at the affected
airports. Authorities at other airports may consider adopting similar noise
regulations.
In the last several years, the FAA has issued a number of maintenance
directives and other regulations relating to, among other things, retirement of
older aircraft, collision avoidance systems, airborne windshear avoidance
systems, noise abatement and increased inspections and maintenance procedures to
be conducted on older aircraft.
Several airports have recently sought to increase substantially the rates
charged to airlines, and the ability of airlines to contest such increases has
been restricted by federal legislation, DOT regulations and judicial decisions.
In addition, legislation which became effective June 1, 1992 allows public
airports to impose passenger facility charges of up to $3 per departing or
connecting passenger at such airports. With certain exceptions, airlines pass
these charges on to passengers.
The FAA has designated New York's John F. Kennedy and LaGuardia, Chicago
O'Hare and Washington National airports as "high density traffic airports" and
has limited the number of departure and arrival slots at those airports.
Currently, slots at the high density traffic airports may be voluntarily sold or
transferred between carriers. The DOT has in the past reallocated slots to other
carriers and reserves the right to withdraw slots. Various amendments to the
slot system, proposed from time to time by the FAA, members of Congress and
others, could, if adopted, significantly affect operations at the high density
traffic airports or expand slot controls to other airports. Certain of such
proposals could restrict the number of flights, limit the ownership
transferability of slots, increase the risk of slot withdrawal, or otherwise
decrease the value of slots. US Airways holds a substantial number of slots at
LaGuardia and Washington National. These slots are valuable assets and important
in US Airways' overall business strategy. US Airways cannot predict whether any
of these proposals will be adopted.
The availability of international routes to air carriers is regulated by
agreements between the U.S. and foreign governments. The U.S. has in the past
generally followed the practice of encouraging foreign governments to accept
multiple air carrier designation on foreign routes, although certain countries
have sought to limit the number of air carriers. Foreign route authorities may
become less valuable to the extent that the U.S. and other countries adopt "open
skies" policies liberalizing entry on international routes. In February 1995,
the U.S. and Canada reached a formal agreement which deregulates airline
services between Canada and the United States and provides that Canadian
airlines have immediate "open skies" access to the United States and that U.S.
airlines will have limited new route rights to Vancouver and Montreal for two
years and to Toronto for three years and open skies thereafter. This agreement
has increased passenger traffic between the U.S. and Canada. The agreement
provided for two new Toronto designations in the first year. In October 1995,
the DOT granted to US Airways route authority for non-stop service between
Pittsburgh and Toronto. US Airways had previously operated this route under
temporary exemption authority. On May 1, 1995, the DOT granted to US Airways
temporary exemption authority to begin twice-daily round-trip nonstop service
between Washington National and Toronto once a Canadian
15
<PAGE>
air carrier entered that market. Air Canada initiated service on that route in
June 1995 and US Airways began service in the same month. US Airways received
permanent route authority in 1996. The route is open to all carriers in 1998.
In October 1995, the DOT granted US Airways a two-year exemption route
authority to operate between Madrid, Spain and both Philadelphia and Boston. US
Airways commenced service from Philadelphia to Madrid in June 1996. In February
1996, the DOT issued a show cause order awarding US Airways authority to
institute service to Rome, Italy from Philadelphia with through service from Los
Angeles. US Airways inaugurated its service to Rome in June 1996. In February
1996, US Airways received final approval from the DOT to institute service to
Munich, Germany from Philadelphia. US Airways inaugurated its Munich service in
May 1996. US Airways has also filed with the DOT to serve London's Heathrow
Airport from Boston, Charlotte, Philadelphia and Pittsburgh.
The Federal excise tax on domestic air transportation was reinstated on August
27, 1996, for tickets sold for travel before January 1, 1997. This tax, 10% of
the cost of an airline ticket, had previously expired on January 1, 1996. The
Company believes that its Passenger transportation revenues were stimulated
during the period the tax was not in effect - the absence of the tax effectively
reduced the cost of air travel. The Company cannot estimate the dollar impact of
the tax expiration on its Passenger transportation revenues during the period
the tax was not collected due to the complexity and number of factors that
contribute to the Company's performance in this area. This tax expired again on
January 1, 1997. On February 28, 1997, President Clinton signed legislation
reinstating the tax for tickets sold beginning March 7, 1997 through September
30, 1997. Reinstatement of this tax, which could effectively increase the cost
of air transportation, may dampen demand for air transportation which, in turn,
may have a material adverse effect on the Company's financial condition and
results of operations.
The Company's airline subsidiaries became obligated to pay the $.043 per
gallon Federal Excise Tax on transportation fuels on October 1, 1995. Airlines
had a two-year exemption from this tax, which became effective during 1993.
Attempts to either rescind this tax or reinstate the airline exemption continue,
although these efforts have not been successful to date. US Airways cannot
predict the ultimate outcome of future attempts to either rescind the tax or
reinstate the airline exemption. US Airways recognized expenses of $43.0 million
and $11.9 million as a result of this tax during 1996 and 1995, respectively.
The FAA has proposed new regulations that would require flight data recorders
that measure more flight parameters than most original equipment flight data
recorders. The proposed regulations, subject to DOT approval, would require the
upgraded flight data recorders to be installed within four years. The proposal,
as drafted, would affect US Airways' entire operating fleet. The Company
estimates that the proposed regulations, if adopted, would cost US Airways
approximately $20 million over the four-year period. The Company cannot predict
whether or when the proposed regulations will be adopted or if the proposed
regulations will result in expenditures consistent with the Company's current
estimate.
Following the July 1996 accident involving a Trans World Airlines, Inc.
("TWA") aircraft and speculation that the cause of the accident may have been
sabotage, President Clinton ordered new security measures related to passenger,
baggage and cargo screening, particularly with respect to international
operations. The increased security measures have resulted in an increase in the
Company's operating expenses, although the dollar effect of the new security
measures is not material. The President also formed a special committee which
reviewed aviation safety and airport security, as well as the air traffic
control system. The committee released its final report on February 12, 1997.
The Committee made several recommendations in the areas of safety, air traffic
control and security. The Company is unable to predict whether any of the
recommendations will be adopted, and if adopted, their impact on the Company's
financial condition and results of operations. Further increases in government-
mandated security measures may have an adverse effect on the Company's results
of operations and financial condition depending on the ability of US Airways and
its regional affiliates to pass through any new Federal taxes, surcharges or
additional operating expenses to customers. Any effective increase in the cost
of air transportation may dampen passenger and cargo traffic levels which could
have a material adverse effect on the Company's financial condition and results
of operations.
Many aspects of US Airways' operations are subject to increasingly stringent
federal, state and local laws protecting the environment. Future regulatory
developments could affect operations and increase operating costs in the airline
industry, including for US Airways.
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Transaction Related Considerations
Ranking of BA Preferred Stock/Structural Subordination
In the event of any liquidation, dissolution or winding up of the Company,
holders of the BA Preferred Stock will be entitled to receive out of the assets
of the Company available for distribution to stockholders liquidating
distributions in the amount of $10,000 per share (equivalent to $50 per
Depositary Share), plus accrued and accumulated but unpaid dividends to the date
of final distribution. The BA Preferred Stock ranks pari passu with the Series
---- -----
A Preferred Stock and senior to the Series B Preferred Stock and Common Stock.
Payment of the principal of, premium, if any, and interest on any debt
obligations of the Company will be made prior to any payment on any outstanding
equity securities of the Company, including shares of the Series A Preferred
Stock, the Series B Preferred Stock, the BA Preferred Stock and the Common
Stock. At December 31, 1996, $2.62 billion (including capitalized lease
obligations) aggregate principal amount of long-term debt obligations of the
Company was outstanding. See "Description of Capital Stock."
Because the Company is a holding company, the BA Preferred Stock is
effectively subordinated to all existing and future liabilities of the Company's
subsidiaries, including US Airways. The right of the Company, and the rights of
its creditors and stockholders (including holders of the BA Preferred Stock), to
participate in the distribution of the assets of any subsidiary of the Company,
including US Airways, upon any liquidation, dissolution, winding up or
reorganization of such subsidiary, or otherwise, will be subject to the prior
claims of creditors (including trade creditors) of such subsidiary, except to
the extent the Company itself may be a creditor with recognized claims against
such subsidiary, in which case the claims of the Company would still be
subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company. See
"Description of Capital Stock."
Absence of Prior Market; Volatility of Stock Price.
Prior to the Offering, there has been no public market for the BA Preferred
Stock or the Depositary Shares. Although application is expected to be made for
the Depositary Shares to be listed on the New York Stock Exchange, there can be
no assurance that an active or liquid trading market in the Depositary Shares
will develop upon completion of the Offering, or if developed, that it will
continue. The market price of the Depositary Shares could be subject to
significant fluctuations in response to the Company's operating results and
other factors, and there can be no assurance that the market price of the
Depositary Shares will not decline below the initial public offering price. In
addition, the stock market has from time to time experienced extreme price and
volume volatility. These fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded and may adversely
affect the market price of the Depositary Shares.
USE OF PROCEEDS
BritAir, a wholly-owned subsidiary of British Airways, will receive all of the
proceeds from the sale of the Depositary Shares pursuant hereto. The Company
will not receive any of the proceeds from the sale of the Depositary Shares
pursuant hereto.
SELLING SECURITY HOLDER
BritAir, a Delaware corporation and a wholly-owned subsidiary of British
Airways, owns 100% of the outstanding shares of Series F Preferred Stock, Series
T-1 Preferred Stock and Series T-2 Preferred Stock. BritAir is offering to sell
all of its interest in such shares pursuant to the Offering contemplated hereby,
subject in the case of the Series T-2 Preferred Stock to the Company's right to
purchase such shares of Series T-2 Preferred Stock. British Airways' and
BritAir's financial advisor in connection with the transactions culminating in
the Offering is Gleacher NatWest Inc.
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THE COMPANY
US Airways Group is a corporation organized under the laws of the State of
Delaware. The Company's executive offices are located at 2345 Crystal Drive,
Arlington, Virginia 22227 (telephone number (703) 872-5306). Effective February
21, 1997, USAir Group, Inc. changed its name to US Airways Group, Inc. and
USAir, Inc. ("USAir") changed its name to US Airways, Inc. USAir's operations
are now conducted under the name US Airways.
US Airways Group's primary business activity is ownership of all the common
stock of US Airways, Allegheny Airlines, Inc. ("Allegheny"), Piedmont Airlines,
Inc. ("Piedmont"), PSA Airlines, Inc. ("PSA"), USAir Fuel Corporation, USAir
Leasing and Services, Inc. and Material Services Company, Inc. US Airways'
accounts include its wholly-owned subsidiary USAM Corp. ("USAM"). The OR Group,
Inc. (the "OR Group") was a wholly-owned subsidiary of US Airways Group
incorporated in February 1996 and dissolved in the fourth quarter of 1996. The
OR Group provided resource allocation consulting services and decision-making
support systems to US Airways, which assumed these activities upon OR Group's
dissolution.
US Airways, a certificated air carrier engaged primarily in the business of
transporting passengers, property and mail, is the Company's principal operating
subsidiary, and accounted for approximately 92% of US Airways Group's operating
revenues for the fiscal year ended December 31, 1996. US Airways enplaned 56.9
million passengers in 1996 and is the fifth largest United States air carrier
ranked by revenue passenger miles ("RPMs") flown. As of December 31, 1996, US
Airways provided regularly scheduled jet service through 110 airports to
approximately 145 cities in the continental U.S., Canada, Mexico, France,
Germany, Italy, Spain and the Caribbean. US Airways' executive offices are
located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone number (703)
872-7000).
A substantial portion of US Airways' operations are located in the Eastern
United States (that region of the United States east of the Mississippi River).
US Airways' primary connecting hubs are located at the Pittsburgh,
Charlotte/Douglas, Philadelphia and BWI Airports, and US Airways also maintains
significant operations at major airports in Boston, New York City (LaGuardia
Airport or "LaGuardia") and Washington, D.C.'s National Airport ("Washington
National"). Measured by departures, US Airways is the largest or second largest
airline at each of the foregoing airports and is the predominant air carrier in
many smaller eastern cities, such as Albany, Buffalo, Hartford, Providence,
Richmond, Rochester and Syracuse. In addition, US Airways is the leading airline
from the Northeast U.S. to Florida. US Airways currently has approximately 85%
of its daily departures and approximately 58% of its ASMs deployed in the
Eastern U.S.
US Airways code shares with ten regional airlines operating under the "US
Airways Express" trade name (formerly doing business as "USAir Express"). US
Airways Group owns three of the US Airways Express air carriers - Piedmont,
Allegheny, and PSA. Under a code share arrangement one air carrier places its
designator code and sells tickets on the flights of another air carrier (its
code share partner). Through service agreements US Airways provides reservations
and, at certain stations, ground support services, in return for service fees.
The US Airways Express network feeds traffic into US Airways' route system at
several points, including its major hub operations at Pittsburgh, Charlotte,
Philadelphia and BWI. As of December 31, 1996, US Airways Express served 174
airports in the United States, Canada and the Bahamas, including 72 also served
by US Airways. During 1996, US Airways Express air carriers enplaned 10.6
million passengers (including 5.6 million passengers enplaned by Piedmont, PSA
and Allegheny), approximately half of whom connected to US Airways flights.
During the fourth quarter of 1996, US Airways began purchasing all of the
capacity generated by the Company's three wholly-owned regional airlines in
exchange for all of their transportation revenues. The program, which has no
effect on the Company's Consolidated Financial Statements, is discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
US Airways also has a management agreement and code shares with Shuttle, Inc.
operating as "US Airways Shuttle" (formerly doing business as "USAir Shuttle").
The US Airways Shuttle operates frequent service between LaGuardia and Boston
and between LaGuardia and Washington National. In 1992, US Airways reached an
agreement (the "Management Agreement") with the consortium of banks (the
creditors of the former Trump Shuttle) which own Shuttle, Inc. (the "Shuttle")
to manage the Shuttle's operations under the name "USAir" or any other name the
Company determines for a period of up
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to ten years. US Airways Group recently exercised its right to commence a
procedure to value the Shuttle in accordance with standards set forth in the
agreement between US Airways Group, lenders to the Shuttle and stockholders of
the Shuttle. Following the establishment of such value, US Airways Group has an
option to purchase the Shuttle at the established value. If US Airways Group
declines to purchase the Shuttle, US Airways Group will continue to have a right
of first refusal with respect to a purchase of the stock or assets of the
Shuttle. Initiation of the valuation procedure does not represent a commitment
by US Airways Group to purchase the Shuttle and there can be no assurance that
any such purchase will occur. Any decision by US Airways Group to purchase the
Shuttle either through the valuation procedure or the right of first refusal
will be made based on price and related business considerations.
The Company's business has historically been seasonal and its second quarter
financial results have been its strongest due to US Airways' combination of
business traffic and North-South leisure traffic in the Eastern U.S. during that
period.
Strategy
In January 1996, the Company's and US Airways' boards of directors elected
Stephen M. Wolf as Chairman of the Board and Chief Executive Officer. During
February 1996, Rakesh Gangwal was elected President and Chief Operating Officer
and Lawrence M. Nagin was elected Executive Vice President - Corporate Affairs
and General Counsel of both companies. The new senior management team is
focusing on addressing US Airways' high cost structure, particularly with
respect to personnel costs, and has embarked on other measures to improve US
Airways' competitive position in today's highly competitive airline industry
environment. These other measures include improving and standardizing US
Airways' product, revamping US Airways' market image and focus, increasing
international service and rationalizing US Airways' operating aircraft fleet.
Addressing US Airways' High Cost Structure - US Airways has the highest cost
structure of all major domestic air carriers. US Airways has been able to reduce
costs in certain expense categories, but has not been successful in its efforts
to reduce costs in its largest expense category - Personnel costs. The Company
is committed to obtaining a significant reduction in US Airways' unit labor
costs (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -Personnel Costs - Continued Negotiations with Organized
Labor Groups" for additional information related to the Company's ongoing
negotiations with US Airways' organized labor groups). With respect to non-labor
cost reductions, for example, US Airways imposed limits on the base commissions
it pays travel agents for domestic air fares beginning in the first quarter of
1995. US Airways has experienced cost savings due to the new commissions limits
(see also "The Company - Legal Proceedings").
Improving and Standardizing US Airways' Product - US Airways' recent name change
signals the expanding reach of US Airways' route structure and its changing
image. Coinciding with the name change, the livery of US Airways' aircraft is
being enhanced and aircraft interiors upgraded and standardized. New products
and features, such as a new international business class called "Envoy Class"
and personal in-seat video systems, will be added in an effort to attract more
business travelers and improve US Airways' image in the marketplace. US Airways
is in the process of equipping all of its aircraft with in-flight phones and
further expanding first class cabins and replacing first class seats on select
aircraft. In addition, US Airways' airport lounges are being enhanced and, in
some cases, expanded.
Revamping US Airways' Market Image and Focus - US Airways has also undertaken
steps to increase its level of on-time performance and improve in other key
industry performance measurements (as compiled and reported by the DOT). For
October 1996, US Airways ranked first in on-time performance among major
domestic air carriers for the first time in its history, despite setting a
company single-month load factor record during that month. US Airways finished
first in on-time performance among major domestic air carriers for the fourth
quarter of 1996. During that quarter, US Airways also ranked first in fewest
damaged or lost baggage complaints, fewest reservations complaints and was
second overall in fewest complaints of all types. In April 1996, US Airways
introduced electronic ticketing, or "ticketless travel," as an option for
customers traveling within the U.S. on US Airways or US Airways Express.
Electronic ticketing enables a customer to book a flight through US Airways'
reservations system or certain travel agencies and receive a confirmation number
instead of a paper ticket. The Company believes that electronic ticketing
enhances customer convenience and helps to reduce US Airways'
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distribution costs. Customer response to electronic ticketing has been favorable
and customer use of electronic ticketing has increased since its introduction.
In October of 1995, US Airways introduced personal computer software that
enables certain high-volume customers to engage in self-service travel booking.
User response has been favorable.
Increasing International Service - During 1996, US Airways' transatlantic
capacity increased 55.4% versus 1995 levels (as measured by ASMs). US Airways
launched new European service to Munich, Madrid and Rome during mid-1996 and
added additional service at Frankfurt during 1996. US Airways has also filed
with the DOT to serve London's Heathrow Airport from Boston, Charlotte,
Philadelphia and Pittsburgh. On March 24, 1997, US Airways announced that on
June 14, 1997, it would begin flying a second daily non-stop flight between
Philadelphia and Paris. US Airways continues to explore additional international
opportunities.
Rationalizing US Airways' Operating Aircraft Fleet - US Airways has entered into
a series of agreements with AVSA, S.A.R.L., an affiliate of Airbus, regarding
the acquisition of up to 400 narrowbody Airbus aircraft. The agreements are part
of US Airways' long-term strategy of replacing several older, diverse aircraft
types with newer, more efficient aircraft types based on a similar design. The
Company believes that the operational and customer service benefits of
modernizing its fleet outweigh the increased expenses that would be incurred by
US Airways with the purchase or lease of the new aircraft. The agreements with
Airbus remain subject to US Airways achieving a competitive cost structure, but
obligate US Airways to inform Airbus by September 30, 1997 of whether or not it
will proceed with the acquisition of the aircraft contemplated thereby. US
Airways has requested that Airbus agree to an extension of this deadline in the
belief that such an extension would facilitate US Airways' efforts to achieve
its desired reductions in operating costs. Airbus had previously advised US
Airways that it could not support the delivery of six aircraft tentatively
scheduled for delivery to US Airways in 1997 due to US Airways' inability to
affirm the contractual arrangement. Airbus subsequently advised US Airways that
it was also withdrawing all of US Airways' 1998 and 1999 firm delivery positions
as well as support for the twelve aircraft contemplated to be leased in 1998 for
similar reasons. If US Airways is able to achieve a competitive cost structure
it may still be able to acquire Airbus aircraft during 1998 and 1999.
Recent Developments - The Company's senior management recently engaged in a
series of presentations to the Company's employees to explain and emphasize its
view that the Company must obtain a competitive cost structure in order to
implement the strategy of becoming an effective global competitor. In
particular, senior management identified reductions in personnel costs as being
the key to the implementation of a competitive cost structure. See "Risk
Factors-Company Related Considerations-High Personnel Costs" and "-Uncertain
Status of Labor Agreements". In the presentations, senior management stated its
view that a competitive cost structure was necessary in order for the Company to
compete with low-cost carriers such as Delta Express, ValuJet and Southwest,
which have continued their rapid expansion in eastern US markets, and for the
Company to be in a position to proceed with its planned purchase of
approximately 400 Airbus aircraft. See "Risk Factors-Industry Related
Considerations-Significant Impact of Low Cost, Low Fare Competition" and "The
Company-Strategy-Rationalizing US Airways' Operating Aircraft Fleet". The
Company further indicated that the implications of not obtaining a competitive
cost structure include: (i) downsizing BWI operations; (ii) reducing Florida
service; (iii) terminating unprofitable east/west and north/south routes; (iv)
reducing aircraft type and achieving fleet rationalization; (v) not affirming
the Airbus order; and (vi) making other operational changes to implement a
rightsizing strategy.
On April 23, 1997, the Company issued the following press release:
ARLINGTON, Va., April 23 -- US Airways Group, Inc. today
reported a record $152.7 million profit for the first quarter of
1997 on revenues of $2.1 billion. This compares to a loss of
$32.3 million on revenues of $1.9 billion in the first quarter of
1996, an improvement of $185 million on a year-over-year basis.
On a per-share basis, after allowing for a $20.9 million preferred
dividend requirement, the net profit applicable to common
shareholders was $131.8 million, or $2 per share ($1.45 on a
fully diluted basis). This compares to a loss in 1996 of $54.6
million or $0.86 per share ($0.86 on a fully diluted basis).
"These outstanding results are a tribute to the superior
efforts of US Airways' employees. While we benefited from very
favorable economic and weather conditions, there is no question
but that the records set in this quarter simply would not have
been possible without the commitment of our 42,000 employees to
build US Airways into the carrier of choice," said Chairman
Stephen Wolf.
"As positive as our first quarter results are, the company
nevertheless continues to experience significant losses in key
markets as a result of an uncompetitive cost structure and the
escalating incursion of low-cost carriers," Wolf said.
US Airways' board of directors added that while the company has made
"significant strides in the airline's operations over the past 15
months, discussions to put in place a competitive cost structure
have now gone on for many years without progress. The lack of
progress in reducing US Airways' costs to competitive levels
leaves us no choice but to conclude that the company must
promptly implement the appropriate steps to address the issue."
In meetings with employees throughout the US Airways system over
the past two weeks, Wolf and President Rakesh Gangwal have
outlined two clear paths facing the company. The preferred path,
based on achieving a competitive cost structure, leads to US
Airways' growth into a major international competitor. The other
path leads to the company becoming a smaller, regional carrier
with a continued focus on quality.
For the first quarter of 1997, the operating profit was $175.6
million as compared to $10.8 million in the first quarter of
1996. Operating expenses were up 3.7 percent at $1.9 billion as
compared to 1996. The operating revenues and profit, net profit
and the passenger load factor of 68.4 percent all were records
for the company for any first quarter in its history.
On the operational side, US Airways remained at the top of the
industry in on-time arrivals even though the number of
passengers, revenue passenger miles and available seat miles all
were up sharply.
The 13.9 million passengers carried by US Airways, Inc. in the
quarter were an increase of 7.2 percent over the first quarter of
1996. Revenue passenger miles (in scheduled service) were up 13.7
percent for the quarter while available seat miles were up 7.3
percent, in part reflecting the sharply improved weather
conditions that allowed more flight completions. The passenger
load factor of 68.4 percent was up by 3.8 percentage points over
1996, while the break-even load factor declined 3.1 percentage
points to 64.0 percent. Cost of aviation fuel, including fuel
taxes, was 75.44 cents per gallon, an increase of 16.1 percent
over 1996.
Yields for the quarter for US Airways, Inc. averaged 17.71 cents,
a decrease of 0.6 percent. Revenue per available seat mile was
13.38 cents, up 5.0 percent, while cost per available seat mile
was 12.35 cents, down 3.6 percent.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for additional information related to the Company's current
strategy, US Airways' program to upgrade and enhance the interiors of its
aircraft and US Airways' agreement with Airbus.
Current Industry Conditions
For a discussion of certain matters affecting the airline industry generally,
see "Risk Factors - Industry Related Considerations."
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Industry Regulation and Airport Access
For a discussion of certain regulatory matters affecting US Airways, see
"Risk Factors - Industry Related Considerations - Regulatory Matters."
Relationship with British Airways
On January 21, 1993, US Airways Group entered into the Investment Agreement
with British Airways. On the same date, British Airways through its subsidiary
BritAir acquired the Series F Preferred Stock from the Company for $300 million
(see "Description of Capital Stock" for the terms of the Series F Preferred
Stock). In June 1993, pursuant to certain preemptive and optional purchase
rights under the Investment Agreement, British Airways through its subsidiary
BritAir acquired the Series T Preferred Stock from the Company for an aggregate
purchase price of approximately $100.7 million (see "Description of Capital
Stock" for the terms of the Series T Preferred Stock)
On March 7, 1994, British Airways announced that it would not make any
additional investments in the Company until the outcome of measures by the
Company to reduce costs and improve financial results was known. On January 19,
1996, British Airways announced that it would not exercise its option to make
any further investment in US Airways Group prior to the January 21, 1996
deadline provided in the Investment Agreement. See also "The Company - British
Airways Investment Agreement" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
On December 17, 1996, British Airways delivered a notice (the "First Sale
Notice") to the Company of its intent to sell in one or more underwritten
public offerings or privately negotiated transactions, all of the shares of
Series F Preferred Stock and Series T Preferred Stock. Under the Investment
Agreement, the First Sale Notice triggered (i) a right of first offer of the
Company to purchase all (or in certain circumstances, any portion) of such
shares at prices ("Offer Prices") set forth in the First Sale Notice (the
"Right of First Offer") and (ii) a public offering registration procedure (the
"Public Offering Procedure"). The Offer Prices set forth in the First Sale
Notice for the Series F Preferred Stock and the Series T-1 Preferred Stock were
established for purposes of both a private sale and a public offering, while the
Offer Price for the Series T-2 Preferred Stock was set forth for a private sale
only. The Right of First Offer with respect to the Series F Preferred Stock and
Series T-1 Preferred Stock expired on February 15, 1997. On March 14, 1997,
British Airways delivered a notice (the "Second Sale Notice") to the Company
triggering a second right of first offer (the "Series T-2 Right of First
Offer") of the Company to purchase all (or in certain circumstances, any
portion) of the shares of Series T-2 Preferred Stock at the price set forth in
the Second Sale Notice. The Series T-2 Right of First Offer will expire on May
14, 1997.
Because the Company elected not to exercise the Right of First Offer, British
Airways is free to complete a sale of the Series F Preferred Stock or the Series
T-1 Preferred Stock (or of the Depositary Shares relating thereto) on terms no
less favorable to British Airways than those set forth in the First Sale Notice,
provided that (i) such sale is closed by August 14, 1997 (or 180 days following
the initial filing of the Company's registration statement in conjunction with
the Public Offering Procedure), (ii) in the case of a public offering of Series
F Preferred Stock or Series T-1 Preferred Stock (or of the Depositary Shares
relating thereto), the sale price may be higher or lower than the price offered
in the First Sale Notice and (iii) in the case of a privately negotiated
transaction, the price must be equal to or higher than the price offered in the
First Sale Notice. In the event the Company does not exercise the Series T-2
Right of First Offer, British Airways will be free to complete a sale of the
Series T-2 Preferred Stock (or of the Depositary Shares relating thereto) in a
public offering on terms no less favorable to BA than those set forth in the
Second Sale Notice, provided that the sale price may be higher or lower than the
price offered in the Second Sale Notice.
In the First Sale Notice, British Airways also exercised the Public Offering
Procedure under the Investment Agreement to cause the Company to use its
"reasonable efforts" to register the Series F Preferred Stock and the Series T
Preferred Stock for sale in an underwritten public offering at British Airways'
request on up to three occasions. The registration procedures provide that the
Company shall prepare and file with the Commission and use its reasonable
efforts to cause to become effective a registration statement under the
Securities Act by April 16, 1997, provided, however, that the Company's
obligation to file a registration statement may be deferred in certain
circumstances for up to 180 days.
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As described more fully under "The Company - Board of Directors
Representation," the British Airways representatives have resigned from the US
Airways Group and US Airways boards of directors. Based on such resignations,
British Airways may take the position that British Airways is no longer an
affiliate of US Airways Group and, therefore, upon the expiration of the third
month following such change in status, BritAir is able to sell the BA Preferred
Stock without registration under the Securities Act in compliance with an
exemption thereunder.
For additional discussion of certain matters relating to British Airways,
including the BA/AA Alliance and ongoing litigation between the Company and
British Airways, see "Risk Factors - Company Related Considerations - Proposed
Alliance between British Airways and American; Other British Airways
Developments."
British Airways Investment Agreement
The following summary of certain terms of the Investment Agreement is subject
to, and is qualified in its entirety by the Investment Agreement and the
exhibits thereto, which have previously been filed with the SEC. Through its
wholly-owned subsidiary BritAir, British Airways has invested approximately $400
million in the BA Preferred Stock in accordance with the Investment Agreement.
Based on the circumstances described under "The Company - Relationship with
British Airways" above, the Company does not expect that British Airways will
make additional investments in US Airways Group.
On January 19, 1996, British Airways announced that it would not exercise its
option to make any further investment in US Airways Group prior to the January
21, 1996 deadline provided in the Investment Agreement. Under the Investment
Agreement, assuming the Series F Preferred Stock or any shares issued upon
conversion thereof were outstanding and British Airways had not sold any shares
of the BA Preferred Stock or any common stock or other securities received upon
conversion or exchange of the BA Preferred Stock, British Airways was entitled
at its option to elect to purchase, on or prior to January 21, 1996, 50,000
shares of Series C Cumulative Convertible Senior Preferred Stock, without par
value ("Series C Preferred Stock"), at a purchase price of $10,000 per share, to
be paid by British Airways' surrender of the Series F Preferred Stock and
payment of $200 million (the "Second Purchase"). The Investment Agreement
provides that, on or prior to January 21, 1998, assuming that British Airways
had purchased (or was purchasing simultaneously in accordance with the terms of
the Investment Agreement) the Series C Preferred Stock, British Airways would
have the option to purchase 25,000 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").
Because British Airways did not elect prior to January 21, 1996 to make the
Second Purchase, it cannot make the Final Purchase, except that if the DOT were
to approve all the transactions and acts contemplated by the Investment
Agreement on or prior to January 21, 1998, the Second Purchase and Final
Purchase could be consummated under certain circumstances at the election of
British Airways (provided that British Airways had not sold any of the BA
Preferred Stock) or the Company (provided that the Company had not repurchased
or redeemed any of the BA Preferred Stock). Because British Airways did not
elect to make the Second Purchase by January 21, 1996, the Company may at its
option redeem, in whole or in part, the Series F Preferred Stock and a like
percentage of Series T Preferred Stock at the higher of (i) the product of (A)
that number of shares of Common Stock equal, in the aggregate, to $10,000
divided by the conversion price at the time of notice of redemption and (B) the
average Closing Price (as defined below in "Description of Capital Stock -
Description of Series F Preferred Stock") on the 20 consecutive trading days
beginning 30 trading days before the date of notice of redemption, and (ii)
$10,000 per share, plus accrued dividends. Under Delaware law, the Company may
be subject to certain legal restrictions on its ability to repurchase or redeem
its own shares of capital stock. Based on the circumstances described under
"Relationship with British Airways" above, the Company does not expect that the
Second Purchase and Final Purchase will be consummated. In addition, assuming
British Airways continues to pursue the sale of the BA Preferred Stock in
accordance with the procedures described below, the Company does not expect that
it will repurchase or redeem the BA Preferred Stock. As of March 24, 1997, the
BA Preferred Stock constituted approximately 24% of the total voting interest in
US Airways Group.
DOT Order Regarding British Airways' Investment in US Airways Group
On March 15, 1993, the DOT issued an order (the "DOT Order") finding, among
other things, that British Airways' initial investment of $300 million does not
impair US Airways' citizenship under Foreign Ownership Restrictions. However,
the DOT instituted a proceeding to consider whether US Airways will remain a
U.S. citizen if the transactions and acts
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contemplated by the Investment Agreement, including the transactions discussed
under "The Company - British Airways Investment Agreement" above, are
consummated. The DOT has suspended indefinitely the period for comments from
interested parties to the proceeding pending its resolution of requests by other
airlines for production of additional documents from US Airways. The DOT Order
states that the DOT expects and advises US Airways Group and British Airways not
to proceed with the Second Purchase and Final Purchase until the DOT has
completed its review of US Airways' citizenship. On March 7, 1994, British
Airways announced that it would make no additional investments in US Airways
Group until the outcome of measures by US Airways Group to reduce its costs and
improve its financial results was known and on January 19, 1996, British Airways
announced that it would not proceed with the Second Purchase. On December 17,
1996, British Airways delivered the First Sale Notice to the Company, indicating
its intent to sell in one or more underwritten public offerings or privately
negotiated transactions, all of the shares of the BA Preferred Stock.
Board of Directors Representation
Under the Investment Agreement (and not as a result of any term of the BA
Preferred Stock), US Airways Group must use its best efforts to cause British
Airways to be proportionally represented on US Airways Group's board of
directors (on the basis of its voting interest), up to a maximum representation
of 25% of the total number of authorized directors, assuming that such
proportional representation is permitted by then applicable U.S. statutory and
DOT regulatory or interpretative restrictions on foreign ownership or control of
US Airways Group or its securities, the breach of which would result in the loss
of the Company's or any subsidiary's operating certificates or authorities
("Foreign Ownership Restrictions"), generally, until the closing of the Second
Purchase. On January 28, 1997, the Company received notice that British Airways'
representatives, Messrs. Ayling, Stevens and Maynard, resigned as directors of
US Airways Group and on February 12, 1997, the Company received notice that such
individuals resigned as directors of US Airways. In the letter of resignation,
British Airways waived its current and future rights under the Investment
Agreement to US Airways Group board representation. British Airways' rights
under the Investment Agreement will not be assigned to purchasers of the BA
Preferred Stock offered hereby.
U.S.-U.K. Routes
Under the Investment Agreement, US Airways 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 its routes
between the U.S. and the United Kingdom (the "U.K. Routes") at such time as
British Airways and US Airways implemented the code sharing arrangement
contemplated by the Investment Agreement discussed below. US Airways Group and
British Airways agreed that they should attempt to mitigate any negative impact
on US Airways employees or communities 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 interests. Accordingly, British Airways operated and
marketed certain routes formerly operated by US Airways under a "wet lease."
Under the wet lease arrangements, US Airways leased three Boeing 767-200ER
aircraft, along with cockpit and cabin crews, to British Airways for three
routes between the U.S. and London. US Airways terminated the wet lease
arrangements with British Airways in a phased approach with one of the three
767-200ER aircraft returned in December 1995, the second in February 1996 and
the third in May 1996. US Airways is using the returned aircraft as part of its
expansion of international service (see "The Company - Strategy" above). In
conjunction with the termination of the wet lease arrangements and related to US
Airways' relinquishment or divestiture of the U.K. Routes, British Airways
agreed to pay US Airways a total of $47 million in the form of periodic payments
commencing with the termination of the three wet leases and continuing annually
for nine years. The first periodic payment was received by US Airways in
December 1995. The route authorities which US Airways was required to sell or
relinquish were the Philadelphia-London and BWI-London route authorities
purchased by US Airways from TWA in April 1992 for $50 million, and its route
authority between Charlotte and London. See Note 12 to the Company's
Consolidated Financial Statements for additional information related to US
Airways' note receivable from British Airways.
Code Sharing and Other Commercial Arrangements
British Airways and US Airways Group entered into a code share agreement on
January 21, 1993 (the "Code Share Agreement") pursuant to which certain US
Airways flights carried the airline designator code of both British Airways and
US
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<PAGE>
Airways. These flights were intended by US Airways Group and British Airways
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
commercial viability and technical feasibility.
The DOT initially granted approval of the code sharing agreement between US
Airways and British Airways on March 17, 1993 for a period of one year. The
authorizations to US Airways and British Airways were expanded by a supplemental
DOT order on November 12, 1993 to permit code sharing on flights serving an
additional number of U.S. points through additional U.S. gateways for British
Airways' transatlantic flights. In June 1995, the DOT renewed its approval of US
Airways' and British Airways' authority to operate code share service on flights
serving 66 U.S. cities and Mexico City. US Airways has ceased serving Mexico
City. In addition, the DOT approved an expansion of the US Airways/British
Airways code share authority to 65 new U.S. cities, Bermuda, Nassau and five
Canadian cities. The approval is valid for two years. As of December 31, 1996,
US Airways and British Airways had implemented code sharing to 80 of the 138
airports authorized by the DOT. British Airways has publicly stated that its
relationship with US Airways has contributed over $100 million in annual
additional revenues and cost savings to its financial results. US Airways
believes that the code share arrangement contributed less than $20 million
annually to its operating revenues.
On October 24, 1996, US Airways notified British Airways that it was
terminating the code share and frequent traveler agreements between the
companies effective March 29, 1997 following British Airways decision to enter
into an alliance with American. The Company does not believe that US Airways'
lack of an international code share partner will have a material impact on its
financial condition and results of operations.
Terms of the Series C Preferred Stock and Series E Preferred Stock
The Series 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 at an initial conversion price of approximately $19.79, 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 convertible, 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 at an initial conversion price of approximately $21.74,
subject to increase if the Series E Preferred Stock is originally issued on or
after January 21, 1997, subject to Foreign Ownership Restrictions (the Class B,
Class C and Non-Voting Class ET Common Stock are collectively referred to as the
"BA Common Stock"). Each share of Series E Preferred Stock will be entitled to a
number of votes equal to the number of shares of Common Stock into which it is
convertible, subject to Foreign Ownership Restrictions. Based on the
circumstances described under "The Company -Relationship with British Airways"
above, the Company does not expect to issue the Series C or Series E Preferred
Stock.
Certain Aspects of the Second and Final Purchase
Under the Investment Agreement, if the Second Purchase were consummated, (i)
new classes of US Airways Group common stock would be created, (ii) certain
changes would be implemented with respect to the size of the board of directors
of the Company and the vote required to approve certain actions, which would
have had the effect of allowing more than 20% of the Board of Directors, which
could have included the British Airways representatives, to veto certain board
actions, subject to the directors' obligations to discharge their fiduciary
duties and, in the case of the British Airways representatives, Foreign
Ownership Restrictions and British Airways' obligation to use its best efforts
to cause such representatives to recuse themselves from any deliberations of the
Board of Directors regarding (a) the bilateral air services agreement between
the U.S. and the U.K. and (b) any matters as to which such recusal would be
required under Foreign Ownership Restrictions or other applicable law, (iii) the
Company and British Airways would integrate certain of their operations, subject
to Foreign Ownership Restrictions and the discretion of the Board of Directors
and (iv) British Airways would be subject to reductions in its voting and
governance rights following a British Airways transfer of capital stock of the
Company. Based on the circumstances as described under "The Company -
Relationship with British Airways" above, US Airways does not expect that these
changes will be implemented.
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<PAGE>
Miscellaneous
Under the terms of the Investment Agreement, British Airways has the right to
maintain its proportionate ownership of US Airways Group's securities under
certain circumstances by purchasing shares of certain series of Series T
Preferred Stock, Common Stock or BA Common Stock. Pursuant to these provisions,
on June 10, 1993, British Airways purchased (i) 152.1 shares of Series T-1
Preferred 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
connection 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 US Airways
Group's issuance on May 4, 1993 of 11,500,000 shares of Common Stock for net
proceeds of approximately $231 million pursuant to a public underwritten
offering. Because British Airways partially exercised its preemptive right in
connection with the Common Stock offering and the offering price was below a
certain level, the conversion price of the Series F Preferred Stock was
antidilutively adjusted on June 10, 1993 from $19.50 to approximately $19.41 per
share. As a result, the Series F Preferred Stock is convertible into 15,458,851
shares of Common Stock. British Airways advised US Airways Group that it would
not exercise its optional purchase rights under the Investment Agreement to buy
additional series of Series T Preferred Stock triggered by issuances of Common
Stock of US Airways Group pursuant to certain US Airways Group benefit plans
during 1994, 1995 and 1996.
The Investment Agreement also imposes certain restrictions on British Airways'
right to acquire additional voting securities, participate in solicitations with
respect to US Airways Group securities or otherwise propose or discuss
extraordinary transactions concerning US Airways Group. These restrictions
remain in effect as long as British Airways or any of its affiliates or
associates beneficially owns any BA Preferred Stock, T Notes (as defined below)
or BA Common Stock, and for two years thereafter.
Payments of Dividends on Senior Preferred Stock
For a discussion of certain matters relating to the payment of dividends by US
Airways Group on its Senior Preferred Stock, see "Risk Factors - Company Related
Considerations - Deferral of Dividends by US Airways Group."
Employees
As of December 31, 1996, US Airways Group's subsidiaries employed
approximately 43,500 full-time equivalent employees. US Airways employed
approximately 4,800 pilots, 8,800 maintenance and related personnel, 10,300
station personnel, 4,000 reservations personnel, 7,800 flight attendants and
4,500 personnel in other administrative and miscellaneous job categories, while
the Company's regional airline subsidiaries and other subsidiaries employed
approximately 900 pilots, 600 maintenance and related personnel, 1,000 station
personnel, 400 flight attendants and 400 personnel in other administrative and
miscellaneous job categories.
Approximately 28,200, or 65%, of the employees of US Airways Group's
subsidiaries are covered by collective bargaining agreements with various labor
unions, or will be covered by a collective bargaining agreement for which
negotiations are in progress. US Airways' four unions include the ALPA, which
represents US Airways' pilots, the IAM, which represents US Airways' mechanics
and fleet service employee groups, the AFA, which represents US Airways' flight
attendants, and the Transport Workers' Union ("TWU") which represents US
Airways' flight crew training instructors, flight simulator engineers and
dispatch employees.
The Company has in the past obtained certain concessions from its employees
that have enabled it to realize lower operating costs. For example, in 1992 and
1993, US Airways reached agreement on new contracts with ALPA, the IAM, the AFA
and the TWU, which new contracts generally provided for wage reductions and
suspension of longevity/step increases for a twelve-month period and for
contributory managed care medical and dental programs. In connection with this
cost reduction program, US Airways implemented wage reductions and suspension of
longevity/step increases on its non-contract employees for the twelve-month
period commencing in June 1992. Earlier in 1992, US Airways had implemented the
contributory managed care medical and dental programs for non-contract
employees. At the end of 1991, US Airways froze
25
<PAGE>
its then-existing pension plan, under which it had been solely responsible for
contributions. This plan was replaced on January 1, 1993 with a defined
contribution pension plan for its non-contract employees.
The temporary wage reductions and suspension of longevity/step increases in
wages referred to above are estimated by US Airways to have saved approximately
$120 million during the period June 1992 through March 1994. These concessions
provided for productivity improvements which saved US Airways approximately $55
million during the same period. The participation by employees in contributory
managed care medical and dental programs also resulted in savings for US
Airways. In exchange for such concessions, US Airways included "no furlough"
provisions in each of the new labor agreements with ALPA, the IAM and the AFA
and created profit sharing and stock option programs for affected employees.
Status of US Airways' Labor Agreements
For a discussion of certain matters relating to US Airways' Labor Agreements,
see "Risk Factors - Company Related Considerations - Uncertain Status of Labor
Agreements."
Frequent Traveler Program
Under US Airways' Frequent Traveler Program ("FTP"), participants generally
receive mileage credits equal to the greater of actual miles flown or 500 miles,
effective May 1, 1995 (750 miles before May 1, 1995), for each paid flight
segment on US Airways or US Airways Express, or actual miles flown on one of US
Airways' FTP airline partners. Participants generally receive a minimum of 500
mileage credits, effective May 1, 1995, for each paid flight on US Airways
Shuttle (1,000 miles prior to May 1, 1995). Participants flying on first or
business class tickets generally receive additional credits. Participants may
also earn mileage credits by utilizing certain credit cards, staying at
participating hotels, renting cars from participating car rental companies and
through other means. Mileage credits earned by FTP participants, which do not
expire under current program guidelines, can be redeemed for various travel
awards, including fare discounts, first class upgrades and tickets on US Airways
or other airlines participating in US Airways' FTP. Certain awards also include
hotel and car rental awards. Awards may not be brokered, bartered or sold, and
have no cash value.
US Airways and its airline partners limit the number of seats allocated per
flight for award recipients through inventory management techniques. The number
of seats available for frequent travelers varies depending upon flight, day,
season and destination. Award travel for all but US Airways' most frequent
travelers generally is not permitted on blackout dates, which correspond to
certain holiday periods in the United States or peak travel dates to foreign
destinations. US Airways reserves the right to terminate the FTP or portions of
the program at any time, and the FTP rules, partners, special offers, blackout
dates, awards and mileage levels are subject to change without prior notice.
US Airways accounts for its FTP under the incremental cost method, whereby
estimated future travel awards are valued at the estimated average incremental
cost of carrying one additional passenger. Incremental costs include unit costs
for passenger food, beverages and supplies, fuel, reservations, communications,
liability insurance and denied boarding compensation expenses. No profit or
overhead margin is included in the accrual for incremental costs. The Company
periodically reviews the assumptions made to calculate its FTP liability for
reasonableness and makes adjustments to these assumptions as necessary. No
liability is recorded for airline, hotel or car rental award certificates that
are to be honored by other parties because there is no cost to US Airways for
such awards.
Effective January 1, 1995, US Airways increased the minimum mileage level
required for a free domestic flight from 20,000 to 25,000. FTP participants had
accumulated mileage credits for approximately 3,715,000 awards and 3,350,000
awards as of December 31, 1996 and 1995, respectively, at the 25,000 mile level
required to earn an award. Because US Airways expects that some potential awards
will never be redeemed, the calculations of the accrued liability for
incremental costs as of December 31, 1996 and 1995 were based on approximately
87% of the accumulated credits. Mileage for FTP participants who have
accumulated less than the minimum number of mileage credits necessary to claim
an award is excluded from the calculation of the accrual. Incremental changes in
FTP liability resulting from redeemed or additional mileage credits are recorded
as part of the regular review process.
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<PAGE>
US Airways' customers redeemed approximately 1.0 million, 1.2 million and 0.9
million awards for free travel on US Airways in 1996, 1995 and 1994,
respectively, representing approximately 6.0%, 9.0% and 7.0% of US Airways' RPMs
in those years, respectively. US Airways does not believe that usage of FTP
awards results in any significant displacement of revenue passengers. US
Airways' exposure to the displacement of revenue passengers is not significant,
as the number of US Airways flights that depart 100% full is minimal. In the
second quarter of 1996, the quarter when the highest number of free frequent
traveler trips were flown for the year, for example, fewer than 8.0% of US
Airways' flights departed 100% full. During this same quarterly period,
approximately 6.0% of US Airways' flights departed 100% full and also had one or
more passengers on board who were traveling on FTP award tickets.
US Airways renamed its frequent traveler program "Dividend Miles" during
February 1997.
Computerized Reservation Systems
As of December 31, 1996, USAM owned 11% of the Galileo International
Partnership, approximately 11% of the Galileo Japan Partnership and
approximately 21% of the Apollo Travel Services Partnership.
The Galileo International Partnership owns and operates the Galileo computer
reservation system ("Galileo CRS"). Galileo Japan Partnership markets the
Galileo CRS in Japan and Apollo Travel Services markets the Galileo CRS in the
U.S. and Mexico. The Galileo CRS is currently the second largest of the four
computer reservation systems ("CRSs") in the U.S. based on revenues generated by
travel agency subscribers. A subsidiary of United Air Lines, Inc. ("United")
controls 38% of the partnership, and the other partners exclusive of US Airways'
interest are subsidiaries of British Airways, Swissair, KLM Royal Dutch
Airlines, Alitalia, Air Canada, Olympic Airways, Austrian Airlines, Aer Lingus
and TAP Air Portugal.
CRSs play a significant role in the marketing and distribution of airline
tickets. Travel agents issue tickets which generate the majority of US Airways'
passenger revenues. Most travel agencies use one or more CRSs to obtain
information about airline schedules and fares and to book their clients' travel.
Aviation Fuel
For a discussion of certain matters relating to the usage of aviation fuel by
US Airways, see "Risk Factors - Industry Related Considerations - Aviation
Fuel."
Insurance
US Airways Group and its subsidiaries maintain insurance of the types and in
amounts deemed adequate to protect themselves and their property. Principal
coverage includes liability for bodily injury to or death of members of the
public, including passengers; damage to property of US Airways Group, US Airways
and others; loss of or damage to flight equipment, whether on the ground or in
flight; fire and extended coverage; and workers' compensation and employer's
liability. Coverage for environmental liabilities is expressly excluded from US
Airways Group's and US Airways' insurance policies.
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<PAGE>
Operating Statistics
US Airways' operating statistics during the years 1992 through 1996 are set
forth in the following table (1):
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue Passengers
(Thousands)* 56,640 56,674 59,495 53,678 54,655
Average Passenger
Journey (Miles)* 688 664 638 656 642
Total Revenue Passenger
Miles ("RPMs")
(Millions) 39,220 38,079 38,395 35,529 35,436
RPMs (Millions)* 38,943 37,618 37,941 35,221 35,097
Total Available Seat
Miles ("ASMs")
(Millions) 57,208 58,678 61,540 59,841 60,052
ASM (Millions)* 56,885 58,163 61,027 59,485 59,667
Passenger Load Factor (2)* 68.5% 64.7% 62.2% 59.2% 58.8%
Break Even Load
Factor (3) (5) 67.9% 64.9% 67.3% 61.7% 63.2%
Passenger Revenue Per
ASM* 11.95c 10.78c 9.70c 10.22c 9.70c
Total Revenue Per ASM
(4) (5) 13.19c 11.80c 10.59c 11.04c 10.38c
Cost per ASM (4) (5) (6) 12.69c 11.40c 11.02c 11.12c 10.85c
Yield (Revenue Per RPM)* 17.46c 16.66c 15.61c 17.27c 16.49c
Average Stage Length
(Miles)* 578 560 536 536 516
</TABLE>
* = Scheduled service only (excludes charter flights).
c = cents
(1) Statistics include free frequent travelers and the related miles flown.
(2) Passenger load factor is the percentage of aircraft seating capacity that
is actually utilized (RPMs/ASMs).
(3) Break even load factor represents the percentage of aircraft seating
capacity that must be utilized, based on fares in effect during the period,
for US Airways to break even at the pre-tax income level, adjusted to
exclude non-recurring and unusual items.
(4) Adjusted to exclude non-recurring and unusual items.
(5) Financial statistics for 1996, 1995, 1994 and 1993 exclude revenues and
expenses generated under the British Airways wet lease arrangement.
Financial statistics for 1996 also exclude revenues and expenses generated
under the US Airways Express capacity purchase program (see Note 10 to US
Airways' Consolidated Financial Statements located elsewhere in this
Prospectus for additional information).
(6) Certain statistics have been recalculated to reflect expense
reclassifications.
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<PAGE>
Flight Equipment
As of December 31, 1996, US Airways operated the following jet aircraft:
<TABLE>
<CAPTION>
Passenger Average
Type Capacity Age Owned (1) Leased (2) Total
---- --------- -------- --------- ---------- -----
(Years)
<S> <C> <C> <C> <C> <C>
Boeing 767-200ER 210 7.5 5 7 12
Boeing 757-200 182 6.2 23 11 34
Boeing 737-400 145 7.0 19 35 54
McDonnell Douglas MD-80 141 14.8 15 16 31
Boeing 737-300 127 9.7 11 74 85
Boeing 737-200 110 14.7 52 12 64
Douglas DC-9-30 101 23.1 50 12 62
Fokker 100 98 6.1 36 4 40
Fokker F28-4000 68 11.8 1 7 8
---- --- --- ---
12.0 212 178 390
==== === === ===
</TABLE>
(1) Of the owned aircraft, 106 were pledged as collateral for various secured
financing obligations aggregating $2.1 billion as of December 31, 1996.
(2) The terms of the leases expire between 1997 and 2015. US Airways purchased
two DC-9-30 aircraft upon lease expiry in January 1997 and three leased DC-
9-30 aircraft in March 1997 (the leases for each such aircraft were
scheduled to expire in the second quarter of 1997).
As of December 31, 1996, the Company's three wholly-owned regional airline
subsidiaries operated the following turboprop aircraft:
<TABLE>
<CAPTION>
Passenger Average
Type Capacity Age Owned Leased (1) Total
---- -------- ------- ----- ---------- -----
(Years)
<S> <C> <C> <C> <C> <C>
de Havilland Dash 7 50 15.5 1 (2) 2 3
de Havilland Dash 8 37 6.4 29 53 82
Dornier 328-110 32 1.3 - 25 25
---- ---- ---- ----
5.5 30 80 110
==== ==== ==== ====
</TABLE>
(1) The terms of the leases expire between 1997 and 2012.
(2) One of the Company's regional airline subsidiaries is party to an agreement
under which it has the option to require a third party to purchase this
aircraft beginning in March 1997 and for 22 months thereafter.
US Airways is a party to purchase agreements with Boeing and Rolls Royce that
provide for the future acquisition of new jet aircraft and jet engines. As of
December 31, 1996, the Company's regional airline subsidiaries, collectively,
were party to agreements related to the acquisition by lease of up to eighteen
additional turboprop aircraft. See Note 4(d) to the Company's Consolidated
Financial Statements for additional information regarding outstanding
commitments and options for the purchase of flight equipment. The Company's
airline subsidiaries maintain inventories of spare engines, spare parts,
accessories and other maintenance supplies sufficient to meet their operating
requirements.
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<PAGE>
As of December 31, 1996, the Company's airline subsidiaries, principally US
Airways, owned or leased the following aircraft which were not considered part
of the operating fleets presented in the tables above. These aircraft were
either parked in storage facilities or, as shown in the far right column, leased
or subleased to unaffiliated third parties.
<TABLE>
<CAPTION>
Leased/Subleased
Average to Unaffiliated
Type Age Owned (1) Leased (2) Total Third Parties
---- ------- --------- ---------- ----- ---------------
(Years)
<S> <C> <C> <C> <C> <C>
British Aerospace
BAe-146-200 (4)(5) 11.7 1 17 18 13
Boeing 737-200 27.8 11 - 11 10
Douglas DC-9-30 (3) 28.5 4 2 6 -
Fokker F28-1000(5) 23.5 17 - 17 17
Fokker F28-4000 (4) 12.9 4 6 10 3
Embraer EMB-120 6.8 - 2 2 2
British Aerospace
Jetstream 31 9.7 - 17 17 17
---- -- -- -- --
17.2 37 44 81 62
==== == == == ==
</TABLE>
(1) US Airways sold ten of its eleven B-737-200 aircraft, its only owned BAe-
146-200 aircraft, and the owned F28-4000 aircraft during the first quarter
of 1997, and sold the remaining B-737-200 aircraft during the second
quarter of 1997.
(2) US Airways purchased the two leased DC-9-30 aircraft upon lease expiry in
January 1997.
(3) US Airways reconditioned three of these aircraft and returned them to its
operating fleet during the first quarter of 1997.
(4) US Airways subleased two leased F28-4000 and one leased BAe-146-200 during
the first quarter of 1997.
(5) US Airways has entered into preliminary agreements to sublease a leased
BAe-146-200 and to lease an owned F28-1000 during the second quarter of
1997.
See Note 4(b) to the Company's Consolidated Financial Statements for
additional information related to third party lease arrangements.
US Airways is a participant in the Civil Reserve Air Fleet ("CRAF"), a
voluntary program administered by the Air Mobility Command (the "AMC"). The
General Services Administration of the United States government also requires
that airlines participate in CRAF in order to receive United States government
business. The United States government is US Airways' largest customer. US
Airways' commitment under CRAF is to provide up to eleven 767-200ER aircraft in
support of military operations, most likely aeromedical missions, as specified
by the AMC. To date, the AMC has not requested US Airways to activate any of its
aircraft under CRAF.
Ground Facilities
US Airways leases the majority of its ground facilities, including executive
and administrative offices in Arlington, Virginia adjacent to Washington
National; its principal operating, overhaul and maintenance bases at the
Pittsburgh and Charlotte/Douglas International Airports; major training
facilities in Pittsburgh and Charlotte; central reservations offices in several
cities; and line maintenance bases and local ticket, cargo and administrative
offices throughout its system. US Airways owns a building and vacant land in
Fairfax, Virginia, a training facility in Winston-Salem, North Carolina and
reservations facilities in San Diego, California and Orlando, Florida. US
Airways' building in Fairfax, Virginia, which is leased to the U.S. government,
and the vacant land are currently for sale.
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<PAGE>
Terminal Construction Projects
The Company's airline subsidiaries utilize public airports for their flight
operations under lease arrangements with the government entities that own or
control these airports. Airport authorities frequently require airlines to
execute long-term leases to assist in obtaining financing for terminal and
facility construction. Any future requirements for new or improved airport
facilities and passenger terminals are likely to require additional expenditures
and long-term commitments. Several significant projects which affect large
airports on US Airways' route system are discussed below.
In 1993, US Airways and the City of Philadelphia reached an agreement to
proceed with certain capital improvements at Philadelphia International Airport,
where US Airways has its third largest hub. The improvements include
approximately $130 million in various terminal renovations and a new $220
million regional airline runway expansion project, exclusive of financing costs.
US Airways expects construction on the terminal project will be completed in
1998. The runway expansion project is not expected to be completed until 2000.
US Airways expects that its annual costs of operations at Philadelphia
International Airport will increase by approximately $14 million once
construction is complete, representing more than a 35% increase.
The Metropolitan Washington Airport Authority is currently undertaking a $1
billion capital development project at Washington National, which includes
construction of a new terminal currently expected to commence operation in the
third quarter of 1997. Based on current projections, US Airways estimates that
its annual operating expenses at Washington National will increase by
approximately $10 million to $12 million.
In 1996, US Airways and the Massachusetts Port Authority reached an agreement
to renovate and expand US Airways' terminal premises at Boston's Logan
International Airport. The Authority issued approximately $49 million of special
facilities bonds to finance various improvements which include renovation and
expansion of holdrooms, ticket counter space, public circulation areas,
concessions, baggage processing, baggage claim areas and the US Airways Club
facility. The terminal expansion will include approximately 95,000 square feet
of additional space. US Airways will be responsible for the awarding of
contracts and managing of construction and expects substantial project
completion by May, 1998, except for the remodeling of certain gate areas which
will be completed by September, 1998. US Airways anticipates that its annual
operating expenses will increase by approximately $5 million per year as a
result of this project.
Legal Proceedings
US Airways is involved in legal proceedings arising out of its two aircraft
accidents that occurred in July and September 1994 near Charlotte, North
Carolina and Pittsburgh, Pennsylvania, respectively. The National Transportation
Safety Board ("NTSB") held hearings beginning in September 1994 relating to the
July accident and January and November of 1995 relating to the September
accident. In April 1995, the NTSB issued its finding of probable causes with
respect to the accident near Charlotte. It assigned as probable causes flight
crew errors and the failure of air traffic control to convey weather and
windshear hazard information. The NTSB has not yet issued its final accident
investigation report for the accident near Pittsburgh. The NTSB has indicated
that a determination of the cause of the accident is not likely until sometime
in 1997. US Airways expects that it will be at least two to three years before
the accident litigation and related settlements will be concluded. Litigation
resulting from the July 1994 accident in Charlotte was recently tried in U.S.
District Court in Columbia, South Carolina. The jury found US Airways was liable
for compensatory damages but was not liable for punitive damages. The amount of
compensatory damages payable to the plaintiffs in this litigation has not been
fully resolved, and the Company cannot estimate the amount of such damages;
however, US Airways is fully insured with respect to this litigation. Therefore,
the Company believes that the litigation will not have a material adverse effect
on the Company's financial condition or results of operations.
On July 30, 1996, the Company and US Airways initiated a lawsuit in U.S.
District Court for the Southern District of New York against British Airways,
BritAir, American and American's parent company, AMR Corporation. The Company
and US Airways claimed that British Airways, in pursuit of an alliance with
American, breached its fiduciary duty to the Company and US Airways and violated
certain provisions of the January 21, 1993 Investment Agreement between the
Company and British Airways. In addition, the lawsuit claims that American aided
and abetted British Airways' breach of its fiduciary duties. The lawsuit also
claims that the defendants are in violation of U.S. antitrust laws that prohibit
conduct that
31
<PAGE>
harms competition. Although the defendants filed motions to dismiss the lawsuit
following the filing of the complaint, these motions became superseded on March
5, 1997 when the Company filed an Amended Complaint with the Court based on
information gathered in the pre-trial discovery process. The defendants filed
new motions to dismiss the Amended Complaint on March 28, 1997. The Company is
unable to predict at this time the ultimate outcome of this lawsuit.
In December 1995, US Airways received a Civil Investigative Demand ("CID")
from the U.S. Department of Justice relating to US Airways' compliance with the
terms of a consent decree entered into in December 1992, as amended in September
1994. The consent decree was entered into to resolve litigation concerning US
Airways' methods of disseminating fare data to the Airline Tariff Publishing
Company. 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. The CID issued in December 1995 seeks information concerning US Airways'
use of travel dates in its fare filings, among other things. Although US Airways
believes there will be no further action stemming from this CID, the
investigation has not been fully closed.
In February and March 1995, 39 class action lawsuits were filed in various
federal district courts by travel agencies and a travel agency trade association
alleging that seven of the major U.S. airlines, including US Airways, violated
the antitrust laws when they individually capped travel agent base commissions
at $50 for round-trip domestic tickets with base fares above $500 and at $25 for
one-way domestic tickets with base fares above $250. The lawsuits were
consolidated in the federal district of Minnesota. The plaintiffs sought
unspecified treble damages for restraint of trade. In September of 1996 the case
against US Airways, and subsequently the cases against the other airlines, were
settled. While US Airways believes that its actions in establishing a commission
cap were in full compliance with the antitrust laws, the uncertainty and expense
of litigation prompted a settlement of the claims. US Airways paid $9.5 million,
as part of a total settlement of $85.8 million for all of the defendants. US
Airways did not admit liability or wrongdoing and the settlement allowed the
commission cap to remain in place. The settlement was approved by the court in
January of 1997.
In October 1995, US Airways terminated for cause an agreement with In-Flight
Phone Corporation ("IFPC"). IFPC was US Airways' provider of on-board telephone
and interactive data systems (the "IFPC System"). The agreement contemplated the
eventual installation of the IFPC System on substantially all of US Airways'
aircraft. The IFPC System had been installed on approximately 80 aircraft prior
to the date of termination of the agreement. On December 6, 1995, IFPC filed
suit against US Airways in Illinois state court seeking equitable relief and
damages in excess of $186 million. US Airways believes that its termination of
its agreement with IFPC was appropriate and that it is owed significant damages
from IFPC. On December 7, 1995, US Airways successfully defended IFPC's
emergency motion for a temporary restraining order. On December 13, 1995, IFPC's
motion for a preliminary injunction was denied and IFPC has relinquished its
right to appeal that decision. IFPC's claim for damages remains pending. In June
1996, US Airways filed a counterclaim against IFPC seeking compensatory damages
in excess of $25 million and punitive damages in excess of $25 million. In
January 1997, IFPC filed for protection from its creditors under Chapter 11 of
the Bankruptcy Code. The bankruptcy court has lifted the automatic stay provided
for in the Bankruptcy Code which allows IFPC's and US Airways' claims to be
fully litigated and discovery has commenced in the Illinois state court
proceeding. The Company is unable to predict at this time the ultimate
resolution or potential financial impact on the Company's financial condition
and results of operations of these proceedings.
In May 1995, the Company, US Airways and the Retirement Income Plan for Pilots
of USAir, Inc. (the "Pilots' Pension Plan") were sued in federal district court
for the District of Columbia by 481 active and retired US Airways pilots
alleging violations of the Employee Retirement Income Security Act ("ERISA") by
erroneously calculating benefits under the Pilots' Pension Plan. The plaintiffs
sought, among other things, damages in excess of $70 million. In May 1996, the
court issued a decision in the lawsuit granting US Airways' Motion to Dismiss
the majority of the complaint for lack of subject matter jurisdiction, deciding
that the dispute must be resolved through the arbitration process. The court
retained jurisdiction over one count of the complaint alleging a violation of a
disclosure requirement of ERISA. There are no significant penalties or damages
which can result from this remaining claim. The plaintiffs appealed the court's
decision, however, in the opinion of US Airways' counsel, the appeal is unlikely
to be successful.
The Equal Employment Opportunity Commission and various state and local fair
employment practices agencies are investigating charges by certain job
applicants, employees and former employees of the Company's subsidiaries
involving
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allegations of employment discrimination in violation of Federal and state laws.
The plaintiffs in these cases generally seek declaratory and injunctive relief
and monetary damages, including back pay. In some instances they also seek
classification adjustment, compensatory damages and punitive damages. Such
proceedings are in various stages of litigation and investigation, and the
outcome of these proceedings is difficult to predict. In the Company's opinion,
however, the disposition of these matters is not likely to have a material
adverse effect on its financial condition or results of operations.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's ratio of earnings to combined
fixed charges and preferred stock dividend requirements for the periods
presented. For purposes of these ratios, earnings consist of earnings from
continuing operations before taxes and fixed charges and fixed charges consist
of interest, amortization of debt expense and rent deemed representative of the
interest factor. Preferred stock dividend requirements represent an amount
equal to income, before income taxes, which would be required to meet the
dividends on preferred stock. These ratios should be read in conjunction with
the other financial information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio................. 1.3 1.1 * * *
</TABLE>
- ----------
* For the years ended December 31, 1994, 1993 and 1992, earnings were not
sufficient to cover fixed charges. Additional earnings of approximately
$768 million for the year ended December 31, 1994, $433 million for 1993
and $674 million for 1992 would have been required to achieve a ratio of
1.0.
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Selected financial data for US Airways Group is presented below. This
financial data has been summarized from the financial statements of US Airways
Group included herein and should be read in conjunction with the notes thereto
and in conjunction with the financial statements contained elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Operating Revenues $ 8,142 $ 7,474 $ 6,997 $ 7,083 $ 6,686
Operating Expenses $ 7,705 $ 7,153 $ 7,489 $ 7,179 $ 7,033
Operating Income (Loss) $ 437 $ 322 $ (491) $ (96) $ (347)
Income (Loss) Before
Accounting Change $ 263 $ 119 $ (685) $ (349) $ (601)
Accounting Change (1) - - - (44) (628)
------- ------- ------- ------ -------
Net Income (Loss) $ 263 $ 119 $ (685) $ (393) $ (1,229)
Net Income (Loss) Applicable
to Common Stockholders $ 175 $ 34 $ (763) $ (467) $ (1,281)
Income (Loss) Per Common Share
Before Accounting Change - Primary $ 2.69 $ 0.55 $ (12.73) $ (7.68) $ (13.88)
Before Accounting Change $ 2.33 $ 0.55 $ (12.73) $ (8.48) $ (27.23)
- Fully-diluted
Effect of Accounting Change - - - (0.80) (13.35)
------- ------- ------- ------ -------
Income (Loss) Per Common
Share - Primary $ 2.69 $ 0.55 $ (12.73) $ (8.48) $ (27.23)
Income (Loss) Per Common $ 2.33 $ 0.55 $ (12.73) $ (8.48) $ (27.23)
Share - Fully-diluted
Dividends Per Common Share $ - $ - $ - $ - $ -
Consolidated Balance Sheets
Total Assets $ 7,531 $ 6,955 $ 6,808 $ 6,878 $ 6,595
Long-Term Obligations and
Redeemable Preferred
Stock (2)(3) $ 4,552 $ 4,572 $ 4,699 $ 4,198 $ 3,714
Series B Preferred Stock (3) $ 213 $ 213 $ 213 $ 213 $ 213
Common Stockholders'
Equity (Deficit) (3) (798) ( 1,049) ( 1,110) (426) (169)
------- ------- ------- ------ -------
Total Stockholders'
Equity (Deficit) (3) $ (584) $ (836) $ (897) $ (213) $ 44
Shares of Common Stock
Outstanding 64.3 63.4 61.1 59.2 47.2
Book Value Per Share (4) $ (14.25) $(18.39) $(18.71) $(7.19) $ (3.58)
</TABLE>
(1) Cumulative effect of change in method of accounting for postemployment
benefits in 1993 and postretirement benefits other than pensions (net of
income tax benefit of $117.6 million) in 1992.
(2) Long-term obligations include long-term debt, capital leases and
postretirement benefits other than pensions, non-current.
(3) 1996, 1995 and 1994 do not include deferred dividends on preferred stock.
See Note 7(d) to the Company's Consolidated Financial Statements.
(4) Based on Common Stockholders' Equity (Deficit), which is adjusted to
reflect deferred dividends on preferred stock as though they had been
declared. See Note 7(d) to the Company's Consolidated Financial Statements.
Note: Numbers may not add or calculate due to rounding.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Effective February 21, 1997, USAir Group, Inc. changed its name to US
Airways Group, Inc. ("US Airways Group" or the "Company") and its wholly-owned
subsidiary, USAir, Inc., changed its name to US Airways, Inc. ("US Airways").
The Company recorded net income of $27.2 million for the fourth quarter of
1996 and net income of $263.4 million for all of 1996. The Company's primary
income per common share was $0.08 for the fourth quarter of 1996 and $2.69 for
all of 1996. US Airways recorded net income of $49.5 million for the fourth
quarter of 1996 and net income of $183.2 million for all of 1996. US Airways'
financial results, which include the results of its wholly-owned subsidiary
USAM, were significantly influenced by related party transactions as discussed
under "Results of Operations" below.
Except where noted, the following discussion relates primarily to the
financial condition, results of operations and future prospects of US Airways.
US Airways is the Company's principal subsidiary and accounted for approximately
92% of the Company's operating revenues for 1996. US Airways is a major United
States air carrier whose primary business is transporting passengers, property
and mail. US Airways enplaned more than 56.9 million passengers during 1996 and
is currently the fifth largest domestic air carrier, as measured by RPMs.
Factors Contributing to Improved 1996 Financial Results
The Company recorded net income of $263.4 million for 1996, net income of
$119.3 million for 1995 and a net loss of $684.9 million for 1994. This upward
trend is primarily attributable to favorable capacity and pricing trends in
markets served by the Company's airline subsidiaries, continued stable domestic
economic conditions and the positive influence of US Airways' revenue
enhancement and cost-reduction initiatives. The Company's results for 1996,
although the best in its history, were dampened by substantial year-over-year
increases in Personnel costs and Aviation fuel expenses, as discussed under
"Results of Operations" below.
Favorable capacity and pricing trends have been evident in markets served
by the Company's airline subsidiaries since early 1995. As discussed further
below, early 1995 marked the demise of the "Continental Lite" service offered by
Continental Airlines, Inc. ("Continental"). Year-over-year industry capacity
growth within the Eastern United States, that region of the U.S. east of the
Mississippi River, was 1.4% for 1996 and a contraction of 3.1% for 1995 (as
measured by ASMs). US Airways currently has approximately 85% of its daily
departures and approximately 58% of its capacity (ASMs) deployed in the Eastern
U.S. With respect to pricing factors, the Company believes that the absence of
the 10% Federal excise tax on domestic air transportation ("ticket tax") during
the first eight months of 1996 had a stimulative effect on the Company's
Passenger transportation revenues (see "Government Regulation" below for
additional information).
The demand for air transportation has historically mirrored general
economic conditions. The Company believes stable domestic economic conditions
during the last several years have contributed to an overall increase in demand
for air travel. As discussed under "Revenue Enhancement and Cost Reduction
Initiatives" below, the Company's revenue enhancement and cost reduction
initiatives have also contributed to the Company's improved 1996 results.
However, as discussed in the following section, the Company's airline
subsidiaries are currently facing renewed pressure from low cost, low fare
competition.
US Airways' Current Competitive Position - Low Cost, Low Fare Threat
US Airways has the highest cost structure of all major domestic air
carriers. Within the last several years, other major domestic air carriers have
made substantial progress toward addressing their cost structures, particularly
in response to competition from low cost, low fare air carriers. US Airways has
been able to reduce costs in certain expense categories (see "Revenue
Enhancement and Cost Reduction Initiatives" below), but has not been successful
in its efforts to reduce costs in its largest expense category - Personnel costs
(See "Personnel Costs - Continued Negotiations With Organized Labor Groups"
below). During 1993, Continental, TWA and Northwest Airlines, Inc., were able to
obtain significant wage concessions and
35
<PAGE>
productivity improvements from unionized employees. The employee concessions
achieved by Continental and TWA were obtained in the course of bankruptcy
proceedings of those companies. During 1994, United completed a transaction in
which employees traded significant wage concessions and productivity
improvements for a majority ownership stake in the company and seats on its
board of directors. The agreement also allowed United to establish a low cost,
low fare operation, "Shuttle by United." The primary function of this operation
is to successfully compete with low cost, low fare air carriers in mainly
secondary or short-haul markets. During 1996, Delta launched its own low cost,
low fare operation, "Delta Express." Delta Express marks the culmination of
Delta's efforts to establish a product capable of competing with low cost, low
fare air carriers such as Southwest and ValuJet. Delta Express became possible
as a result of a new labor agreement Delta entered into with its unionized
pilots group.
As mentioned above, Eastern U.S. operations comprise a substantial portion
of US Airways' current route structure. Although a competitive strength in some
regards, the regional concentration of significant operations results in US
Airways being susceptible to changes in certain regional conditions that may
adversely effect the Company's financial condition and results of operations.
The combination of a high cost structure and the regional concentration of
operations has also contributed to US Airways being particularly vulnerable to
low cost, low fare competition. In late 1993, for example, Continental launched
its low cost, low fare Continental Lite product in certain markets in the
Eastern U.S. also served by US Airways. Continental Lite operations were
substantially expanded during 1994. US Airways responded to this competitive
threat by selectively lowering its fares by as much as 70% compared to the fares
in effect prior to the Continental Lite incursion. By late 1994, US Airways
competed with Continental Lite in primary and secondary markets from which US
Airways then derived approximately 46% of its passenger revenues. Continental
terminated its Continental Lite service in early 1995. Competition with
Continental, however, was one of the major contributing factors to the Company's
poor financial performance during 1994.
ValuJet, an air carrier centered around low costs of operations and a low
fare structure, commenced operations in October of 1993 by offering service
within the Eastern U.S. operating two aircraft. By April 1996, ValuJet had grown
substantially and operated 51 aircraft. However, ValuJet reduced its service in
May 1996 and suspended operations entirely on June 17, 1996. The Company
estimates that approximately 8% of US Airways' capacity (as measured by ASMs)
directly overlapped with ValuJet's route structure prior to ValuJet's service
reduction. The Company believes that ValuJet's cessation of operations had a
favorable effect on the Company's Passenger transportation revenues, but has not
quantified such effect. ValuJet reinstated service at reduced levels on
September 30, 1996, but the Company is unable to predict whether ValuJet's
capacity in markets also served by US Airways will eventually match or exceed
the pre-May 1996 levels. ValuJet currently operates 21 aircraft.
The fourth quarter of 1996 included the introduction of Delta Express on
October 1st and Southwest's inauguration of service to and from Providence,
Rhode Island on October 27th. As mentioned above, Delta Express became possible
as a result of a new labor agreement Delta reached with its unionized pilots
group. Delta Express currently operates between Florida and 10 Northeast and
Midwest cities. Southwest's service at Providence, which is approximately 60
miles from Boston, has resulted in some passenger traffic being drawn from
Boston's Logan International Airport. US Airways and its regional airline
affiliates have substantial operations at Boston's Logan International Airport.
Southwest, another air carrier centered around low cost operations and a low
fare structure, first entered Northeast U.S. markets during 1993 by adding
service to and from BWI. Since that time, Southwest has expanded service at BWI,
initiated service to Florida from BWI (among other locations), launched intra-
Florida service and, as mentioned above, added service to and from Providence.
In April 1997, Southwest announced that it would increase its operations at
Providence. BWI is one of US Airways' hub airports and Northeast-Florida
service forms one of US Airways' primary leisure markets. On April 7, 1997, US
Airways announced plans to reduce its presence at BWI, including reductions in
flights and employees. Certain flights from BWI to Caribbean destinations will
originate in the future in Philadelphia in connection with a shift by US Airways
of international service from BWI to Philadelphia.
The Company estimates that US Airways' direct route overlap with Delta
Express and Southwest is currently 3.9% and 2.8%, respectively (as measured by
ASMs). However, the Company anticipates that US Airways' route overlap with both
competitors, as well as the intensity of the competitive pressure on US Airways,
will increase as Delta Express follows its planned doubling of operations in
1997 and Southwest allocates additional resources to its new Northeast U.S.
operations. The Company views Southwest's continued expansion into the intra-
Eastern U.S. market and Delta's ability to establish a low cost, low fare
operation as serious competitive threats. For comparative purposes, US Airways'
unit operating cost (operating
36
<PAGE>
expenses per ASM or "Cost per ASM") was 12.69 cents for full-year 1996,
Southwest's unit operating cost for 1996 was 7.50 cents and the Company believes
that Delta Express' annual unit operating cost is close to Southwest's.
Overall, US Airways currently has low cost, low fare competition
overlapping approximately 43% of its traffic base; up from approximately 40%
during early 1995. In an effort to preserve market share, US Airways has
typically responded to the entry of a low cost, low fare competitor into its
markets by matching fares and increasing the frequency of service in related
markets, generally with the result of diluting US Airways' yield (Passenger
transportation revenue per RPM) in these markets. In some cases US Airways has
responded by reducing service in affected markets.
The Company believes that lowering US Airways' costs of operations is
essential in order for US Airways to remain competitive and ensure the Company's
long-term financial viability, particularly in light of recent competitive
developments.
Revenue Enhancement and Cost Reduction Initiatives
In January 1996, the Company's and US Airways' boards of directors elected
Stephen M. Wolf as Chairman of the Board and Chief Executive Officer. During
February 1996, Rakesh Gangwal was elected President and Chief Operating Officer
and Lawrence M. Nagin was elected Executive Vice President of Corporate Affairs
and General Counsel of both companies. The new senior management team is
focusing on addressing US Airways' high cost structure, particularly with
respect to Personnel Costs, and has embarked on other measures to improve US
Airways' competitive position in today's highly competitive airline industry
environment. These other measures include improving and standardizing US
Airways' product, revamping US Airways' market image and focus, increasing
international service and rationalizing US Airways' operating aircraft fleet.
The Company's senior management recently engaged in a series of presentations to
the Company's employees to explain and emphasize its view that the Company must
obtain a competitive cost structure in order to implement its strategy of
becoming an effective global competitor. See "The Company-Strategy" for
additional information concerning this strategy and the Company's alternatives
if such strategy cannot be implemented. If and to the extent that the
alternatives pursued include reducing certain operations, the Company could
incur charges such as those related to any resulting decrease in value of
certain assets employed in such operations. No final decisions have been made
with respect to such alternatives and, accordingly, the Company cannot determine
the amount of any such possible charges.
As mentioned above, US Airways recently changed its name. The name change
signals the expanding reach of US Airways' route structure and its changing
image. Coinciding with the name change, the livery of US Airways' aircraft will
be enhanced and aircraft interiors upgraded and standardized. New products and
features, such as a new international business class called "Envoy Class" and
personal in-seat video systems, will be added in an effort to attract more
business travelers and improve US Airways' image in the marketplace. US Airways
is in the process of equipping all of its operating aircraft with in-flight
phones and further expanding first class cabins and replacing first class seats
on select aircraft. In addition, US Airways' airport lounges are being enhanced
and, in some cases, expanded.
In 1991, US Airways began reducing the size of its operating aircraft fleet
culminating in a "right-sizing" strategy in the Spring of 1995. The goal of this
strategy was to reduce annual system capacity by five percent and emphasize the
strengths of its hubs at the major airports in Pittsburgh, Charlotte,
Philadelphia and Baltimore, as well as its operations at other major East Coast
urban centers. Capacity reductions were focused on eliminating redundant or
unprofitable routes. US Airways' capacity (ASMs) for 1995 decreased by 4.7%
versus 1994 as a result of these efforts. The strengthening of hub operations
was achieved by reducing point-to-point flights (flights between cities that are
not US Airways hubs) thereby increasing the utilization of equipment and
personnel at hub locations. The percentage of point-to-point flights in US
Airways' schedule was reduced from approximately 18% at the end of 1994 to
approximately 10% by the end of 1995. Point-to-point flying comprised
approximately 9% of US Airways' schedule at the end of 1996. US Airways also
expanded its transatlantic focus from Charlotte and Pittsburgh to include Boston
and Philadelphia to take advantage of better connecting traffic and the larger
population bases in those cities. These initiatives produced substantial
financial benefits during 1996 and 1995.
During 1996, US Airways redirected its right-sizing efforts and began
focusing on diversifying its route structure. US Airways' transatlantic capacity
increased 55.4% in 1996 versus 1995 levels (as measured by ASMs). US Airways
launched new European service to Munich, Madrid and Rome during mid-1996 and
added additional service at Frankfurt during 1996. US Airways has also filed
with the DOT to serve London's Heathrow Airport from Boston, Charlotte,
Philadelphia and Pittsburgh. US Airways continues to explore additional
international opportunities.
In light of the proposed BA/AA Alliance, as described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Relationship with British Airways" below, a critical element of US Airways'
strategy to achieve sustained financial health and growth in international and
domestic markets is the establishment of competitive service to Heathrow. The
BA/AA Alliance is currently being reviewed by regulatory authorities in the
United Kingdom, the United States and Europe. The Company believes that it is
likely that British Airways and American will be forced to divest slots and
ground facilities at Heathrow in order for regulatory authorities to approve the
BA/AA Alliance.
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<PAGE>
Based on US Airways' extensive route structure in the Eastern U.S., the
Company believes that it is uniquely situated to receive slots and ground
facilities at Heathrow which are divested by British Airways or American as part
of regulatory approval of the BA/AA Alliance. However, many airlines, including
competitors of US Airways, have appealed to the regulatory authorities to
receive such slots and ground facilities at Heathrow.
The Company is unable to determine whether or when (a) the BA/AA Alliance
will be approved or (b) it will receive any slots or ground facilities at
Heathrow. In the event (a) regulatory authorities do not approve the BA/AA
Alliance or (b) US Airways does not receive sufficient slots and ground
facilities at Heathrow in connection with the regulatory approval of the BA/AA
Alliance to support our proposed level of service, the Company's international
strategy will be constrained by its lack of access to Heathrow.
US Airways has also undertaken steps to increase its level of on-time
performance and improve in other key industry performance measurements (as
compiled and reported by the DOT). For October 1996, US Airways ranked first in
on-time performance among major domestic air carriers for the first time in its
history, despite setting a company single-month load factor record during that
month. US Airways finished first in on-time performance among major domestic air
carriers for the fourth quarter of 1996. During that quarter, US Airways also
ranked first in fewest damaged or lost baggage complaints, fewest reservations
complaints and was second overall in fewest complaints of all types. US Airways
continues its efforts to improve its image in the marketplace.
In October of 1995, US Airways introduced personal computer software that
enables certain high-volume customers to engage in self-service travel booking.
User response has been favorable. In April 1996, US Airways introduced
electronic ticketing, or "ticketless travel," as an option for customers
traveling within the U.S. on US Airways or US Airways Express. Electronic
ticketing enables a customer to book a flight through US Airways' reservations
system or certain travel agencies and receive a confirmation number instead of a
paper ticket. The Company believes that electronic ticketing enhances customer
convenience and helps to reduce US Airways' distribution costs. Distribution
costs currently account for approximately $1 billion of the Company's annual
operating expenses. Customer response to electronic ticketing has been favorable
and customer use of electronic ticketing has increased since its introduction.
Electronic ticketing currently accounts for approximately 14% of US Airways'
ticket sales.
During 1996, US Airways continued its cost reduction efforts in non-labor
areas initiated in late 1994. These efforts have included various organizational
changes, process reengineering, the centralization of US Airways purchasing
functions, operations research initiatives intended to improve operational
efficiency and maximize passenger revenue generation and the outsourcing of
certain cargo, catering and communications functions. In addition, US Airways
imposed limits on the base commissions it pays travel agents for domestic air
fares beginning in the first quarter of 1995. The new limits on commissions are
designed to reduce one of US Airways' largest expenses - Commissions (see also
"Results of Operations" below). US Airways signed a ten-year contract with a
subsidiary of the General Electric Company ("GE") during the third quarter of
1996 for the upkeep and overhaul of US Airways' CFM-56 and CF-6 jet engines.
These engines, originally manufactured by GE and an affiliate of GE, power US
Airways' Boeing 737-300, Boeing 737-400 and Boeing 767-200ER aircraft. US
Airways expects substantial cost savings over the next ten years associated with
the new GE "power-by-the-hour" aircraft engine maintenance contract. The Company
believes that US Airways' cost reduction efforts helped reduce non-labor
expenses by approximately $500 million during 1995, from otherwise expected
levels, with similar savings achieved during 1996.
As part of the Company's efforts to reduce its capital expenses, the
Company reached an agreement with Boeing in 1994 which enabled US Airways to
reschedule the delivery of 40 Boeing 737-Series aircraft from the 1997-2000 time
period to the years 2003-2005. In addition, as part of the same agreement, US
Airways relinquished all of its options to purchase Boeing aircraft during the
1996-2000 time period. During 1995, the Company reached agreements with Boeing
and Rolls Royce regarding the deferral of eight Boeing 757-200 aircraft
deliveries from 1996 to 1998. As part of the latter agreements, the delivery
dates for progress payments associated with the previously scheduled 1996
deliveries were likewise rescheduled. These agreements with Boeing and Rolls
Royce have resulted in a substantial reduction in US Airways' expected capital
expenditures for the years 1996 through 2000 (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Aircraft Fleet and
Related Matters" below for recent events concerning Boeing).
US Airways announced in November 1996 that it had entered into an agreement
with AVSA, S.A.R.L., an affiliate of Airbus, regarding the acquisition of up to
400 narrowbody Airbus aircraft. The agreement, discussed further under "Aircraft
38
<PAGE>
Fleet and Related Matters" below, is part of US Airways' long-term strategy of
replacing several older, diverse aircraft types with newer, more efficient
aircraft types based on a similar design. The Company believes that the
operational and customer service benefits of modernizing its fleet outweigh the
increased expenses that would be incurred by US Airways with the purchase or
lease of the new aircraft.
Personnel Costs - Continued Negotiations With Organized Labor Groups
Personnel costs represented 41.5% of US Airways' operating costs for 1996.
US Airways currently has the highest unit labor costs in the domestic airline
industry (see additional information regarding Personnel costs under "Results of
Operations"). The Company remains committed to obtaining a significant reduction
in US Airways' unit labor costs and believes that US Airways' long-term
financial viability depends on its success in further reducing its cost of
operations.
During the Spring of 1995, the Company reached agreements-in-principle with
each of US Airways' major unions regarding concession agreements involving wage
and benefit reductions, improved productivity and other cost savings totaling
approximately $500 million annually. However, those tentative agreements were
conditioned on, among other things, ratification by the members of each labor
group and the approval of the Company's stockholders and the Company's and US
Airways' boards of directors. These agreements-in-principle provided for wage
and other concessions in exchange for equity participation in the Company,
profit sharing and representation on the Company's board of directors for US
Airways' labor groups. In July 1995, the membership of the AFA, which represents
US Airways' flight attendants, voted not to ratify its agreement-in-principle.
The ALPA, which represents US Airways' pilots, made significant additional
demands which were unacceptable and negotiations were thereafter terminated by
the Company.
US Airways' contract with the employees represented by the IAM became
amendable on October 1, 1995. ALPA's contract became amendable on May 1, 1996
and US Airways' contract with the AFA became amendable on January 1, 1997. The
collective bargaining process is in progress with all three unions - the Company
is unable to predict how long it will take to conclude these negotiations or the
eventual outcome of these discussions. Such negotiations traditionally take one
or more years from the time a contract becomes amendable, as described in the
following paragraph. In recent talks, the Company proposed that US Airways
split-off short-haul and certain longer-haul flights into a separate, distinct
operating unit. The new operation, centered on lower operating costs than the
"mainline" service and an attractive pricing structure, would be designed to
help US Airways' competitive stance against Southwest, Delta Express, ValuJet
and other low cost competitors.
Under the RLA, a labor contract does not "expire," but rather becomes
amendable on a certain date. Thirty days prior to that date, either party to the
contract may give notice to the other of its intention to amend the contract, at
which point the collective bargaining process begins. If after a period of
negotiations, the parties cannot reach an agreement, a federal mediator from the
NMB is brought in to assist. The process of mediation continues until the NMB
determines, at its sole discretion, that the parties have reached an impasse. At
that point, the parties enter a thirty-day "cooling off" period before either
party may employ so-called self-help (e.g., the imposition of contract changes
or a lockout by the company or a strike by the union). While in negotiations and
mediation, both parties are bound by the contractual terms that were in effect
prior to the commencement of the collective bargaining process.
Aircraft Fleet and Related Matters
The Company has embarked on a program to upgrade and standardize the
interiors of US Airways' operating aircraft over the next three years. The first
phase of the program, which was completed during the fourth quarter of 1996,
involved minor changes and improvements to the interiors of each of US Airways'
operating aircraft. This phase of the program resulted in minimal incremental
expenditures, but has provided a substantial short-term improvement in the
appearance of each aircraft. The second phase of the program, which began in
February 1997 and is expected to be completed in 1999, includes, depending on
the type of aircraft, replacing carpets, seat cushions, sidewalls and overhead
storage bins, repainting other aircraft interior components, reconfiguring
and/or upgrading seats, expanding first class seating and adding or replacing
lavatories. The Company currently estimates that the second phase of this
program will result in one-time incremental expenditures of approximately $73
million, approximately $27 million of which is expected to be capitalized.
As mentioned previously, US Airways recently entered into a series of
agreements with an affiliate of Airbus regarding the acquisition by US Airways
of up to 400 Airbus aircraft. The A319, A320 and A321 narrowbody aircraft
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(collectively, the "Airbus Aircraft") were tentatively scheduled for delivery to
US Airways between 1997 and 2009. The proposed transaction would be comprised of
120 firm Airbus Aircraft and 120 Airbus Aircraft to be reconfirmed by US Airways
at a future date. In addition, US Airways would have the option to acquire up to
160 additional Airbus Aircraft with open-ended delivery dates. US Airways would
have the flexibility in selecting among the 122-seat A319, the 144-seat A320 and
the 168-seat A321, depending upon projected industry conditions at the time
final delivery schedules were set. The Airbus Aircraft are presently intended
as, at a minimum, replacement aircraft for US Airways' existing fleet of Douglas
DC-9-30 and MD-80 aircraft, Boeing 737-200 aircraft, and Fokker F28-4000
aircraft. US Airways is also examining alternatives for widebody aircraft to
support US Airways' goal of increased international operations.
The agreements with Airbus remain subject to US Airways achieving a
competitive cost structure, but obligate US Airways to inform Airbus by
September 30, 1997 of whether or not it will proceed with the acquisition of the
aircraft contemplated thereby. US Airways has requested that Airbus agree to an
extension of this deadline in the belief that such an extension would facilitate
US Airways' efforts to achieve its desired reductions in operating costs. See
Note 4(d) to the Company's Consolidated Financial Statements contained elsewhere
in this Prospectus for additional information.
In early January 1997, Airbus advised US Airways that it could not support
the delivery of six aircraft tentatively scheduled for delivery to US Airways in
1997 due to US Airways' inability to affirm the contractual arrangement. Airbus
subsequently advised US Airways that it was also withdrawing all of US Airways'
1998 and 1999 firm delivery positions as well as support for the twelve aircraft
contemplated to be leased in 1998 for similar reasons. If US Airways is able to
achieve a competitive cost structure it may still be able to acquire Airbus
aircraft during 1998 and 1999 (see also "Personnel Costs - Continued
Negotiations with Organized Labor Groups" above).
The Company has not yet determined whether consummation of the Airbus
transaction and the disposition of the aircraft intended to be replaced with
Airbus Aircraft would require the Company to recognize an "impairment loss" in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of ("SFAS 121").
During October 1996, US Airways advised Boeing and Rolls Royce that it does
not plan to accept delivery of the eight Boeing 757-200 aircraft US Airways
presently has on firm order. Consistent with a written statement from Boeing
extending the scheduled delivery dates of the Boeing 757s from 1998 to 1999 and
the ongoing business discussions between the two parties, US Airways did not
make a progress payment to Boeing of approximately $3 million which was, prior
to such extension, scheduled to be due on November 1, 1996. On November 7, 1996,
Boeing alleged that US Airways was in default of the 757 purchase agreement for
failing to make the November 1st payment. Boeing has further alleged, among
other things, that US Airways has repudiated a purchase agreement relating to 40
737-Series aircraft scheduled for delivery commencing in 2003. Boeing has
purported to terminate both such 757-200 and 737-Series purchase agreements, an
action which US Airways believes is not supported by law or the facts, and has
claimed almost $450 million as damages for US Airways' alleged breach of such
agreements. US Airways subsequently advised Boeing, among other things, that US
Airways rejects Boeing's asserted legal basis for termination of such
agreements. In addition, US Airways stated that it would hold Boeing responsible
for any damages incurred as a result of Boeing's unlawful termination and
demanded immediate return of all payments made by US Airways in furtherance of
the 737-Series purchase agreement, together with interest from the date of
payment. US Airways also expressed its belief that Boeing is legally committed
to pursue contract resolutions in good faith. Notwithstanding the formal legal
positions of the parties, both sides have expressed a desire to resolve this
dispute on a mutually satisfactory basis. US Airways cannot predict whether
Boeing will seek to exercise remedies against US Airways and if so, whether the
effect on US Airways' financial condition or results of operations would be
material. See Note 4(d) to the Company's Consolidated Financial Statements for
additional information.
Relationship With British Airways
On June 11, 1996, British Airways and American announced a proposed
alliance to jointly market, price and manage their North Atlantic airline
services, effective April 1, 1997, subject to U.S. and international approvals.
The joint services would carry the designator codes of both airlines and each
would code-share beyond the other's gateways. The two airlines have also
indicated that they intend to act cooperatively in other areas, such as
marketing, sales, facilities use and cargo. British Airways and American are
seeking antitrust immunity in connection with approval of their alliance.
Certain competition
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authorities in the U.S. and Europe have made inquiries into the proposed
alliance and several airlines serving the North Atlantic have raised very strong
objections to the proposed alliance.
On July 30, 1996, the Company and US Airways initiated a lawsuit in the
U.S. District Court for the Southern District of New York against British
Airways, BritAir, American and American's parent company, AMR Corporation. The
Company and US Airways claim that British Airways, in pursuit of an alliance
with American, is responsible for breaches of fiduciary duty to the Company and
US Airways and violated certain provisions of the January 21, 1993 Investment
Agreement between the Company and British Airways. The lawsuit also claims that
the defendants are in violation of U.S. antitrust laws that prohibit conduct
that harms competition. Although the defendants filed motions to dismiss the
lawsuit following the filing of the complaint, these motions because superceded
on March 5, 1997 when the Company filed an Amended Complaint with the Court
based on information gathered in the pre-trial discovery process. The defendants
filed new motions to dismiss the Amended Complaint on March 28, 1997.
The Company is unable to predict at this time the ultimate outcome of this
lawsuit.
On October 24, 1996, US Airways notified British Airways that it would
terminate the code sharing and frequent traveler agreements between the two
companies effective March 29, 1997 as a result of British Airways' decision to
enter into an alliance with American. In addition, certain other commercial
arrangements between US Airways and British Airways have been or are in the
process of being terminated. The Company does not anticipate any material
adverse impact on its financial condition or results of operations as a result
of the termination of these arrangements. US Airways believes that the code
share arrangement contributed less than $20 million annually to its operating
revenues. Further, the Company does not believe that US Airways' lack of an
international code share partner will have a material impact on its financial
condition or results of operations.
On December 17, 1996, British Airways delivered a notice (the "First Sale
Notice") to the Company of its intent to sell in one or more underwritten public
offerings or privately negotiated transactions, all of the shares of Series F
Preferred Stock and Series T Preferred Stock. Under the Investment Agreement,
the First Sale Notice triggered (i) a right of first offer of the Company to
purchase all (or in certain circumstances, any portion) of such shares at prices
("Offer Prices") set forth in the First Sale Notice (the "Right of First Offer")
and (ii) a public offering registration procedure (the "Public Offering
Procedure"). The Offer Prices set forth in the First Sale Notice for the Series
F Preferred Stock and the Series T-1 Preferred Stock were established for
purposes of both a private sale and a public offering, while the Offer Price for
the Series T-2 Preferred Stock was set forth for a private sale only. The Right
of First Offer with respect to the Series F Preferred Stock and Series T-1
Preferred Stock expired on February 15, 1997. On March 14, 1997, British Airways
delivered a notice (the "Second Sale Notice") to the Company triggering a second
right of first offer (the "Series T-2 Right of First Offer") of the Company to
purchase all (or in certain circumstances, any portion) of the shares of Series
T-2 Preferred Stock at the price set forth in the Second Sale Notice. The Series
T-2 Right of First Offer will expire on May 14, 1997.
Because the Company elected not to exercise the Right of First Offer,
British Airways is free to complete a sale on terms no less favorable to British
Airways than those set forth in the First Sale Notice, provided that (i) such
sale is closed by August 14, 1997 (or 180 days following the initial filing of
the Company's registration statement in conjunction with the Public Offering
Procedure), (ii) in the case of a public offering of Series F Preferred Stock or
Series T-1 Preferred Stock, the sale price may be higher or lower than the price
offered in the First Sale Notice and (iii) in the case of a privately negotiated
transaction, the price must be equal to or higher than the price offered in the
First Sale Notice. In the event the Company does not exercise the Series T-2
Right of First Offer, British Airways will be free to complete a sale of the
Series T-2 Preferred Stock in a public offering on terms no less favorable to BA
than those set forth in the Second Sale Notice, provided that the sale price may
be higher or lower than the price offered in the Second Sale Notice.
In the First Sale Notice, British Airways also exercised the Public
Offering Procedure under the Investment Agreement to cause the Company to use
its "reasonable efforts" to register the Series F Preferred Stock and the Series
T Preferred Stock for sale in an underwritten public offering at British
Airways' request on up to three occasions. The registration procedures provide
that the Company shall prepare and file with the Commission and use its
reasonable efforts to cause to become effective a registration statement under
the Securities Act by April 16, 1997, provided, however, that the Company's
obligation may be deferred in certain circumstances for up to 180 days.
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On January 28, 1997, the Company received notice that British Airways'
representatives, Messrs. Ayling, Stevens and Maynard, resigned as directors of
US Airways Group and on February 12, 1997, the Company received notice that such
individuals resigned as directors of US Airways. In the letter of resignation,
British Airways waived its current and future rights under the Investment
Agreement to US Airways Group board representation.
Based on such resignations, British Airways may take the position that
British Airways is no longer an affiliate of US Airways Group and, therefore,
upon the expiration of the third month following such change in status, is able
to sell the BA Preferred Stock without registration under the Securities Act in
compliance with an exemption thereunder.
Payments of Dividends on Senior Preferred Stock
During August and October of 1996, the Company paid dividends of $43.0
million and $40.0 million, respectively, on its outstanding Senior Preferred
Stock. Prior to these dividend payments, the Company had deferred the payment of
dividends on all of its outstanding preferred stock issuances effective with
dividend payments due September 30, 1994.
As of December 31, 1996, the Company's capital surplus, as calculated in
accordance with Delaware Law based on the Company's Consolidated Balance Sheets
(which are contained elsewhere in this Prospectus), was $110.0 million. The
Company, organized under Delaware Law, may be subject to certain legal
restrictions on its ability to pay dividends or repurchase or redeem its own
shares of capital stock for cash or other property depending on the amount of
its capital surplus. Capital surplus, under Delaware Law, is calculated as (i)
net assets (total assets minus total liabilities), less (ii) total capital (that
amount of preferred and common equity designated as capital by a company's board
of directors). As of December 31, 1996, the Company's net assets were in a
surplus position of $174.3 million based on the Company's Consolidated Balance
Sheets and its total capital was $64.3 million (all attributable to the
Company's outstanding Common Stock; capital for the Company's outstanding
preferred stock issuances is a nominal amount of one cent per share).
As of December 31, 1996, accumulated deferred dividends on all of the
Company's outstanding preferred stock issuances, including penalty dividends
thereon, totaled $118.9 million. See Note 7(d) to the Company's Consolidated
Financial Statements for additional information with respect to accumulated
deferred dividends.
On January 31, 1997, the Company paid additional dividends of $50.0 million
to holders of the Company's Senior Preferred Stock. On March 26, 1997, the
Company paid dividends of $34.8 million on its outstanding Senior Preferred
Stock. Following such payments, the Company was current with respect to all
dividends on its outstanding Senior Preferred Stock. On March 31, 1997, the
Company paid its regular quarterly dividend on the Series A Preferred Stock.
Government Regulation
The ticket tax was reinstated on August 27, 1996, for tickets sold for
travel before January 1, 1997. This tax, 10% of the cost of an airline ticket,
had previously expired on January 1, 1996. The Company believes that its
Passenger transportation revenues were stimulated during the period the tax was
not in effect - the absence of the tax effectively reduced the cost of air
travel. The Company cannot estimate the dollar impact of the tax expiration on
its Passenger transportation revenues during the period the tax was not
collected due to the complexity and number of factors that contribute to the
Company's performance in this area. This tax expired again on January 1, 1997.
On February 28, 1997, President Clinton signed legislation reinstating the tax
for tickets sold beginning March 7, 1997 through September 30, 1997.
Reinstatement of this tax, which could effectively increase the cost of air
transportation, may dampen demand for air transportation which, in turn, may
have a material adverse effect on the Company's financial condition and results
of operations.
The Company's airline subsidiaries became obligated to pay the $.043 per
gallon Federal Excise Tax on Transportation Fuels on October 1, 1995. Airlines
had a two-year exemption from this tax, which became law during 1993. Attempts
to either rescind this tax or reinstate the airline exemption continue, although
these efforts have not been successful to date. US Airways cannot predict the
ultimate outcome of future attempts to either rescind the tax or reinstate the
airline exemption. US Airways recognized expenses of $43.0 million and $11.9
million as a result of this tax during 1996 and 1995, respectively.
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The FAA has proposed new regulations that would require flight data
recorders that measure more flight parameters than most original equipment
flight data recorders. The proposed regulations, subject to DOT approval, would
require the upgraded flight data recorders to be installed within four years.
The proposal, as drafted, would affect US Airways' entire operating fleet. The
Company estimates that the proposed regulations, if adopted, would cost US
Airways approximately $20 million over the four year period. The Company cannot
predict whether or when the proposed regulations will be adopted or if the
proposed regulations will result in expenditures consistent with the Company's
current estimate.
Following the July 1996 accident involving a TWA aircraft and speculation
that the cause of the accident may have been sabotage, President Clinton ordered
new security measures related to passenger, baggage and cargo screening,
particularly with respect to international operations. The increased security
measures have resulted in an increase in the Company's operating expenses,
although the dollar effect of the new security measures is not material. The
President also formed a special committee which is reviewing aviation safety and
airport security, as well as the air traffic control system. The committee
released its final recommendations on February 12, 1997. The committee made
several recommendations in the areas of safety, air traffic control and
security. The Company is unable to predict whether any of the recommendations
will be adopted, and if adopted, their impact on the Company's financial
condition and results or operations. Further increases in government-mandated
security measures could have an adverse effect on the Company's financial
condition and results of operations depending on the ability of US Airways and
its regional affiliates to passthrough any new Federal taxes, surcharges or
additional operating expenses to customers. Any effective increase in the cost
of air transportation may dampen passenger and cargo traffic levels which could
have a material adverse effect on the Company's financial condition and results
of operations.
Many aspects of US Airways' operations are subject to increasingly
stringent federal, state and local laws protecting the environment. Future
regulatory developments could affect operations and increase operating costs in
the airline industry, including for US Airways.
Results of Operations
The following section provides an overview of changes in certain components
of the Company's results of operations (the Company's Consolidated Statements of
Operations are contained elsewhere in this Prospectus). See "The Company -
Operating Statistics" for selected US Airways operating and financial statistics
(which also includes the definition of each term used below). All terms used in
this section refer to US Airways' scheduled service operations except for unit
operating cost, which includes charter service.
Year Ended December 31, 1996 Compared to
Year Ended December 31, 1995
The Company recorded net income of $263.4 million for 1996, an improvement
of $144.1 million or more than double its net results for 1995. After preferred
dividend requirement (the Company reflects dividends on all its outstanding
preferred stock as if paid during the period for purposes of calculating income
per common share), the Company earned $174.6 million for 1996, or $2.69 per
common share on a primary basis.
The Company's second quarter financial results have historically been its
strongest due to US Airways' combination of business traffic and North-South
leisure traffic in the Eastern U.S. during that period.
US Airways' RPMs and passenger load factor for 1996 were company records.
Although US Airways' capacity (ASMs) fell 2.2% and the number of revenue
passengers carried was relatively unchanged year-over-year, yield improved 4.8%
and average passenger journey increased 3.6%. The yield improvement was
primarily driven by the factors discussed under "Factors Contributing to
Improved 1996 Financial Results" and the decrease in capacity (ASMs) was due
mainly to less operating aircraft in US Airways' operating fleet year-over-year.
The increase in average passenger journey reflects US Airways increased
transatlantic service (see related discussion under "Revenue Enhancement and
Cost Reduction Initiatives"). In general, favorable capacity and pricing trends
have been evident in markets served by the Company's airline subsidiaries since
the demise of Continental Lite in early 1995. Competition with Continental Lite
included US Airways selectively lowering fares in certain markets to maintain
market share.
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As mentioned above, the Company's airline subsidiaries are experiencing
increased competitive pressure with the October 1996 launch of Delta Express,
Southwest's late-October 1996 expansion into the Northeast U.S. and ValuJet's
recent reinstatement of service. Direct competition with low cost, low fare air
carriers or operations has typically resulted in the dilution of yield realized
by the Company's airline subsidiaries in the affected markets.
US Airways continues to be the highest cost major air carrier in the United
States. US Airways' unit operating cost was 12.69 cents for 1996, an 11.3%
increase versus its unit operating cost for 1995. This increase is primarily the
result of higher operating expenses applied over slightly less capacity (ASMs)
year-over-year (see discussion below related to year-over-year changes in
certain components of the Company's operating expenses). US Airways' high cost
structure relative to its major competitors results in it being particularly
susceptible to adverse changes in general economic and market conditions.
During 1996, US Airways recorded two non-recurring items related to its
subleasing of 11 non-operating British Aerospace BAe-146-200 ("BAe-146")
aircraft (in addition to the three sublease agreements reached during the fourth
quarter of 1995 for which US Airways recorded a non-recurring item of $4.1
million - a credit to Aircraft rent expense). US Airways reversed $22.5 million
of previously accrued rent obligations related to these aircraft against
Aircraft rent expense and reversed $7.0 million against Aircraft maintenance
expense related to previously accrued lease return provisions.
Operating Revenues
Passenger Transportation - US Airways' Passenger transportation revenues
increased $531.7 million, or 8.5%, with the remainder of the $622.3 million
increase attributable to passengers carried by the Company's regional airline
subsidiaries. US Airways' increase is primarily the result of a 4.8% increase in
yield and a 3.6% increase in average passenger journey. The main factors
contributing to the Company's improved performance during 1996 are discussed
above. In addition, the Company estimates that severe winter weather within the
Eastern U.S. and the partial Federal Government shutdown adversely affected
first quarter 1996 revenues by approximately $55 million. Hurricanes Fran and
Eduoard, which occurred during September 1996, also adversely affected the
Company's Passenger transportation revenues by approximately $10 million.
Although a competitive strength, concentration of significant operations in the
eastern U.S. results in the Company's airline subsidiaries being susceptible to
certain regional conditions that may have an adverse effect on the Company's
financial condition and results of operations. The Company's airline
subsidiaries faced intense competitive pressure from Continental Lite during
early 1995 (see discussion under "US Airways' Current Competitive Position - Low
Cost, Low Fare Threat").
Other Operating Revenues - Fees received by US Airways for passenger
handling and reservation services from US Airways Express air carriers (other
than the fees US Airways receives from the Company's three wholly-owned regional
air carriers, which are eliminated during the consolidation of the Company's
results of operations) increased due to higher passenger volumes carried by
these air carriers and a higher fee structure. In addition, US Airways revenues
from frequent traveler program participation fees, reservation cancellation fees
and aircraft lease arrangements all increased year-over-year. US Airways'
results include certain transactions with related parties that are eliminated at
the US Airways Group level. The final wet lease with British Airways expired
during the second quarter of 1996. Wet lease revenues of $12.6 million were
included in the Company's Other Operating Revenues for 1996 as compared to $63.6
million for 1995. See additional information related to the Company's third
party lease and sublease arrangements in Note 4(b) to the Company's Consolidated
Financial Statements. Increases or decreases in components of Other Operating
Revenues are largely offset by related changes in Other Operating Expenses, Net
or other operating expense categories.
US Airways' Operating Revenues include the line item "US Airways Express
transportation revenues." Effective October 1, 1996, US Airways began purchasing
all of the capacity (ASMs) generated by the Company's three wholly-owned
regional air carriers and, concurrently, recognizing the passenger
transportation revenues that result from passengers being carried by these
affiliated companies. The rate per ASM that US Airways pays is based on
estimates of the costs incurred to produce the capacity. The program is designed
to reflect the reality of US Airways' relationship with the Company's regional
airline subsidiaries - US Airways controls the markets these air carriers
operate in, the marketing programs and the fares they charge. US Airways'
expenses associated with this program are eliminated during the consolidation of
the Company's results of operations and US Airways' revenues associated with
this program are reclassified to Passenger transportation revenues during the
consolidation process. The revenues and expenses recognized by US Airways during
the fourth quarter of 1996 related to this program may not be indicative of
future revenues and expenses associated with this program.
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Operating Expenses
Personnel Costs - Profit sharing expenses, the impact of adding a stock
appreciation right ("SAR") feature to one of the Company's stock option plans,
interest rate driven increases in pension and postretirement benefits expenses,
contractual wage increases that US Airways' pilot and flight attendant employee
groups received in January 1996 and wage increases received by certain non-
contract employees effective January 1, 1996 were the primary factors which
resulted in the Company's Personnel costs increasing $308.3 million or 10.7%
versus 1995. US Airways' mechanics and pilots also received contractual wage
increases in March 1995 and July 1995, respectively. US Airways had 40,160 full-
time equivalent employees as of December 31, 1996 versus 39,900 full-time
equivalent employees as of December 31, 1995.
The Company recorded profit sharing expense related to its 1992 Salary
Reduction Plan of $121.6 million for 1996 versus $49.7 million for 1995. The
Company's obligations under this plan ended with a payment to participants in
early March 1997.
During the fourth quarter of 1996, the Company's 1992 Stock Option Plan
("1992 Plan"), a component of the Company's 1992 Salary Reduction Plan, was
amended to include a SAR feature and SARs were granted to option holders under
this plan on a one-for-one basis. For each SAR, the holder is entitled to
receive the excess of the fair market value of a share of the Company's Common
Stock above $15. The exercise of any SAR cancels its tandem option and,
conversely, the exercise of any option cancels its tandem SAR. The SARs have the
same expiration date as the tandem options. To the extent the fair market value
of a share of its Common Stock exceeds $15, the Company recognizes compensation
expense based on the number of SARs outstanding. The Company recognized
compensation expense of $41.6 million related to the implementation of this
program during the fourth quarter of 1996. Approximately 4.2 million SARs were
outstanding under this plan as of December 31, 1996. Additional information
related to the Company's stock option plans (including SARs) can be found in
Note 8(e) to the Company's Consolidated Financial Statements.
Pension and postretirement benefits expenses increased $107.1 million due
primarily to interest rate factors. In addition, expenses related to stock
option grants, stock grants, severance payments and similar-type compensation
(excluding SARs expense) increased $20.6 million year-over-year. Long-term
disability expenses increased $22.7 million due mainly to an increase in number
of employees on long-term disability.
Aviation Fuel - US Airways' aviation fuel consumption was relatively
unchanged, but rate factors drove the Company's Aviation fuel expense up $147.1
million. US Airways' average cost of aviation fuel consumed during 1996 was
70.56 cents per gallon versus an average rate of 56.83 cents for 1995. Aviation
fuel prices are subject to market conditions and other factors that are
generally outside of the Company's control. Fluctuations in the price of
aviation fuel can have a dramatic effect on the Company's results of operations.
Based on consumption for 1996, each one cent per gallon increase in US Airways'
cost of aviation fuel translates into an increase of approximately $11 million
in US Airways' annual aviation fuel expense. Effective the first quarter of
1997, the Company began recognizing fuel taxes as an element of Aviation fuel
expense. These expenses were previously recognized in the Other operating
expenses category (the Company's prior period results have been restated for
this reclassification). The Federal excise tax on transportation fuels was $43.0
million for 1996 (see also "Government Regulation" above).
Commissions - Increases resulted from higher Passenger transportation
revenues. See also Other, Net below.
Aircraft Rent - Excluding the effects of the non-recurring item discussed
above, Aircraft rent expense increased 4.0%. The increase is due primarily to
two leased Boeing 767-200ER aircraft reentering US Airways' operating fleet
during the first half of 1996. US Airways recognized expenses related to these
aircraft in the Other Operating Expenses category while they were operated by
British Airways.
Aircraft Maintenance - Excluding the effects of the non-recurring item
discussed above, Aircraft maintenance expense increased $33.1 million.
Efficiencies gained from reengineering efforts in US Airways maintenance areas
and the effects of fewer operating aircraft in US Airways' fleet year-over-year
were more than offset by timing factors and expenses identifiable as transition
expenses related to a change in service providers for certain jet engine
maintenance work. US Airways signed a ten year contract with a subsidiary of GE
during the third quarter of 1996 for the upkeep and overhaul of certain jet
engines. Although the Company expects a significant decrease in maintenance
costs associated with these engines because of the new contract, US Airways
experienced approximately $14 million in costs during the fourth quarter of 1996
directly related to the transition of work from the former contractor to GE (see
discussion under "Revenue Enhancement and Cost Reduction Initiatives" above).
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Depreciation and Amortization - Decreased due mainly to fewer owned
aircraft in US Airways' operating fleet.
Other Operating Expenses, Net - Increased primarily due to increases in
insurance and communications-related costs. US Airways also experienced higher
credit card expenses linked to higher Passenger transportation revenues.
Expenses related to the wet lease arrangement with British Airways decreased
$51.0 million due to the expiration of this arrangement during May 1996 (see
also Other Operating Revenues and Aircraft Rent above).
US Airways' Operating Expenses include the line item "US Airways Express
capacity purchases." These expenses, which are eliminated during the
consolidation of the Company's results of operations, are discussed under
Operating Revenues above.
Other Income (Expense)
Interest Income - Increased due mainly to higher Cash and cash equivalents
and Short-term investments balances.
Interest Expense - Decreased primarily as the result of less long-term debt
outstanding year-over-year. The Company made early debt repayments of $150.5
million during 1996.
Equity in Earnings (Loss) of Affiliates - Amounts pertain to USAM's equity
interest in the earnings of Galileo International Partnership, Apollo Travel
Services Partnership ("ATS") and Galileo Japan Partnership ("GJP"). USAM owns
11% of the Galileo International Partnership, which owns and operates the
Galileo Computerized Reservation System ("Galileo CRS"), approximately 21% of
ATS, which markets the Galileo CRS in the U.S. and Mexico and approximately 11%
of GJP, which markets the Galileo CRS in Japan. Results for all three partner-
ships improved primarily driven by increases in airline industry passenger
volumes year-over-year.
Other, Net - Results for 1996 include expenses of $9.8 million related to
US Airways' settlement of litigation involving travel agencies (see "The
Company -Legal Proceedings" for additional information) and losses of $8.7
million related to US Airways' disposition of eight non-operating aircraft.
Results for 1995 included gains totaling $10.7 million related to the sale of
certain 737-300 aircraft. US Airways sold ten non-operating Boeing 737-200
aircraft during the first quarter of 1997 which resulted in a gain of
approximately $18 million.
Provision (Credit) for Income Taxes - The Company was subject to Federal
alternative minimum tax for 1996 and 1995 as well as income taxes in certain
states. The Company was not subject to regular Federal income tax for 1996 or
1995 as the result of using Federal net operating loss carryforwards. See Note 5
to the Company's Consolidated Financial Statements for additional information.
Year Ended December 31, 1995 Compared to
Year Ended December 31, 1994
US Airways Group recorded net income of $119.3 million for 1995 compared
with a net loss of $684.9 million for 1994. US Airways recorded net income of
$33.0 million for 1995 which represents an improvement of $749.2 million over
its 1994 results. US Airways' results include the results of its wholly-owned
subsidiary USAM.
The Company's year-over-year improvement in net income reflects a $477.2
million (6.8%) revenue increase coupled with a decrease in operating expenses of
approximately $335.9 million (4.5%). Excluding the unusual items recognized
during 1995 and 1994, as discussed further below, the Company's operating costs
decreased approximately 1.1% year-over-year.
US Airways' yield was 16.66 cents for 1995, a 6.7% improvement versus 1994.
The stronger than anticipated increase in yield primarily resulted from the
effects of the relatively stable domestic economic climate and favorable
capacity and pricing trends in markets served by the Company's airline
subsidiaries which were prevalent during most of 1995 (see related discussion in
"Factors Contributing to Improved 1996 Results" above).
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US Airways' capacity (ASMs) for 1995 decreased by 4.7%. RPMs, however,
decreased less than 1% and US Airways' load factor was 64.7% for 1995, a
historical high (which was subsequently eclipsed in 1996). US Airways' unit
operating cost increased to 11.40 cents from 11.02 cents for 1994 primarily due
to the capacity (ASMs) reductions that occurred in 1995.
The financial results for 1994 include several non-recurring items:
- a $172.9 million charge related to US Airways' grounded BAe-146 fleet and
to US Airways' decision to cease operations of its remaining Boeing 727-200
aircraft in 1995 (the last operational 727-200 aircraft was retired from
service in September 1995). During 1994, US Airways again evaluated the
secondary market for BAe-146 aircraft and determined that it was probable
that it would not be successful in its efforts to sublease or otherwise
dispose of these assets (before lease expiry). Considering this analysis,
US Airways did not include a provision for any potential subleasing
activity in determining the amount of the 1994 charge.
- a $54.0 million charge for obsolete inventory and rotables to reflect
market values.
- a $25.9 million charge related to US Airways' decision to substantially
reduce service between Los Angeles and San Francisco in November 1994.
- a $28.3 million gain resulting from the sale of certain aircraft and assets
to Mesa Air Group, Inc. ("Mesa") and the accounting treatment of the hull
insurance recovery on the aircraft lost in the September 1994 accident.
- a $1.7 million charge related to the sale of certain assets to Mesa.
The following table indicates where the above items appear in the Company's
Consolidated Statements of Operations ($ millions, brackets denote expense):
<TABLE>
<CAPTION>
California Other Asset
Line Item Aircraft Inventory Reduction Dispositions Total
--------- -------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating Expenses:
Personnel costs $ - $ - $ (0.3) $ - $ (0.3)
Aircraft rent (115.5) - - - (115.5)
Aircraft maintenance 3.4 - - - 3.4
Depreciation and
Amortization (21.7) (18.0) (18.2) - (57.9)
Other, net (39.1) (36.0) (7.4) (1.7) (84.2)
------- -------- -------- ----------- ----------
Total Operating Expenses $ (172.9) $ (54.0) $ (25.9) $ (1.7) $ (254.5)
======= ======== ======== =========== ==========
Other Income (Expense):
Other, net $ - $ - $ - $ 28.3 $ 28.3
------- -------- -------- ----------- ----------
Total Other Income (Exp.) $ - $ - $ - $ 28.3 $ 28.3
======= ======== ======== =========== ==========
</TABLE>
US Airways also recorded a $50.0 million addition to Passenger transportation
revenues in the fourth quarter of 1994 to adjust estimates made during the first
three quarters of 1994.
As mentioned above under "Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995," the Company recognized a $4.1 million unusual item during
the fourth quarter of 1995 related to US Airways' BAe-146 aircraft (a reduction
of Aircraft rent expense).
Operating Revenues
Passenger Transportation - Increased $391.0 million (6.2%), $345.5 million of
which is attributable to US Airways and the remainder to the Company's wholly-
owned regional airlines. The Company estimates that its Passenger transportation
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revenues were adversely affected during 1994 by approximately $50 million due to
unfavorable weather during the first quarter and approximately $150 million as
the result of the two accidents that occurred during the third quarter. By early
1995, US Airways' traffic had recovered from the effects of the accidents and
approached a level more normally associated with US Airways' capacity in the
marketplace. US Airways' 6.7% yield improvement was sufficient to offset the
effects on revenues of a 4.7% decrease in both revenue passengers and capacity
(ASMs).
Cargo and Freight - Decreased $6.3 million (3.9%) primarily due to US Airways'
$6.7 million (4.2%) decrease. The U.S. Postal Service's increased emphasis on
truck movement of mail in the Northeastern U.S. resulted in lower mail volumes
and yields.
Other Operating Revenues - Increased $92.5 million (19.4%), $67.5 million
(13.6%) of which is attributable to US Airways, primarily due to an increase in
fees received from participants in US Airways' frequent traveler program and
increased revenues from higher volumes and rates for cancellation and rebooking
fees. Revenues from third party aircraft lease and sublease arrangements also
increased during 1995. US Airways' results include certain transactions with
related parties that are eliminated at the US Airways Group level. Overall,
increases in the Other Operating Revenue category were largely offset by
increases in related expenses recognized as Other Operating Expenses, Net.
Operating Expenses
Personnel Costs - Relatively unchanged year-over-year. US Airways recognized
profit sharing expense of $49.7 million in 1995 and $4.1 million during 1994
associated with the profit sharing component of the 1992 Salary Reduction
Program (see further discussion of this profit sharing plan in "Year Ended
December 31, 1996 Compared to Year Ended December 31, 1995" above). The 1994
profit sharing expenses resulted from employees receiving certain guaranteed
profit sharing payments upon their termination. Overall, profit sharing expense
and the contractual wage increases that US Airways' pilots, flight attendants
and mechanics received during 1995 were offset by lower personnel levels. US
Airways' workforce had approximately 2,500 fewer employees at December 31, 1995
than at December 31, 1994.
Aviation Fuel - Decreased $26.3 million (3.7%), primarily due to US Airways'
$26.5 million (3.9%) decrease. Year-over-year, the average cost of fuel per
gallon was relatively unchanged but US Airways' capacity (ASMs) decreased
approximately 4.7%. The decreased capacity contributed to a 5.6% reduction in
fuel consumption.
Commissions - Decreased $20.1 million (3.5%) and $22.1 million (4.0%) at US
Airways despite an increase in Passenger transportation revenues primarily due
to the effects of a change in the rate structure for travel agency commissions
that went into effect during early 1995.
Aircraft Rent - Decreased $125.9 million (22.3%) primarily due to US Airways'
$123.3 million (23.7%) decrease. Excluding the unusual items recognized during
1995 and 1994, as discussed above, US Airways' Aircraft rent expense decreased
$3.7 million (0.9%) mainly due to fewer leased aircraft in US Airways' operating
fleet year-over-year.
Other Rent and Landing Fees - Decreased $32.4 million (7.4%) and $33.3 million
(7.9%) at US Airways primarily due to US Airways' capacity (ASMs) reductions
during 1995 and credits totaling approximately $6.0 million received from
various airport authorities during 1995 related to 1994 activity.
Aircraft Maintenance - Decreased $45.3 million (11.6%) primarily due to US
Airways' $40.2 million (12.0%) decrease which resulted from fewer operating
aircraft year-over-year and the positive impact of US Airways' re-engineering
efforts in the maintenance areas.
Depreciation and Amortization - Excluding the effects of the unusual items
recognized during 1994, as discussed above, US Airways' expense increased $7.8
million (2.4%).
Other Operating Expenses, Net - Excluding the effect of the unusual items
recognized in 1994, as discussed above, these expenses increased approximately
$57.2 million (4.0%) largely due to increases in expenses associated with
increased sales activity. Increased third party lease and sublease arrangements
also contributed to the increase in this expense category (see also "Other
Operating
48
<PAGE>
Revenues" above). Decreases in certain capacity-related expenses partially
offset increases in other components of Other Operating Expenses, Net. US
Airways' results include certain transactions that are eliminated at the US
Airways Group level.
Other Income (Expense)
Interest Income - Improved by $24.5 million (90.6%) mainly as a result of
significantly higher cash levels during 1995.
Interest Expense - Increased $18.6 million (6.5%) primarily as a result of
interest incurred on debt associated with new aircraft deliveries during 1995
and 1994 which outweighed the effects of US Airways' early debt repayments
during 1995 which totaled $202.1 million.
Interest Capitalized - Decreased $5.0 million (36.2%) mainly due to US
Airways' agreement with Boeing to defer the delivery of certain 757-200 aircraft
from 1996 to 1998 (see related discussion under "Aircraft Fleet and Related
Matters" above).
Equity in Earnings (Loss) of Affiliates - Results for all three of USAM's
equity investments improved primarily driven by increases in airline industry
passenger volumes year-over-year.
Other, Net - Decreased $8.9 million as the effects of the $28.3 million gain
recognized in 1994 (discussed above) were only partially offset by US Airways'
$10.7 million gain associated with the sale of thirteen 737-300 aircraft during
1995.
Provision (Credit) for Income Taxes - The Company was subject to Federal
alternative minimum tax for 1995 as well as income taxes in certain states. The
Company was not subject to regular Federal income tax for 1995 as the result of
using Federal net operating loss carryforwards. The results for 1994 do not
include any income tax credit due to Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") limitations in recognizing a
current benefit for net operating losses. See Note 5 to the Company's
Consolidated Financial Statements for additional information.
Inflation and Changing Prices
Inflation and changing prices do not have a significant effect on the
Company's operating revenues and expenses (other than depreciation and
amortization) because such revenues and expenses generally reflect current price
levels.
Depreciation and amortization expense is based on historical cost. For assets
acquired through the purchase of Pacific Southwest Airlines, US Airways'
historical cost is based on the market value of the assets on May 29, 1987. In
the case of Piedmont Aviation, Inc., US Airways' historical cost is based on the
fair market value of the assets on November 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 expense reflected today's replacement costs
for existing productive assets. In evaluating how inflation would increase
depreciation expense, however, consideration 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
As of December 31, 1996, Cash and cash equivalents and Short-term investments
totaled $1.59 billion. US Airways also had $74.4 million deposited in trust
accounts to collateralize letters of credit and workers' compensation policies
at year-end 1996. These deposits are included in the Other Asset category on the
Company's Consolidated Balance Sheets.
Net cash provided by operations was $1.03 billion for 1996, $576.6 million for
1995 and $1.1 million for 1994. The significant year-over-year improvements in
cash flows from operating activities experienced by the Company for the last
three years are primarily due to factors discussed under "Factors Contributing
to Improved 1996 Financial Results" above.
USAM received a special cash distribution of $33.7 million from ATS during the
second quarter of 1996, reflected in the Other operating adjustments category in
the Company's Consolidated Statements of Cash Flows (contained elsewhere
49
<PAGE>
in this Prospectus). This special distribution was part of an ATS distribution
of cash to its partners. USAM received distributions of $48.7 million from its
computer reservation system investments, including the special ATS distribution,
during 1996. USAM received distributions of $14.0 million and $8.3 million from
these investments for 1995 and 1994, respectively.
As discussed under "Government Regulation" above, the ticket tax expired on
January 1, 1996, but was reinstated effective August 27, 1996 for tickets sold
for travel before January 1, 1997. During February 1997, US Airways remitted
approximately $180 million to the Federal Government primarily related to ticket
taxes that US Airways collected during the time period in 1996 that this tax was
in effect. In addition, the Company paid its remaining obligation under the
1992 Salary Reduction Plan, $129.1 million, in early March 1997; this payment
ended the Company's obligations for profit sharing under this plan and was based
on expenses the Company recognized during 1996 and in earlier periods.
The Company added a SAR feature to its 1992 Stock Option Plan during the
fourth quarter of 1996 (see discussion of Personnel Costs under "Year Ended
December 31, 1996 Compared to Year Ended December 31, 1995" above). SAR
exercises could potentially have a material adverse effect on the Company's
future cash outflows depending on the number and timing of SAR exercises and
changes in the fair market value of the Company's Common Stock. Approximately
570,000 SARs were exercised during the fourth quarter of 1996 resulting in a
cash outlay of $4.9 million.
During the third quarter of 1996, the Company revised its estimate of short-
term pension plan funding requirements resulting in a decrease of approximately
$137 million in the Company's current liabilities as of September 30, 1996
(which was offset by a corresponding increase in the Company's long-term
liabilities) and a significant reduction in the Company's original estimate of
anticipated cash outflows for 1997.
The Company has also embarked on a program to upgrade and standardize the
interiors of US Airways' operating aircraft. This program, described under
"Aircraft Fleet and Related Matters" above, will result in currently estimated
incremental expenditures of approximately $73 million, primarily during 1997 and
1998.
The Company anticipates that its capital expenditures for 1997 will total
approximately $150 million, almost all of which is related to US Airways'
operations. This estimate includes $20 million related to the purchase of hush
kits for certain aircraft in order to comply with Federal noise and pollution
mandates and $115 million primarily related to the purchase of aircraft
rotables, other aircraft components (including items associated with US Airways'
Aircraft Interior Upgrade and Standardization Program), ground support equipment
and computer equipment. The Company expects that it will satisfy its liquidity
requirements for 1997 through a combination of cash on hand (Cash and cash
equivalents and Short-term investments) and cash flow from operations. The
Company's estimate of capital expenditures for 1997 is subject to change. As
discussed further under "Aircraft Fleet and Related Matters" above, US Airways
has entered into an agreement with an affiliate of Airbus for the acquisition of
up to 400 Airbus Aircraft; however, this agreement is contingent upon the
Company achieving a competitive cost structure. If an aircraft acquisition
agreement with Airbus is consummated, the Company's estimate of short-term and
long-term capital expenditures may be materially effected. In addition, and also
discussed further under "Aircraft Fleet and Related Matters" above, the Company
has advised Boeing that it does not plan to accept delivery of certain aircraft
the Company has on firm order with Boeing. The Company's estimate of capital
expenditures for 1997 does not include equipment purchase deposits that had
originally been scheduled to be paid to Boeing under the terms of the Company's
contract with Boeing. The outcome of the Company's discussions with Boeing and
any impact on the Company's future capital expenditures that may result from
these discussions cannot be determined at this time.
As of December 31, 1996, the Company's current assets were $2.31 billion, an
increase of $727.1 million since the end of 1995; however, the Company remains
highly leveraged. The Company and US Airways require substantial working capital
in order to meet scheduled debt and lease payments and to finance day-to-day
operations. In addition, the Company currently does not have in place a short-
term credit or receivable sale facility. Changes in certain factors that are
generally outside the Company's control, such as an economic downturn,
additional government regulation, intensified low cost, low fare competition
(see related discussion under "US Airways' Current Competitive Position - Low
Cost, Low Fare Threat" above) and further increases in the price of aviation
fuel, could have a materially adverse effect on the Company's liquidity,
financial condition and results of operations. In addition, the Company is
currently in contract negotiations with US Airways' organized labor groups with
the goal of achieving a competitive cost structure. There can be no assurance
that the Company will be able to accomplish this goal. Currently, US Airways'
high cost structure relative to its major competitors results in the Company
being particularly susceptible to adverse changes in general economic and market
conditions.
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Investing activities during 1996 included cash outflows of $180.7 million for
the acquisition of assets ($34.9 million for hush kits, progress payments for
757-200 aircraft of $31.4 million (see "Aircraft Fleet and Related Matters"
above for recent developments concerning Boeing), $15.2 million to purchase four
737-200 aircraft prior to lease expiry and $99.2 million related to the purchase
of rotables, various ground support equipment and computer equipment). The
Company's Short-term investments increased $603.6 million year-over-year
primarily due to the Company's operations generating significantly more cash
than needed to fulfill immediate operational needs. The Other investing uses of
cash category on the Company's Consolidated Statements of Cash Flows includes
$12.2 million related to the purchase of debt issued by Shuttle, Inc. during the
first quarter of 1996. Net cash used by investing activities during 1996 was
$753.8 million.
Net cash used by financing activities during 1996 was $209.0 million. During
the third quarter of 1996, US Airways paid off certain long-term debt with a
principal amount of $42.8 million for one of the Company's regional airline
subsidiaries (the affiliated company repaid US Airways during December 1996).
US Airways sold $263.0 million principal amount of Enhanced Equipment Notes
("Enhanced Notes") during the first quarter of 1996 through a private placement
offering under SEC Regulation 144A. US Airways used the proceeds from the
offering as part of the funds necessary to repay in full the indebtedness
incurred in connection with certain Boeing 757-200 aircraft delivered to US
Airways in 1995 and 1994. The transaction is reflected on the Company's
Consolidated Statements of Cash Flows as proceeds from the issuance of debt of
$103.0 million and a "non-cash" issuance of debt of $160.0 million. The non-cash
component reflects proceeds that US Airways directed to reduce debt and pay
underwriter's fees at the time of the offering. US Airways used the cash
proceeds it received from the offering and additional funds to make debt
repayments of approximately $105.5 million immediately following the offering.
The Enhanced Notes are secured by nine 757-200 aircraft. US Airways filed a Form
S-4 Registration Statement with the SEC during July 1996 in connection with its
offer to exchange registered Enhanced Notes for the privately-placed Enhanced
Notes. The exchange offer was completed in August 1996. The exchange offer did
not result in cash inflows or outflows with the exception of filing fees and
certain administrative costs.
In addition to the prepayment and refinancing transactions and the early pay-
off by US Airways of an affiliate's third party debt, both discussed above, the
Company's subsidiaries made scheduled debt repayments of $85.0 million during
1996. US Airways also incurred new debt of $29.2 million associated with
progress payments for 757 aircraft (see "Aircraft Fleet and Related Matters"
above for recent developments concerning Boeing). The $29.2 million is reflected
as non-cash activity in the Company's Consolidated Statements of Cash Flows
because US Airways incurred the related debt in conjunction with the payment of
the progress payments.
During 1996, the Company paid dividends of $83.0 million on its outstanding
Senior Preferred Stock. The Company had previously deferred the payment of
dividends on all of its outstanding series of preferred stock beginning in
September 1994 (see discussion under "Payments of Dividends on Senior Preferred
Stock" above). The combined annual dividend requirement of all the Company's
outstanding preferred stock issuances, each of which has a cumulative dividend
feature, is approximately $78.8 million. As of December 31, 1996, dividends of
$118.9 million on all of the Company's outstanding preferred stock issuances had
been deferred (including additional dividends (interest) on deferred dividends).
On January 31, 1997, the Company paid dividends of $50.0 million to holders of
its Senior Preferred Stock. On March 26, 1997, the Company paid dividends of
$34.8 million and $46.6 million, respectively, on its outstanding Senior
Preferred Stock and Series B Preferred Stock. Following such payments, the
Company was current with respect to all dividends on its outstanding preferred
stock. On March 31, 1997, the Company paid its regular quarterly dividend on
the Series A Preferred Stock. The Company expects to pay the regular quarterly
dividend on the Series B Preferred Stock on April 15, 1997. See discussion under
"Payments of Dividends on Senior Preferred Stock" above. The Company's Series A
Preferred Stock is mandatorily redeemable on August 7, 1999 at $1,000 per share
plus accrued dividends (interest) and the Company's Series F Preferred Stock and
Series T Preferred Stock are mandatorily redeemable in the year 2008.
As of December 31, 1996, the redemption values of the Series A Preferred
Stock, Series F Preferred Stock and Series T Preferred Stock were $404.7
million, $323.4 million and $107.6 million, respectively, and the liquidation
preference of the Series B Preferred Stock was $255.1 million.
Except for the Enhanced Notes sold in 1996, the Company's and US Airways'
outstanding debt and equity securities are presently rated "below investment
grade" by Standard and Poor's Corporation and Moody's Investors Service, Inc.
Such ratings may make it more difficult and costly for the Company and US
Airways to effect additional financing, particularly
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<PAGE>
unsecured financing. US Airways recently reached an agreement with a subsidiary
of Airbus to acquire up 400 Airbus Aircraft. Final consummation of this
agreement would result in a significant increase in the Company's need for
additional financing (see discussion under "Aircraft Fleet and Related Matters"
above).
US Airways is party to certain financial contracts to reduce its exposure to
fluctuations in the price of aviation fuel. Under these arrangements, US Airways
pays a fixed rate per notional gallon of fuel and receives in return a floating
rate per notional gallon based on the market rate during the month of
settlement. Decreases in the market cost of the fuel below the rates specified
in the contracts require US Airways to make cash payments. The Company believes
that these financial contracts, although inherently risky, do not present a
material risk to the Company's or US Airways' liquidity, financial condition or
results of operations due to the relatively simple terms, the purpose and short
duration of these arrangements. US Airways periodically reviews the financial
condition of each counterparty to these financial contracts and believes that
the potential for default by any of the current counterparties is negligible.
See Note 2 to the Company's Consolidated Financial Statements for additional
information.
US Airways and certain of the Company's other subsidiaries have received
notices from the U.S. Environmental Protection Agency and various state agencies
that they are potentially responsible parties with respect to the remediation of
existing sites of environmental concern. Negotiations with various governmental
agencies continue concerning known and possible cleanup sites. US Airways has
made financial contributions for the performance of remedial investigations and
feasibility studies at sites in Moira, New York; Escondido, California; and
Elkton, Maryland. The contributions totaled approximately $120,000 in 1996 and
$200,000 for 1995, 1994 and 1993 combined. The Company believes that the
ultimate resolution of known environmental contingencies should not have a
material adverse effect on its financial condition and results of operations
based on the Company's experience with similar environmental sites.
Also, US Airways has been identified as a potentially responsible party
("PRP") for environmental contamination at Boston's Logan International Airport.
There are a number of other PRPs at the site. The Company has reached an
agreement-in-principle with the Massachusetts Port Authority to pay
approximately $300,000 in cash, and to undertake certain remedial activities in
connection with its operations at Boston's Logan International Airport.
The Company terminated its revolving credit facility with a group of banks
during 1994. The Company had historically utilized such a facility to supplement
its liquidity from time to time. In addition, US Airways' revolving accounts
receivable sale program expired in December 1994. US Airways was unable to sell
receivables under the agreement during 1994 because of failure to comply with
certain financial covenants required to be maintained in connection with that
agreement. The Company does not believe the absence of either type of liquidity
supplement is detrimental to its short-term financial condition due primarily to
the Company's current substantial cash, cash equivalents and short-term
investments reserves.
Investing activities during 1995 included cash inflows from asset sales of
approximately $222.3 million (primarily from the sale of thirteen 737-300
aircraft) offset by a $146.7 million cash outflow for the acquisition of assets
($61.7 million cash payments related to new 757-200 aircraft) (see "Aircraft
Fleet and Related Matters" above for recent developments concerning Boeing) and
$85.0 million cash payments related to the purchase of aircraft rotables, hush
kits, computer equipment and various ground support equipment. Net cash provided
by investing activities for 1995 was $148.9 million.
Financing activities during 1995 included $283.2 million of debt payments,
including the redemption of US Airways' remaining outstanding 12 7/8% Unsecured
Senior Notes ("12 7/8% Notes"), partially offset by $8.7 million in cash
proceeds from the sale of the Company's stock to an employee benefit plan stock
fund and new debt of $1.2 million incurred at one of the Company's regional
airline subsidiaries. In addition, the Company incurred debt of $169.7 million
associated with the delivery of seven new 757-200 aircraft and scheduled
progress payments for the future aircraft deliveries during 1995. In connection
with the deferral of eight 757-200 deliveries to 1998, US Airways rescheduled
the due date of $70.8 million of previously satisfied aircraft purchase deposits
into the future resulting in a reduction of both debt and equipment deposits
(see "Aircraft Fleet and Related Matters" above for recent developments
concerning Boeing). The $169.7 million and $70.8 million are reflected as non-
cash activity in the Company's Consolidated Statements of Cash Flows because US
Airways experienced an increase or decrease in fixed assets or equipment
deposits concurrently with the increase or decrease in debt. US Airways made
early debt payments, including the redemption of the 12 7/8% Notes, totaling
approximately $202.1 million during 1995.
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<PAGE>
During December 1995, US Airways completed a transaction which enabled it to
substitute previously unencumbered aircraft in lieu of cash deposits as
collateral for certain workers' compensation liabilities. As a result of the
arrangement, approximately $67.2 million of previously restricted cash and
security deposits were returned to US Airways.
During 1994, the Company's investment in new aircraft acquisitions and
purchase deposits totaled $270.6 million (which includes $224.6 million
presented as non-cash on the Company's Consolidated Statement of Cash Flows
since debt was incurred upon delivery of aircraft or to satisfy equipment
deposit progress payments). US Airways took delivery of five new 757-200
aircraft during 1994. The Company invested $134.1 million in non-aircraft
property during 1994 (e.g., ground support equipment, computer equipment,
software, aircraft rotables and hush kits, and take-off and landing slots),
partly offset by $75.1 million in proceeds from disposition of assets which
includes the sale of certain aircraft and assets to Mesa and insurance proceeds
related to the jet aircraft involved in the September 1994 accident. Net cash
provided by financing activities was $183.4 million, which includes (i) $172.2
million net proceeds received by US Airways upon the sale of $175 million
principal amount of 9 5/8% Senior Notes due 2001 through an underwritten public
offering and (ii) $136.7 million of new debt issued which is secured by aircraft
delivered before 1994, offset by $87.1 million of scheduled debt payments and
$49.7 million of preferred dividend payments. In addition, as discussed above,
the Company incurred $270.6 million of debt upon delivery of five 757-200
aircraft and to satisfy equipment deposit progress payments (see "Aircraft Fleet
and Related Matters" above for recent developments concerning Boeing).
As of December 31, 1996, the Company's ratio of current assets to current
liabilities was 0.81 to 1 and the debt component of the Company's capitalization
structure was greater than 100% (and also greater than 100% if the three series
of mandatorily redeemable preferred stock are considered to be debt) due to a
deficit in stockholders' equity.
Certain information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Prospectus
should be considered "forward-looking information" which is subject to a number
of risks and uncertainties. The preparation of forward-looking information
requires the use of estimates of future revenues, expenses, activity levels and
economic and market conditions, many of which are outside the Company's control.
Among the specific factors that could cause actual results to differ materially
from those set forth in the forward-looking information are the following: labor
costs, or, in the alternative, not putting in place a competitive cost
structure, aviation fuel costs, competitive pressures on pricing particularly
from low cost air carriers, weather conditions, consumer perceptions of the
Company's product, demand for air transportation in the markets in which the
Company operates and the risks listed from time to time in the Company's U.S.
Securities and Exchange Commission reports. Other factors and assumptions not
identified above are also involved in the preparation of forward-looking
information, and the failure of such other factors and assumptions to be
realized may also cause actual results to differ materially from those
discussed. The Company assumes no obligation to update such estimates to reflect
actual results, changes in assumptions or changes in other factors affecting
such estimates.
53
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Directors and executive officers of US Airways Group and US Airways as of
March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert W. Bogle 57 Director
Edwin I. Colodny 69 Director
Christopher Doan 50 Senior Vice President - Maintenance, US Airways
Mathias J. DeVito 66 Director
Robert L. Fornaro 44 Senior Vice President-Planning, US Airways
Rakesh Gangwal 43 Director; President and Chief Operating Officer, US Airways Group and
US Airways
George J.W. Goodman 66 Director
John W. Harper 57 Senior Vice President-Finance and Chief Financial Officer, US Airways
Group and US Airways
John W. Harris 49 Director
Edward A. Horrigan, Jr 67 Director
Robert LeBuhn 64 Director
John R. Long, III 48 Executive Vice President-Human Resources, US Airways
John G. Medlin, Jr 63 Director
Hanne M. Merriman 55 Director
Lawrence M. Nagin 56 Executive Vice President-Corporate Affairs and General Counsel, US
Airways Group and US Airways
Robert C. Oaks 61 Senior Vice President-Operations, US Airways
Raymond W. Smith 59 Director
Stephen M. Wolf 55 Director; Chairman of the Board and Chief Executive Officer, US
Airways Group and US Airways
</TABLE>
Certain Information Concerning Directors and Officers
There are no family relationships among any of the officers listed above. No
officer was selected pursuant to any arrangement between him or her and any
other person. Officers are elected annually to serve for the following year or
until the election and qualification of their successors. All the executive
officers except Messrs. Wolf, Gangwal, Doan, Oaks and Nagin have been actively
engaged in the business and affairs of US Airways during the past five years.
Each of the Directors of US Airways is also a Director of US Airways Group.
Messrs. Gangwal, Harper, Nagin and Wolf each holds the same office at US Airways
Group as each does at US Airways. Information with respect to the business
experience and affiliations of the Directors and executive officers of US
Airways since at least January 1, 1991 is set forth below:
Mr. Bogle is President and Chief Executive Officer of The Philadelphia
Tribune, the nation's oldest newspaper addressed to the African American
community. He assumed his position in May 1989 and previously held other high-
level positions at the newspaper. In June 1995, Mr. Bogle completed his tenure
as President of the National Newspaper Publishers Association, a trade
association comprising the publishers of 205 Black-owned newspapers from across
the nation. Mr. Bogle is Chairman of the Council of Trustees at Cheyney
University, serves on the Executive Committee of the greater Philadelphia
Chamber of Commerce and is a board advisor to the United Negro College Fund. He
is also a member of the Executive Committee of the Boy Scouts of America, a
member of the Union League of Philadelphia and a life member of Kappa Alpha Psi
fraternity. Mr. Bogle is Vice Chairman of The Hospitals and Higher Education
Authority of Philadelphia and Vice Chairman of Amalgamated Publishers, Inc. He
serves on the Board of Directors of The American Red Cross, Presbyterian Medical
Center of Philadelphia, the Police Athletic League, the Christian Street YMCA
and The American Heart Association. Mr. Bogle is also a founding member of
United Media of Philadelphia, an organization comprised of media owned and
operated by African Americans.
54
<PAGE>
Mr. Colodny is of counsel to the law firm of Paul, Hastings, Janofsky &
Walker. Paul, Hastings, Janofsky & Walker provides legal services to US Airways.
Mr. Colodny retired as Chairman of the Board of US Airways and US Airways Group
in July 1992. He served as Chief Executive Officer of US Airways from 1975 until
retiring as an employee of US Airways in June 1991. Mr. Colodny is a Director of
Lockheed Martin Corporation, Comsat Corporation and Esterline Technologies,
Inc., and is a member of the Board of Trustees of the University of Rochester.
Mr. Doan previously held the position of Vice President-Technical Operations
at Northwest from 1993 to 1996. He served as Chairman of the Air Transport
Association's Engineering, Maintenance and Materiel Council from 1995 to 1996.
He joined US Airways as Senior Vice President-Maintenance in March 1997.
Mr. DeVito is Chairman Emeritus of the Board and Chairman of the Executive
Committee of The Rouse Company (real estate development and management). He also
serves as a Director of First Maryland Bancorp, Allied Irish Bank plc, and
subsidiaries of The Rouse Company. He is a member of the Board of the Maryland
Institute, College of Art, Chairman of the Board of Empower Baltimore Management
Corporation and former Chairman of the Greater Baltimore Committee.
Mr. Fornaro previously held several executive positions at Northwest from
August 1988 to February 1992. He was Senior Vice President-Market Planning at
Northwest until his election as Senior Vice President-Planning of US Airways in
March 1992.
Mr. Gangwal was elected President and Chief Operating Officer of US Airways
Group and US Airways, effective February 19, 1996. Mr. Gangwal came to US
Airways from Air France where he had been Executive Vice President-Planning and
Development since November 1994. Mr. Gangwal previously served in a variety of
management roles at United over an eleven-year period, culminating in the role
of Senior Vice President-Planning.
Mr. Goodman is President of Continental Fidelity, Inc., which provides
editorial and investment services. He is the author of a number of books and
articles on finance and economics under the pen name "Adam Smith" and is the
host of a television series of that name seen on public broadcasting stations in
the U.S. and on other networks abroad. He is a Director of Cambrex Corporation
and of New England Life. Mr. Goodman also serves as a member of the Advisory
Committee of the Center for International Relations at Princeton University and
is a Life Trustee of the Urban Institute.
Mr. Harper was Senior Vice President-Marketing and Information Systems at Axe-
Houghton Management (investment management) until his election as Vice President
and Controller of US Airways in December 1991. He was elected Senior Vice
President-Information Systems of US Airways in October 1992 and Senior Vice
President-Finance and Chief Financial Officer of US Airways Group and US Airways
in 1994.
Mr. Harris is President of The Harris Group (real estate development). From
1972 through 1991, he was President of The Bissell Companies, Inc. (real estate
development). He is a Director of Piedmont Natural Gas Company and Dominion
Capital. Mr. Harris is former Chairman of the Greater Charlotte Chamber of
Commerce and a member of the Board of Trustees of the University of North
Carolina and serves on the boards of several community service organizations.
Mr. Horrigan is the former Chairman of the Board of Directors of Liggett Group
Inc. (consumer products), a position he had held from May 1993 until his
retirement in December 1994. He is also the retired Vice Chairman of the Board
of RJR Nabisco, Inc. and retired Chairman and Chief Executive Officer of R.J.
Reynolds Tobacco Company (consumer products). He is a Director of the Haggai
Foundation.
Mr. LeBuhn was the Chairman of Investor International (U.S.), Inc.
(investments) until his retirement in December 1994. He is now a private
investor and is a Director of Acceptance Insurance Companies, New Jersey Steel,
Cambrex Corporation and Enzon, Inc. He is Trustee and President of the Geraldine
R. Dodge Foundation, Morristown, New Jersey, and is a member of the New York
Society of Security Analysts.
Mr. Long served as Senior Vice President-Administration of US Airways until
his election as Senior Vice President-Customer Operations of US Airways in June
1989. He was elected Senior Vice President-Customer Services in March 1991 and
Executive Vice President-Customer Services in May 1992 and appointed Executive
Vice President-Human Resources in May 1996.
55
<PAGE>
Mr. Medlin is Chairman of the Board and, until December 31, 1993, was Chief
Executive Officer of Wachovia Corporation (bank holding company). Mr. Medlin
also serves as a Director of BellSouth Corporation, Burlington Industries, Inc.,
Media General, Inc., National Services Industries, Inc., RJR Nabisco Holdings
Corp. and Nabisco Holdings Corp.
Mrs. Merriman is the Principal in Hanne Merriman Associates (retail business
consultants). Previously, she served as President of Nan Duskin, Inc.
(retailing), President and Chief Executive Officer of Honeybee, Inc., a division
of Spiegel, Inc., and President of Garfinckel's, a division of Allied Stores
Corporation. Mrs. Merriman is a Director of CIPSCO, Inc., Central Illinois
Public Service Company, State Farm Mutual Automobile Insurance Company, The
Rouse Company, Ann Taylor Stores Corporation and T. Rowe Price Mutual Funds. She
is a member of the National Women's Forum and a Trustee of The American-
Scandinavian Foundation. She was a member of the board of directors of the
Federal Reserve Bank of Richmond, Virginia from 1984 to 1990 and served as
Chairman in 1989-1990.
Mr. Nagin practiced law with Skadden, Arps, Slate, Meagher & Flom LLP from
August 1994 until he joined US Airways in February 1996. He previously served in
several executive positions at UAL and United from September 1988 to July 1994,
culminating in the role of Executive Vice President-Corporate Affairs and
General Counsel of UAL and United. From 1980-1988, Mr. Nagin was Senior Vice
President and General Counsel of The Flying Tiger Line Inc. ("Flying Tiger").
Mr. Oaks is a retired United States Air Force General. He was commander of the
Air Training Command, the service's organization responsible for all initial
training, including flight training, prior to his last post in his 35-year
career with the Air Force, as commander of U.S. Air Forces in Europe. He retired
from the Air Force in 1994 and joined US Airways in December 1994 as its Vice
President-Corporate Safety and Regulatory Compliance. He was elected to his
present position in February 1995.
Mr. Smith is Chairman of the Board and Chief Executive Officer of Bell
Atlantic Corporation (telecommunications). Previously, Mr. Smith had served as
Vice Chairman and President of Bell Atlantic and Chairman of The Bell Telephone
Company of Pennsylvania. He is a member of the Board of Directors of CoreStates
Financial Corporation, Westinghouse Electric Corporation, a trustee of the
Carnegie Mellon University and is active in many civic and cultural
organizations.
Mr. Wolf is Chairman of the Board of Directors and Chief Executive Officer of
US Airways Group and US Airways and was elected to those positions in January
1996. Immediately prior to joining US Airways, Mr. Wolf was a senior advisor to
the investment bank Lazard Freres & Co. From 1987 to July 1994, Mr. Wolf was
Chief Executive Officer of UAL and United and became Chairman of each in 1988.
From 1986 to 1987, Mr. Wolf was Chief Executive Officer of Tiger International,
Inc. and Flying Tiger. From 1984 to 1986, Mr. Wolf was President and Chief
Executive Officer of Republic. Prior to that time, Mr. Wolf held senior
management positions at Continental, Pan Am and American. Mr. Wolf is a Director
of Philip Morris Companies, R.R. Donnelley & Sons Co., The Brookings Institution
and the Alzheimer's Disease and Related Disorders Association. He is also a
trustee of Northwestern University and Rush-Presbyterian-St. Luke's Medical
Center.
Compensation of Directors
The annual retainer and meeting fee payable to directors of US Airways Group
and US Airways in 1996 were $22,000 and $1,000, respectively, payable to
nonemployee directors. Mr. DeVito, Chairman of the Human Resources Committee,
Mrs. Merriman, Chairman of the Audit Committee, Mr. Medlin, Chairman of the
Nominating Committee, and Mr. Harris, Chairman of the Safety Committee, each
receives an additional fee of $2,000 per year for serving in those respective
capacities. Messrs. Wolf and Gangwal receive salaries in their capacities as
officers of US Airways and receive no additional compensation as directors of
the Company and US Airways.
Prior to 1996, the Company maintained a retirement plan for outside directors.
The retirement benefit payable under the plan was 100% of the highest annual
retainer in effect during the five years prior to retirement. The Company
terminated the retirement plan for directors as of December 31, 1995. Pursuant
to such termination, (i) no individual who first becomes a director on or after
December 31, 1995 will participate in the retirement plan and (ii) directors as
of December 31, 1995 were credited with Deferred Stock Units (as hereinafter
defined) equal in value to the present value of their accrued benefits as of
December 31, 1995. Such Deferred Stock Units will be paid in cash following the
director's termination of service.
56
<PAGE>
Effective in 1996 and thereafter, directors also receive an annual grant of
1,500 stock options. Also effective in 1996 and thereafter, directors receive an
annual grant of 500 Deferred Stock Units. These Deferred Stock Units and options
will vest after the director serves his or her full one-year term. The addition
of stock-based compensation in lieu of a retirement plan for directors is
designed to increase the alignment of directors' compensation with stockholder
interests.
The director, the director's spouse and the director's dependent children are
provided transportation on US Airways and reimbursement for federal income taxes
incurred thereon. During 1996, the average value of this transportation and tax
reimbursement was approximately $5,000 per director.
57
<PAGE>
Compensation of Executive Officers
The Summary Compensation Table below sets forth the compensation paid during
the years indicated to each individual who served as the Chief Executive Officer
during any portion of the last fiscal year and the four remaining most highly
compensated executive officers of the Company (including its subsidiaries).
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------ -------------------------
Other
Name and Principal Annual Restricted Stock All Other
Position Year Salary Bonus(B) Compensation Awards(H) Options Compensation(M)
- ------------------------------ ---- ----------- ------------ --------------- ------------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen M. Wolf 1996 $451,923 -- $ 145,962(D) $ 5,118,750(I) 1,300,000 $ 74,337
Chairman of the Board 1995 -- -- -- -- -- --
and Chief Executive Officer 1994 -- -- -- -- -- --
Rakesh Gangwal 1996 $330,769 -- $ 1,948,882(E) $ 4,281,250(J) 850,000 $ 89,704
President and Chief 1995 -- -- -- -- -- --
Operating Officer 1994 -- -- -- -- -- --
Lawrence M. Nagin 1996 $292,923 $275,000 $ 2,400(F) $ 787,500(K) 225,000 $ 89,265
Executive Vice 1995 -- -- -- -- -- --
President--Corporate Affairs 1994 -- -- -- -- -- --
and General Counsel
W. Thomas Lagow 1996 $339,423 -- -- -- -- $ 392,922(N)(O)
Executive Vice 1995 $325,000 $ 96,688(C) -- $ 223,125(L) -- $ 354,202(N)(O)
President--Marketing of 1994 $325,000 $ 0 -- -- -- $ 286,225(N)
US Airways
John R. Long, III 1996 $329,654 -- $ 6,687(G) -- -- $ 255,914(O)
Executive Vice President 1995 $275,000 $ 81,813(C) $ 21,847(G) $ 223,125(L) -- $ 62,328(O)
- --Human Resources of 1994 $275,000 $ 0 $ 36,458(G) -- -- $ 10,693
US Airways
Seth E. Schofield 1996 $ 53,846 $ 0 $ 2,152(G) -- -- $5,459,530(P)
Former Chairman and 1995 $417,908(A) $212,500(C) $ 228,949(G) -- -- $ 89,967
Chief Executive 1994 $500,000 $ 0 $ 116,136(G) -- -- $ 74,821
Officer of the Company and
of US Airways
</TABLE>
- --------------
(A) Amounts disclosed reflect a voluntary pay reduction incurred by Mr.
Schofield during 1995 of $82,092.
(B) The Human Resources Committee has not yet taken action establishing the
amount of the incentive awards to be paid to executives for the 1996 fiscal
year.
(C) Earned in 1995 but paid in 1996.
(D) Amount disclosed includes $70,902 in living expenses reimbursed for 1996,
$59,535 paid for tax liability on such amount (paid in 1997 for 1996
expenses), and $15,525 paid for financial/tax planning services (paid in
1997 for 1996 expenses).
(E) Amount disclosed includes $13,752 paid for automobile expenses and
$1,935,130 paid to establish a $1 million (after-tax) deferred annuity,
payable to Mr. Gangwal at retirement or severance.
(F) Amount disclosed was paid for tax and financial planning services.
(G) Amounts disclosed include for (i) 1995, $221,911 and $16,870, (ii) 1994,
$108,633 and $29,410, received by Messrs. Schofield and Long, respectively,
to cover incremental tax liability resulting from income derived from the
lapsing of restrictions on the disposition of Restricted Stock. Any amounts
disclosed in the column that are in excess of the amounts disclosed in the
preceding sentence represent income derived from personal travel on US
Airways.
(H) The aggregate number of shares of Restricted Stock held by each of Messrs.
Wolf, Gangwal, Nagin, Lagow and Long on December 31, 1996, and the
respective value of such shares based on the fair market value of the stock
on such date were, respectively: Mr. Wolf--325,000 shares,
58
<PAGE>
$7,657,813. Mr. Gangwal--200,000 shares, $4,712,500; Mr. Nagin--40,000
shares, $942,500; Mr. Lagow--12,250 shares, $288,641; and Mr. Long--12,250
shares, $288,641.
(I) Mr. Wolf was awarded 325,000 shares of Restricted Stock effective January
22, 1996 vesting ratably on each of the four anniversaries of the effective
grant date. The amount shown is based on the closing price ($15.75) on the
grant date.
(J) Mr. Gangwal was awarded 250,000 shares of Restricted Stock effective
February 19, 1996 vesting 20% on February 19, 1996 and 20% on each of the
succeeding four anniversaries of the grant date. Amount shown is based on
the closing price ($17.125) on the grant date.
(K) Mr. Nagin was awarded 50,000 shares of Restricted Stock effective February
6, 1996 vesting 20% on February 6, 1996 and 20% on each of the succeeding
four anniversaries of the grant date. Amount shown is based on the closing
price ($15.75) on the grant date.
(L) On November 28, 1995, each of Messrs. Lagow and Long were awarded 17,500
shares of Restricted Stock. Amount shown is based on closing price ($12.75)
on such date. These shares vest 30%, 30% and 40% on each anniversary of the
grant date.
(M) Under the split dollar life insurance plan of US Airways, individual life
insurance coverage is available to the named officers. In 1993, US Airways
commenced paying the premium associated with this coverage. In 1994, 1995
and 1996 US Airways paid the remainder of the premium associated with the
whole life component of the coverage. If all assumptions as to life
expectancy and other factors occur in accordance with projections, US
Airways expects to recover the premiums it pays with respect to the whole
life component of the coverage. The following amounts reflect the value of
the benefits accrued during 1996, calculated on an actuarial basis, ascribed
to the insurance policies purchased on the lives of the named officers (plus
the dollar value of premiums paid by US Airways with respect to term life
insurance): Mr. Wolf--$57,415, Mr. Gangwal--$38,123, Mr. Lagow--$34,580, Mr.
Long--$30,711, Mr. Nagin--$46,387 and Mr. Schofield--$50,043. During 1996,
US Airways made contributions to the accounts of Messrs. Wolf, Gangwal,
Nagin, Lagow, Long and Schofield in certain defined contribution pension
plans in the following amounts: $16,922, $8,770, $12,000, $32,705, $30,425
and $4,615, respectively. During 1996, US Airways made the following moving
expense payments to Messrs. Gangwal, Nagin and Long, respectively; $42,811,
$30,878, and $113,204.
(N) Upon the commencement of his employment, US Airways agreed to pay Mr. Lagow
$1 million over four years, which amount was intended to compensate him for
restricted stock and stock options which he forfeited when he left his
former employer. The amount disclosed includes the annual installment,
$250,000, of the total payment.
(O) Amounts include profit sharing payments in 1996 and 1997 for fiscal years
1995 and 1996 attributable to pay reductions in 1991 and 1992 in the
following amounts: 1995, Mr. Lagow $52,792 and Mr. Long $30,861; 1996--Mr.
Lagow $75,637 and Mr. Long $81,574.
(P) Amount includes $2,094,078 in severance payments pursuant to his employment
agreement and $3,310,794 in benefits payable pursuant to his supplemental
pension arrangements.
59
<PAGE>
Stock Option Grants in Last Fiscal Year
The following table provides information on stock option grants in 1996 to the
named executive officers.
<TABLE>
<CAPTION>
Percent of Total
Number of Shares Options Granted Exercise Grant Date
Underlying to Employees or Base Expiration Present Value
Name Option Granted in 1996 Price Date $(1)
- -------------------- -------------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Stephen M. Wolf 1,300,000 52.3% $12.1875 2/16/06 $10,078,900
Rakesh Gangwal 850,000 34.2 $ 14.875 2/28/06 $ 8,043,550
W. Thomas Lagow 0 0.0 -- -- 0
John R. Long III 0 0.0 -- -- 0
Lawrence M. Nagin 225,000 9.1 $ 14.875 2/28/06 $ 2,129,175
Seth E. Schofield 0 0.0 -- -- 0
</TABLE>
- --------------
(1) The Black-Scholes model used to calculate the hypothetical values at date of
grant considers a number of factors to estimate the option's present value,
including the stock's projected volatility, the expected exercise period of
the option, interest rates and the vesting features of the option. The
following assumptions were used in determining the values under the Black-
Scholes model: (i) risk-free rate of return: 5.65%, (ii) expected stock
price volatility: 50%, (iii) exercise period of 8.37 years, and (iv)
dividend yield: 0.00%. The actual value, if any, realized upon the exercise
of a stock option will depend on the excess of the market value of the
Common Stock on the date the option is exercised over the exercise price.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table provides information on the number of options held by the
named executive officers at fiscal year-end 1996. The unexercised options held
by all of the officers (except certain options held by Messrs. Long and
Schofield) were in-the-money based on the fair market value of the Common Stock
on December 31, 1996 ($23.5625).
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Value Unexercised In-the-Money
Acquired Realized Options/SAR's at Options/SAR's at
Name on Exercise $ Year End (#) Year-End ($)
- ------------------- -------------- -------- -------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Wolf 0 $ 0 500,000 800,000 $5,687,500 $9,100,000
Rakesh Gangwal 0 $ 0 170,000 680,000 $1,476,875 $5,907,500
W. Thomas Lagow 3,211(1) $33,515 150,000 0 $ 946,875 $ 0
John R. Long III 1,877(1) $14,664 93,500 0 $ 154,063 $ 0
Lawrence M. Nagin 0 $ 0 45,000 180,000 $ 390,938 $1,563,750
Seth E. Schofield 5,569 $22,276 380,000 0 $1,079,688 $ 0
</TABLE>
- --------------
(1) Represents exercise of stock appreciation rights.
60
<PAGE>
Retirement Benefits
Prior to 1993, US Airways' retirement plan (the "Retirement Plan") for its
salaried employees was comprised of two qualified plans. The Retirement Plan was
designed so that the two plans, when aggregated, would provide noncontributory
benefits based upon both years of service and the employee's highest three-year
average annual compensation during the last ten calendar years of service. The
primary plan is a defined benefit plan which provides a benefit based on the
factors mentioned above. The primary plan is integrated with the Social Security
program so that the benefits provided thereunder are reduced by a portion of the
employee's benefits from Social Security. US Airways' contributions to the
primary plan are not allocated to the account of any particular employee. The
primary plan was frozen on December 31, 1991, and accordingly, retirement
benefits payable under the plan were determinable on that date.
The secondary plan is a target benefit defined contribution plan. The
secondary plan was established in 1983 as a result of changes to the Internal
Revenue Code of 1986, as amended (the "Code"), which lowered the maximum
benefit payable from a defined benefit plan. In the event that the benefit
produced under the primary plan formula cannot be accrued for any employee
covered by such plan because of the limit on benefits payable under defined
benefit plans, contributions were made on behalf of such employee to the
secondary plan. Such contributions were calculated to provide the benefit
produced under the formula in the primary plan in excess of such limit, to the
extent permitted under the Code's limitation on the contributions to defined
contribution plans. US Airway's contributions to the secondary plan are
allocated to individual employees' accounts. During 1996, no contributions were
made to any executive officer's account. The secondary plan was also frozen on
December 31, 1991.
Under the Retirement Plan, benefits usually begin at the normal retirement age
of 65. The Retirement Plan also provides benefits for employees electing early
retirement from ages 55 through 64. If such an election is made, the benefits
may be reduced to reflect the longer interval over which the benefits will be
paid. Executive officers participate in the Retirement Plan on the same basis as
other employees of US Airways.
Contributions to and benefits payable under the Retirement Plan must be in
compliance with the applicable guidelines or maximums established by the Code.
US Airways has adopted an unfunded supplemental plan which will provide those
benefits which would otherwise be payable to officers under the Retirement Plan,
but which, under the Code, are not permitted to be funded or paid through the
qualified plans maintained by US Airways. Benefit accruals under the
supplemental plan also ceased upon the freezing of the Retirement Plan on
December 31, 1991. Such supplemental plan provides that any benefits under the
unfunded supplemental plan will be paid in the form of a single, lump sum
payment. Such supplemental plans are specifically provided for under applicable
law and have been adopted by many corporations under similar circumstances. Mr.
Long is currently entitled to receive retirement benefits in excess of the
limitations established by the Code.
The following table presents the noncontributory benefits payable per year for
life to employees under the frozen Retirement Plan and the unfunded supplemental
plan described above, assuming normal retirement in the current year. The table
also assumes the retiree would be entitled to the maximum Social Security
benefit in addition to the amounts shown.
<TABLE>
<CAPTION>
Final Earnings
as defined in
the Plan Noncontributory Pension Based on Years of Service
- ---------------- -------------------------------------------------
10 Years 15 Years 20 Years 25 Years 30 Years
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 100,000....... $ 19,226 $ 28,840 $ 38,453 $ 48,066 $ 53,066
200,000....... $ 43,226 $ 64,840 $ 86,453 $108,066 $118,066
300,000....... $ 67,226 $100,840 $134,453 $168,066 $183,066
400,000....... $ 91,226 $136,840 $182,453 $228,066 $248,066
500,000....... $115,226 $172,840 $230,453 $288,066 $313,066
600,000....... $139,226 $208,840 $278,453 $348,066 $378,066
700,000....... $163,226 $244,840 $326,453 $408,066 $443,066
800,000....... $187,226 $280,840 $374,453 $468,066 $508,066
900,000....... $211,226 $316,840 $422,453 $528,066 $573,066
1,000,000....... $235,226 $352,840 $470,453 $588,066 $638,066
</TABLE>
61
<PAGE>
The values reflected in the above chart represent the application of the
Retirement Plan formula to the specified amounts of compensation and years of
service. The compensation covered by the Retirement Plan is salary and bonus, as
reported in the Summary Compensation Table. The credited years of service under
the Retirement Plan through the date of freezing of the plan (December 31, 1991)
for each of the individuals included in the Summary Compensation Table are as
follows: Messrs. Wolf, Gangwal, Lagow and Nagin--none, and Mr. Long--17 years.
US Airways has entered into agreements with Messrs. Wolf, Gangwal, Nagin,
Lagow and Long which provide for a supplement to their retirement benefits under
the Retirement Plan. The supplements are designed to provide such persons with
the additional benefits they would have received had they been employed by US
Airways for the minimum number of years to be entitled to full retirement
benefits under the Retirement Plan and provides for pension benefits to be
calculated using their salary of record rather than the salary in effect under
various salary reduction programs. The credited years of service under these
supplemental arrangements for each of the individuals included in the Summary
Compensation Table are as follows: Mr. Wolf--30 years, Mr. Gangwal--5 years, Mr.
Nagin--4 years, Mr. Lagow--15 years and Mr. Long--17 years.
Commencing in January of 1993, US Airways adopted a defined contribution plan
retirement program comprised of (i) a money purchase pension plan where
contributions are based on a percentage of compensation and is age-weighted,
(ii) a 401(k) savings plan with a company match, and (iii) a profit sharing
plan. This retirement program is an individual account program and amounts
contributed to each named executive's account were included in the Summary
Compensation Table above.
Employment Arrangements with Messrs. Wolf, Gangwal and Nagin
Under his employment arrangements with US Airways, Mr. Wolf is entitled to an
annual base salary of not less than $500,000. In addition, Mr. Wolf is eligible
for an annual bonus pursuant to the terms of the Incentive Compensation Plan.
Bonus eligibility will be based on performance criteria established by the Human
Resources Committee or payable at the Committee's discretion if they believe
performance and circumstances are appropriate for such payment. Under the plan,
Mr. Wolf may receive a bonus of 50% of annual base salary for target results,
which may be increased for results in excess of the target up to a maximum bonus
of 100% of base salary.
Mr. Wolf received an award of stock options and Restricted Stock, as follows:
(i) 1,300,000 stock options effective January 16, 1996, at an exercise price
based on the fair market value of the stock on January 16, 1996 ($12.1875) with
500,000 options vesting immediately on January 16, 1996, 575,000 options vesting
on January 16, 1997, 75,000 options vesting on January 16, 1998, 75,000 options
vesting on January 16, 1999, and the remaining 75,000 options vesting on January
16, 2000, and (ii) 325,000 shares of Restricted Stock, effective January 22,
1996, vesting ratably on the first through fourth anniversaries of the effective
grant date.
US Airways has entered into a supplemental retirement agreement with Mr. Wolf
which will provide him with a pension benefit under the formula contained in US
Airways' frozen defined benefit pension plan for salaried employees, on the
basis that he had "deemed credited service" under the plan for all of his 29
years of service within the airline industry and without regard to certain
limitations set forth in the Code. Benefits will be calculated on the assumption
that Mr. Wolf's annual compensation has been and will remain at the rate of the
annual base salary set forth above and the maximum bonus described above has
been earned. Mr. Wolf became vested in 25% of this supplemental benefit on the
date of his employment and 25% of this supplemental benefit on the first
anniversary of the date of his employment and will become incrementally vested
in the remainder of this supplemental benefit ratably on the second and third
anniversary of the date of his employment. This benefit is subject to an offset
for benefits payable as a result of contributions from US Airways to the tax-
qualified and non-qualified defined contribution retirement program for salaried
employees of US Airways.
Under their employment arrangements with US Airways, Messrs. Gangwal and Nagin
are entitled to annual base salaries of not less than $400,000 and $340,000,
respectively. Upon employment, Mr. Gangwal became entitled to the purchase and
assignment by US Airways of an annuity with an after-tax value of $1 million and
Mr. Nagin received a $275,000 signing bonus. Both Mr. Gangwal and Mr. Nagin are
eligible for an annual bonus pursuant to the terms of the Company's Incentive
Compensation Plan. Bonus eligibility will be based on performance criteria to be
established by the Human Resources Committee or payable at the Committee's
discretion if they believe performance and circumstances are appropriate for
such payment. If Mr. Gangwal and Mr. Nagin achieve their targets, they will
receive a bonus of 50% and 35% of their annual base salary, respectively, which
may be increased for results in excess of the target up to a maximum bonus of
100% and 70% of
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<PAGE>
their base salaries, respectively. Messrs. Gangwal and Nagin received awards of
850,000 and 225,000 stock options, respectively, effective January 31, 1996, at
an exercise price of $14.875 (the fair market value on January 31, 1996), with
20% of the respective options vesting immediately on such dates and an
additional 20% vesting on the first through fourth anniversaries of such dates.
Messrs. Gangwal and Nagin received 250,000 and 50,000 shares, respectively, of
Restricted Stock, with 50,000 and 10,000 shares, respectively, vesting
immediately on February 19 and 6, 1996, respectively, and 20% of each such grant
vesting on the first through fourth anniversaries of such dates.
US Airways has entered into a supplemental retirement agreement with each of
Mr. Gangwal and Mr. Nagin which will provide each with a pension benefit under
the formula contained in US Airways' frozen defined benefit pension plan for
salaried employees, on the basis that each had "deemed credited service" under
the plan accruing at the rate of: (1) five (Mr. Gangwal) or four (Mr. Nagin)
years of "deemed service" for each year of actual service up through the fifth
year of employment of each; and (2) one year of service for each year of actual
service after five years of employment; up to a maximum of 30 years of credited
service. The benefits will be calculated on actual base salary and the
assumption that the maximum bonus described above has been earned. This benefit
is subject to an offset for benefits payable as a result of contributions from
US Airways to the tax-qualified and non-qualified defined contribution
retirement program for salaried employees of US Airways.
In connection with their employment arrangements, each of Messrs. Wolf,
Gangwal and Nagin also received relocation assistance (and, in the case of
Messrs. Gangwal and Nagin, tax reimbursement related thereto) and became
entitled to reimbursement of fees for certain tax and financial planning advice.
Each of Messr. Wolf's, Gangwal's and Nagin's stock options and Restricted Stock
and benefits under the supplemental retirement agreement will vest immediately
upon a change-of-control, a termination of employment without cause or upon
resignation for good reason.
The Company has entered into agreements substantially similar to the
Employment Contracts (described below) with each of Messrs. Wolf, Gangwal and
Nagin.
Arrangements Concerning Termination of Employment and Change of Control
In connection with their respective retirements, the Company entered into
certain arrangements with Messrs. Schofield and Lagow.
Pursuant to an agreement approved by the Board of Directors, in consideration
for his past services to US Airways and for services between the date of the
agreement and the time of his retirement, USAir agreed to provide Mr. Schofield
with (i) payments required under his employment agreement with US Airways for
termination upon mutual agreement paid as if such termination was by Mr.
Schofield for "good reason", (ii) a six-month consulting arrangement and (iii)
supplemental pension benefits based on his salary of record, as described below.
Upon his retirement, Mr. Schofield received an aggregate of $1,719,231
pursuant to the terms of his Employment Agreement and became entitled to receive
payment for his six-month consulting arrangement at his salary rate in effect on
the date of his retirement ($500,000). Mr. Schofield's supplemental pension
benefit was $3,310,794.
Upon his retirement, Mr. Lagow received $1,291,963 in severance payments
pursuant to the terms of his Employment Agreement. In addition, Mr. Lagow was
provided with certain additional pension benefits, Restricted Stock vesting and
retiree health and medical benefits.
US Airways currently has employment contracts (the "Employment Contracts")
with the executive officers (the "Executives") named in the Summary
Compensation Table who remain employees of the Company. The terms of the
Employment Contracts extend until the earlier of the fourth anniversary thereof
or the Executive's normal retirement date and are subject to automatic one-year
annual extensions on each anniversary date (to the fourth anniversary of such
anniversary date) unless advance written notice is given by US Airways. In
exchange for each Executive's commitment to devote his or her full business
efforts to US Airways, the agreements provide that each Executive will be re-
elected to a responsible executive position with duties substantially similar to
those in effect during the prior year and will receive (1) an annual base salary
at a rate not less than that in effect during the previous year, (2) incentive
compensation as provided in the contract and (3) insurance,
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<PAGE>
disability, medical and other benefits generally granted to other officers. In
the event of a change of control, as defined in each Employment Contract, the
term of each Employment Contract is automatically extended until the earlier of
the fourth anniversary of the change of control date or the Executive's normal
retirement date.
The Employment Contracts provide that, should US Airways or any successor fail
to re-elect the Executive to his or her position, assign the Executive to
inappropriate duties which result in a diminution in the Executive's position,
authority or responsibilities, fail to compensate the Executive as provided in
the Employment Contract, transfer the Executive in violation of the Employment
Contract, fail to require any successor to US Airways to comply with the
Employment Contract or otherwise terminate the Executive's employment in
violation of the Employment Contract, the Executive may elect to treat such
failure as a breach of the Employment Contract if the Executive then terminates
employment. As liquidated damages as the result of an event not following a
change of control that is deemed to be a breach of the Employment Contracts, US
Airways or its successor would be required to pay the Executive a lump sum equal
to either (i) his annual base salary for the then remaining term of the
Employment Contract (in the case of Messrs. Wolf, Lagow and Long), or (ii) three
years' base salary (in the case of Messrs. Gangwal and Nagin), and to continue
granting certain employee benefits for the then remaining term of the
Executive's Employment Contract. If the breach follows a change of control, the
Executive would be entitled to receive (i) an amount equal to the product of
three times the sum of the Executive's annual base salary plus an annual bonus,
(ii) a lump sum equal to the actuarial equivalent of the pension benefits which
the Executive would have received had he remained employed by US Airways until
the end of the term of the Employment Contract, (iii) medical benefits until
such time as the Executive qualifies for group medical benefits from another
employer, (iv) travel benefits for the Executive's life, and (v) continuation of
certain other benefits during the remainder of the term of the Employment
Contract. In addition, except under certain circumstances, during the 30-day
period immediately following the first anniversary of a change of control any
Executive could elect to terminate his or her Employment Contract for any reason
and receive the liquidated damages described in the immediately preceding
sentence. Each Employment Contract provides that the Executive shall be entitled
to recover from US Airways reasonable attorney's fees in connection with
enforcement of such Executive's rights under the Employment Contract. Each
Employment Contract also provides that any payments the Executive receives in
the event of a termination after a change of control shall be increased, if
necessary, such that, after taking into account all taxes he would incur as a
result of such payments, the Executive would receive the same after-tax amount
he would have received had no excise tax been imposed under Section 4999 of the
Code.
Currently, under the Company's 1984 Stock Option and Stock Appreciation Rights
Plan (the "1984 Plan") and the 1996 Stock Incentive Plan (the "1996 Plan", and
together with the 1984 Plan, the "Plans"), pursuant to which employees of the
Company and its subsidiaries have been awarded stock options and stock
appreciation rights with respect to Common Stock and shares of Restricted Stock,
the occurrence of a change of control, as defined, would make all granted
options immediately exercisable without regard to the vesting provisions
thereof, and under certain circumstances, would cause shares of Restricted Stock
to vest. In addition, grantees would be able, during the 60-day period
immediately following a change of control, to surrender all unexercised stock
options under the Plans to the Company for a cash payment equal to, in the case
of options not issued in tandem with stock appreciation rights, the excess, if
any, of the fair market value of the Common Stock over the exercise prices of
such stock options or, in the case of options issued in tandem with stock
appreciation rights, the positive value of such stock appreciation rights.
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<PAGE>
BENEFICIAL SECURITY OWNERSHIP
The following information pertains to Common Stock, Series A Preferred Stock,
Series F Preferred Stock, Series T Preferred Stock and Series B Depositary
Shares (as defined below), beneficially owned by all directors, nominees for
director and executive officers of the Company as of January 31, 1997. Unless
indicated otherwise, the information refers to ownership of Common Stock. Unless
indicated otherwise by footnote, the owner exercises sole voting and investment
power over the securities (other than unissued securities, the ownership of
which has been imputed to such owner).
<TABLE>
<CAPTION>
Number of Percent of
Owner Shares Class(1)
----- ------ --------
<S> <C> <C>
Directors and Nominees for Director
Robert W. Bogle......................... 1,500
Edwin I. Colodny........................ 39,512(2)
Mathias J. DeVito....................... 700
Rakesh Gangwal.......................... 571,275(3)
George J. W. Goodman.................... 200 Series B
Depositary Shares(4)
John W. Harris.......................... 1,000(5)
Edward A. Horrigan, Jr.................. 500
Robert LeBuhn........................... 8,000
John G. Medlin, Jr...................... 2,000
Hanne M. Merriman....................... 1,500
Raymond W. Smith........................ 500
Stephen M. Wolf......................... 1,371,379(6)
Executive Officers
W. Thomas Lagow......................... 180,652(7)
John R. Long III........................ 120,469(8)
Lawrence M. Nagin....................... 136,105(9)
19 directors, nominees for director and
executive officers of the Company as a
group........................................ 2,648,868.5(10) 4.1%
</TABLE>
- --------------
(1) Percentages are shown only where they exceed one percent of the number of
shares outstanding and, in the case of Common Stock holdings, are based on
shares of Common Stock outstanding on January 31, 1997.
(2) The listing of Mr. Colodny's holding includes 20,000 shares of Common Stock
issuable within 60 days of January 31, 1997 upon exercise of stock options.
(3) The listing of Mr. Gangwal's holding includes 200,000 shares of Common Stock
held by Mr. Gangwal which are subject to certain restrictions
("Restricted Stock") and 340,000 shares of Common Stock issuable within 60
days of January 31, 1997 upon exercise of stock options.
(4) Mr. Goodman's holding of Series B Depositary Shares is convertible into
498.5 shares of Common Stock.
(5) The listing of Mr. Harris' holding includes 600 shares of Common Stock for
which he has shared voting and dispositive power.
(6) The listing of Mr. Wolf's holding includes 243,750 shares of Restricted
Stock and 1,075,000 shares of Common Stock issuable within 60 days of
January 31, 1997 upon exercise of stock options.
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<PAGE>
(7) The listing of Mr. Lagow's holding includes 150,000 shares of Common Stock
issuable within 60 days of January 31, 1997 upon exercise of stock options
and 12,250 shares of Restricted Stock.
(8) The listing of Mr. Long's holding includes 89,250 shares of Common Stock
issuable within 60 days of January 31, 1997 upon exercise of stock options
and 12,250 shares of Restricted Stock.
(9) The listing of Mr. Nagin's holding includes 40,000 shares of Restricted
Stock and 90,000 shares of Common Stock issuable within 60 days of January
31, 1997 upon exercise of stock options.
(10) The listing of all directors', nominees' and officers' holdings includes,
in the case of Series B Depositary Shares, the number of shares of Common
Stock into which the Series B Depositary Shares are convertible, and also
includes 1,933,500 shares of Common Stock issuable within 60 days of
January 31, 1997 upon exercise of stock options and 541,500 shares of
Restricted Stock.
Effective in May 1996, the compensation for directors was changed from cash
compensation plus retirement income to cash and stock compensation. Each year
active directors receive a grant of 1,500 stock options and 500 deferred stock
units, both of which vest one year after grant. Establishing stock based
compensation for directors is intended to more closely align directors'
financial interests with that of shareholders of the Company. Additionally,
effective December 31, 1995 the Retirement Plan for Outside Directors of USAir
Group, Inc. was terminated and the value of the accrued benefits for past
service was converted into units of phantom stock of the Corporation (''Deferred
Stock Units'') based on the average price of the stock in the month of December
1995. Set forth below are the number of options and Deferred Stock Units held by
each director and nominee for director pursuant to the aforementioned
compensation programs. Although each Deferred Stock Unit represents the economic
equivalent of a share of Common Stock, no voting rights are attached thereto and
the Deferred Stock Units lack certain other attributes of Common Stock.
<TABLE>
<CAPTION>
Number of Number of Director
Owner Deferred Stock Units Stock Options(1)
- ----- -------------------- ----------------
<S> <C> <C>
Directors and Nominees for
Director
Robert W. Bogle 500.00 1,500
Edwin I. Colodny 9,441.54 1,500
Mathias J. DeVito 8,569.29 1,500
Rakesh Gangwal -0- -0-
George J. W. Goodman 8,569.29 1,500
John W. Harris 1,825.49 1,500
Edward A. Horrigan, Jr. 9,140.53 1,500
Robert LeBuhn 7,611.38 1,500
John G. Medlin, Jr. 7,685.42 1,500
Hanne M. Merriman 4,739.13 1,500
Raymond W. Smith 3,194.78 1,500
Stephen M. Wolf -0- -0-
</TABLE>
- --------------
(1) The stock options for each director vest on the earlier of the completion of
their term or on May 23, 1997.
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<PAGE>
The only persons known to the Company (from Company records and reports on
Schedules 13D and 13G filed with the Commission) which owned, as of January 31,
1997, more than 5% of each of its Common Stock, Series A Preferred Stock, Series
B Preferred Stock, Series F Preferred Stock and Series T Preferred Stock are
listed below:
<TABLE>
<CAPTION>
Percent
Name and address Amount and nature of
Title of Class of beneficial owner of beneficial ownership Class(1)
- -------------- ------------------- ----------------------- --------
<S> <C> <C> <C>
Series A Preferred Stock Berkshire Hathaway Inc. 358,000(2) 100.0%(3)
1440 Kiewit Plaza
Omaha, Nebraska 68131
Series B Preferred Stock M.D. Sass 281,689(4) 6.6%
1185 Avenue of the Americas
New York, New York 10036
Series B Preferred Stock George Soros 294,000(5) 6.9%
888 Seventh Avenue
New York, New York 10106
Series B Preferred Stock Ryback Management Corporation 427,900(6) 10.6%
7711 Carondelet Ave. Box 16900
St. Louis, Missouri 63105
Series F Preferred Stock BritAir Acquisition Corp. Inc. 30,000(7) 100.0%(8)
75-20 Astoria Blvd.
Jackson Heights, New York 11370
Series T Preferred Stock BritAir Acquisition Corp. Inc. 10,071.9(9) 100.0%(8)
75-20 Astoria Blvd.
Jackson Heights, New York 11370
Common Stock Torchmark Corporation 3,704,800(10) 5.6%
2001 Third Avenue South
Birmingham, Alabama 35233
Common Stock Tiger Management LLC 15,846,800(11) 24.7%
101 Park Avenue
New York, New York 10178
- --------------
</TABLE>
(1) Represents percent of class of stock outstanding on January 31, 1997.
(2) Number of shares as to which such person has shared voting power--358,000;
shared dispositive power--358,000.
(3) These shares of Series A Preferred Stock are owned directly by affiliates
of Berkshire, are convertible, under certain circumstances and subject to
certain antidilution adjustments, into 9,239,944 shares of Common Stock and
represent approximately 10.2% of the combined voting power of the
outstanding Common Stock, Series A Preferred Stock, Series F Preferred
Stock and Series T Preferred Stock, voting as a single class.
(4) As set forth in a Schedule 13D amendment dated January 23, 1997.
(5) As set forth in a Schedule 13D amendment dated January 1, 1997.
(6) As set forth in a Schedule 13G, dated January 27, 1997, as of
December 31, 1996.
(7) Number of shares as to which BritAir has sole voting power and sole
dispositive power--30,000.
(8) BritAir is a wholly-owned subsidiary of British Airways and owns Series F
Preferred Stock and Series T Preferred Stock pursuant to the Investment
Agreement. Series F Preferred Stock and Series T Preferred Stock are
convertible, under certain circumstances on or after January 21, 1997 and
subject to certain antidilution adjustments and Foreign Ownership
Restrictions, into a total of 15,458,851 and 3,831,695 shares of Common
Stock, respectively. Together, the Series F Preferred Stock and Series T
Preferred Stock represent approximately 24.1% of the combined voting power
of the outstanding Common Stock, Series A Preferred Stock, Series F
Preferred Stock and Series T Preferred Stock, voting as a single class.
(9) Reflects 152.1 or 100% of the outstanding shares of Series T-1 Preferred
Stock and 9,919.8 or 100% of the outstanding shares of Series T-2 Preferred
Stock. BritAir has sole voting power and sole dispositive power as to all
these outstanding shares of Series T Preferred Stock.
(10) As set forth in a Schedule 13G dated January 31, 1997, as of December 31,
1996, Waddell & Reed Investment Management Company has sole voting power
and sole dispositive power over 3,296,700 of these shares. Each of Waddell
& Reed, Inc., Waddell & Reed Financial Services, Inc., United Investors
Management Company, Liberty National Life Insurance Company and Torchmark
Corporation claims sole voting and dispositive power over 3,704,800 shares.
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<PAGE>
(11) As set forth in a Schedule 13G dated February 12, 1997 (the "Tiger
Schedule 13G"). As set forth in the Company's Restated Certificate
of Incorporation, so long as British Airways beneficially owns 20%
or more of the voting power of the Company's voting stock, any
foreign corporation which holds shares of the Company's voting stock
shall have no voting rights in respect of, and shall not be entitled
to vote, such shares on any matter. As disclosed in the Tiger
Schedule 13G, a portion of the shares of Common Stock is held by the
Jaguar Fund N.V., a Netherlands Antilles corporation ("Jaguar
Fund"). Therefore, in accordance with the Restated Charter, so long
as British Airways continues to beneficially own 20% or more of the
voting power of the Company's voting stock, the shares held by
Jaguar Fund are not presently voting Common Stock.
MARKET FOR US AIRWAYS GROUP'S COMMON STOCK
US Airways Group's Common Stock is traded on the New York Stock Exchange
(Symbol "U"). On March 31, 1997, there were approximately 64,567,000 shares
of the Company's Common Stock outstanding held by 32,093 stockholders of
record.
Market Prices of Common Stock
The high and low sale prices of the Company's Common Stock as reported on
the New York Stock Exchange Composite Tape during the periods indicated are
presented in the table below:
<TABLE>
<CAPTION>
Period High Low
------ ------- -------
<S> <C> <C>
1997
First Quarter $26 3/4 $19 1/4
Second Quarter 34 1/2 23 1/8
(through April 25, 1997)
1996
First Quarter 19 3/4 11 3/4
Second Quarter 20 3/4 15 7/8
Third Quarter 19 1/2 15 1/8
Fourth Quarter 25 7/8 15 1/4
1995
First Quarter 6 5/8 4 1/4
Second Quarter 14 5 5/8
Third Quarter 12 5/8 8
Fourth Quarter 15 7/8 10 3/8
</TABLE>
Holders of the Common Stock are entitled to receive such dividends as may
be lawfully declared by the Company's board of directors. The Company paid
dividends of $.03 per share on its Common Stock every quarter from the second
quarter of 1980 through the second quarter of 1990. In September 1990, however,
the Company suspended the payment of dividends on Common Stock for an indefinite
period. For additional information relating to the payment of dividends by US
Airways Group, see "Risk Factors - Company Related Considerations - Deferral of
Dividends by US Airways Group."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 158,000,000
shares: 3,000,000 shares of senior preferred stock, without nominal or par value
(the "Senior Preferred Stock"), 5,000,000 shares of preferred stock, without
nominal or par value (the "Regular Preferred Stock"), and 150,000,000 shares of
Common Stock. Both the Senior Preferred Stock and the Regular
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<PAGE>
Preferred Stock are issuable in series. At March 31, 1997, 358,000 shares of
Series A Preferred Stock (a series of Regular Preferred Stock), 4,263,050
Depositary Shares ("Series B Depositary Shares"), representing 42,630.5 shares
of the Series B Preferred Stock (a series of Regular Preferred Stock), 30,000
shares of Series F Preferred Stock (a series of Senior Preferred Stock), 152.1
shares of Series T-1 Preferred Stock (a series of Senior Preferred Stock),
9,918.2 shares of Series T-2 Preferred Stock (a series of Senior Preferred
Stock) and approximately 64,567,000 shares of Common Stock were outstanding,
exclusive of shares held in treasury. For certain information relating to the
payment of dividends by the Company, see "Risk Factors - Company Related
Considerations - Deferral of Dividends by US Airways Group."
Description of Series A Preferred Stock
The Series A Preferred Stock was issued on August 7, 1989 in a single
series of 358,000 shares to affiliates of Berkshire Hathaway, Inc. ("Berkshire
Hathaway") pursuant to a letter agreement dated August 7, 1989 between the
Company and Berkshire Hathaway (the "Letter Agreement"). The following summary
of the terms and provisions of the Series A Preferred Stock and the Letter
Agreement does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the Letter Agreement and to the Company's Restated
Certificate of Incorporation, as amended, and the Certificate of Designation for
the Series A Preferred Stock (the "Series A Certificate of Designation"), which
are Exhibits to the Registration Statement of which this Prospectus is a part.
The meanings of capitalized terms defined in this summary shall, except where
expressly stated otherwise, be applicable to such capitalized terms only where
such terms appear in this summary.
Rank. The Series A Preferred Stock ranks, with respect to voting
powers, preferences and relative, participating, optional and other special
rights and the qualifications, limitations and restrictions thereof, including
with respect to the payment of dividends and the distribution of assets, whether
upon liquidation or otherwise, (i) equally with (x) the BA Preferred Stock and
(y) subject to certain limitations, Regular Preferred Stock which may be issued
to employee stock ownership plans of the Company, (ii) senior to all shares of
Series B Preferred Stock and Common Stock, and (iii) senior to all shares of any
other class or series of Preferred Stock of the Company, unless such other class
or series by its terms ranks equally with or senior to the Series A Preferred
Stock.
Dividends. Each holder of shares of Series A Preferred Stock is
entitled to receive, when, as and if declared by the Board of Directors of the
Company, in preference to the holders of Common Stock and to any other capital
stock ranking junior to the Series A Preferred Stock as to payment of dividends,
cumulative cash dividends at the annual rate of $92.50 per share, payable in
equal quarterly payments on the last business day of March, June, September and
December. The Board of Directors may fix a record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive payments of a
dividend declared thereon, which record date shall be no more than 60 days nor
less than 10 days prior to the date fixed for the payment thereof. Accumulated
but unpaid dividends and any overdue redemption payments will accrue interest at
(A) the higher of (x) an annual rate of 9 1/4% or (y) an annual rate equal to 5%
plus the "prime rate" as reported in The Wall Street Journal on the date of
publication closest to the date of determination or (B) such lesser rate as may
be the maximum rate that is permitted by applicable law (in either case
compounded quarterly). In addition, if the Company declares a dividend or other
distribution on the Common Stock (other than (i) cash dividends in an aggregate
amount in any fiscal year which are not expected to exceed the net income of the
Company during such year from continuing operations before extraordinary items
or (ii) any dividend or distribution of shares of Common Stock), then each
holder of shares of Series A Preferred Stock is entitled to receive, at the same
time such dividend or distribution is made on the Common Stock, with respect to
each share of Series A Preferred Stock held, the same dividend or distribution
received by a holder of the number of shares of Common Stock into which such
shares of Series A Preferred Stock are convertible.
Conversion Rights. The Series A Preferred Stock is convertible into
Common Stock, at the option of the holders thereof, on the terms and conditions
summarized herein.
The current number of shares of Common Stock into which each share of
Series A Preferred Stock is convertible is 25.8099 shares of Common Stock (the
"Series A Conversion Rate"). The Series A Conversion Rate is subject to
adjustment in the event of certain stock dividends, subdivisions,
reclassifications and combinations of shares of Common Stock and certain
issuances of Common Stock (or rights or warrants or other securities convertible
into Common Stock) at a price per share (or having an exercise or conversion
price per share) less than an amount equal to $1,000 divided by the number of
shares of Common Stock into which one share of Series A Preferred Stock is
convertible at such time (or would be convertible if the Series A Preferred
Stock were then convertible) (such amount, the "Series A Conversion Price").
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<PAGE>
If the Company is a party to certain extraordinary transactions
(including a merger, consolidation, sale of all or substantially all its assets,
liquidation or recapitalization) in which the shares of Common Stock are changed
into or exchanged for other stock or securities or property, then the holders of
shares of Series A Preferred Stock will be entitled to receive, upon conversion,
the stock, securities or property which the holders of that number of shares of
Common Stock into which the shares of Series A Preferred Stock are convertible
would receive in such transaction.
Liquidation Rights. In the event of liquidation or of dissolution of
the Company, or in certain events of bankruptcy of the Company, the holders of
shares of Series A Preferred Stock shall receive $l,000 per share plus all
accrued dividends thereon to the date of such payment before any distribution of
assets will be made to holders of any class or series, or any shares of any
class or series, of stock of the Company ranking junior to the Series A
Preferred Stock with respect to the payment of dividends and the distribution of
assets, whether upon liquidation, dissolution or winding up or otherwise,
including the Series B Preferred Stock and the Common Stock ("Junior Stock").
Any such distribution of assets to holders of shares of any class or series, or
any shares of any class or series, of stock of the Company ranking on a parity
with the Series A Preferred Stock with respect to the payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up or
redeemable at or prior to the time that the Series A Preferred Stock may be
redeemable pursuant to the Series A Certificate of Designation ("Parity Stock")
shall be made only ratably with holders of Series A Preferred Stock.
Redemption. The Company is obligated to redeem on August 7, 1999 (if
any shares of Series A Preferred Stock remain outstanding) all outstanding
shares of Series A Preferred Stock at a cash price of $1,000 per share plus
accrued but unpaid dividends thereon to the date of redemption.
The Company has the right, at its sole option and election, to redeem at
any time, all (but not less than all) of the outstanding shares of Series A
Preferred Stock at a cash price of $1,100 per share plus all accrued but unpaid
dividends thereon to the date of redemption.
In the event of a Change in Control (as defined below), any holder of
shares of Series A Preferred Stock may require the Company to redeem all (but
not less than all) of such holder's shares of Series A Preferred Stock at a
price equal to, at the sole option and election of the holder, either (i) $1,000
per share or (ii) an amount per share equal to the Event Price (as defined
below) of the Common Stock into which such shares of Series A Preferred Stock
are then convertible plus, in either case, all accrued but unpaid dividends
thereon to the date of redemption.
The term "Change in Control" means any of the following:
(a) the acquisition by any person, other than the Company or
any of its subsidiaries, any employee benefit plan or related trust of
the Company or any of its subsidiaries, or Berkshire Hathaway (an
"Acquiring Person"), of beneficial ownership of 50% or more of the
combined voting power of the then-outstanding voting stock of the
Company entitled to vote generally in the election of directors; or
(b) the public announcement of a tender or exchange offer by
any Acquiring Person for 50% or more of the outstanding voting
securities of the Company, which was not approved by the Board of
Directors in advance of such public announcement; provided, however,
that such announcement shall not constitute a Change in Control as
long as (i) the Board of Directors of the Company opposes such offer
in its Schedule l4D-9 statements and (ii) the Company has sufficient
capital and surplus (as determined in accordance with the terms of
Delaware Law) to permit the Company to redeem the issued and
outstanding Series A Preferred Stock in accordance with the Series A
Certificate of Designation. A Change in Control will be deemed to have
occurred at any time a tender or exchange offer, not approved by the
Board of Directors of the Company in advance of its public
announcement, for 50% or more of the outstanding voting securities of
the Company is pending, if (i) the Board of Directors of the Company
in its Schedule l4D-9 statements (A) approves, or (B) fails to oppose,
such tender or exchange offer, (ii) the Company does not possess
sufficient capital and surplus (as determined in accordance with the
terms of Delaware Law) to permit the Company to redeem the issued and
outstanding Series A Preferred Stock in accordance with the Series A
Certificate of Designation or (iii) the Company gives notice to the
holders of Series A Preferred Stock that consummation of such a tender
or exchange offer is likely; or
(c) individuals who, as of August 7, 1989, constituted the
Board of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of such Board; provided,
however, that any
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individual becoming a director subsequent to August 7, 1989 whose
election, or nomination for election by the Company's stockholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board will be considered as though such
individual were a member of the Incumbent Board, but excluding, as a
member of the Incumbent Board, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the
Company and further excluding any person who is an affiliate or
associate of an Acquiring Person having or proposing to acquire
beneficial ownership of 10% or more of the continued voting power of
the Company; or
(d) the sale or other disposition of all or substantially all
the assets of the Company in one transaction or series of related
transactions.
The term "Event Price" means any of the following, as applicable:
(a) The weighted average price per share of Common Stock paid
by any person (or affiliate or associate (as such terms are defined in
Rule 12b-2 under the Exchange Act) of such person) whose acquisition
of shares of stock of the Company triggered a Change in Control during
the 60-day period preceding the Change in Control, in the event of a
Change in Control described in paragraph (a) of the definition of
Change in Control (unless such Change in Control was occasioned by the
purchase of shares of the Company's voting stock in a tender or
exchange offer, in which case the Event Price shall be determined by
reference to paragraph (b) below); or
(b) the highest price paid, offered to be paid or agreed to be
paid by any person (or affiliate or associate of such person) for a
share of Common Stock in a tender or exchange offer in the event of
(i) a Change in Control described in paragraph (a) of the definition
of Change in Control occasioned by the purchase of shares of the
Company's voting stock in a tender offer or exchange offer or (ii) a
Change in Control described in paragraph (b) of the definition of
Change in Control; or
(c) the Average Market Price per share of Common Stock, in the
event of a Change in Control described in paragraphs (c) or (d) of the
definition of Change in Control, computed as of the date of such
Change in Control.
The term "Average Market Price" per share of Common Stock on any date
means the weighted average of the Closing Prices per share of Common Stock on
the 10 trading days immediately preceding such date, determined by (i)
multiplying each Closing Price during such 10 trading day period by the number
of shares of Common Stock traded that day, (ii) adding the product of the
foregoing multiplications and (iii) dividing the sum by the total number of
shares of Common Stock traded during that 10 day period.
The term "Closing Price" per share of Common Stock on any date means
the last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange. If the Common Stock is not listed or admitted to trading on the New
York Stock Exchange, the "Closing Price" shall be determined as set forth in the
Series A Certificate of Designation.
In the event that the Company shall redeem, repurchase, exchange any
security or property for, or otherwise acquire for consideration, any Common
Stock (excluding certain extraordinary transactions in which the Common Stock
shall be changed into or exchanged for different securities of the Company or
securities of another corporation, such as a merger or consolidation, a sale of
all or substantially all of the Company's assets or other such similar
transactions) at a price equal to or greater than the Series A Conversion Price,
then, and in each such case, any holder of Series A Preferred Stock may require
the Company, at the sole option and election of the holder, to redeem a
proportionate number of such holder's shares of Series A Preferred Stock at a
price per share equal to the sum of (X) the product of (l) the number of shares
of Common Stock into which each share of Series A Preferred Stock is convertible
immediately prior to such redemption, repurchase, exchange or other acquisition
and (2) the price paid for each share of Common Stock in such redemption,
repurchase, exchange or other acquisition (or the fair market value in the event
of non-cash consideration) plus (Y) all accrued but unpaid dividends thereon to
the date of redemption.
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All redemption payments not made on the date set for redemption shall accrue
interest at (A) the higher of (x) an annual rate of 9 1/4% or (y) an annual rate
equal to 5% plus the "prime rate" as reported in The Wall Street Journal on the
date of publication closest to the date of determination or (B) such lesser rate
as may be the maximum rate that is permitted by applicable law. If, however,
following a Change in Control, a holder of shares of Series A Preferred Stock
elects to require the Company to redeem his shares of Series A Preferred Stock
and the Company fails to redeem such shares on the date set for redemption, the
interest accrued pursuant to clause (y) of the previous sentence will increase
each month by an annual rate of 100 basis points, up to a maximum annual rate of
19%, or such lesser rate as may be the maximum rate that is permitted by
applicable law. See "Description of Series A Preferred Stock--Covenants" and
"--The Letter Agreement".
Voting Rights. Each share of Series A Preferred Stock is entitled to 25.8099
votes on all matters on which holders of Common Stock are entitled to vote,
subject to adjustment in the manner set forth in the Series A Certificate of
Designation. See "Description of Series A Preferred Stock--Conversion Rights".
The Series A Preferred Stock, the BA Preferred Stock and the Common Stock vote
together as one class on all matters submitted to a vote of stockholders of the
Company, except as noted below or as otherwise required by law or the Company's
Restated Certificate of Incorporation, as amended, or the Series A Certificate
of Designation.
Whenever (i) dividends payable on shares of the Series A Preferred Stock shall
have been in arrears and not paid in full at or before 30 days following any
quarterly dividend payment date (a "Dividend Default"), thereafter and until all
such dividends shall have been paid in full or declared and set apart for
payment, (ii) the Company shall have violated any of the restrictions summarized
below under "Certain Restrictions" and such violation shall be continuing, (iii)
the Company shall not have redeemed shares of Series A Preferred Stock within 5
business days of the date such redemption is required (a "Redemption Default"),
thereafter and until such redemption shall have been performed or all funds
necessary therefor set apart for payment, or (iv) the Company shall not have
distributed any dividend or other distribution described in the third sentence
under "Dividends" above distributable to the holders of Series A Preferred Stock
within 5 business days of the date such distribution is required (a
"Distribution Default"), thereafter and until such distribution shall have been
made, the holders of Series A Preferred Stock shall have the right, voting
together as a single class, to elect two additional directors. However, the
directors elected or appointed as a result of a Dividend Default shall not be
elected or appointed until they have been approved by the Company, which
approval may not be unreasonably withheld or delayed. The term of office of the
directors elected or appointed in accordance with this paragraph shall terminate
automatically upon the cure of the default or once the covenant violation has
ceased to continue.
In addition, the affirmative vote of the holders of two-thirds of the then-
outstanding Series A Preferred Stock (unless the consent or approval of a
greater number of shares shall then be required by law) is required before the
Company may: (i) authorize or create any class or series, or any shares of any
class or series, of stock of the Company having any preference or priority as to
dividends or upon redemption, liquidation, dissolution, or winding up over the
Series A Preferred Stock, or redeemable prior to the time that the Series A
Preferred Stock may be redeemable pursuant to the Series A Certificate of
Designation ("Senior Stock"); (ii) authorize or create any Parity Stock, other
than certain Parity Stock issued by the Company to an employee stock ownership
plan, employee stock ownership trust or other similar arrangement; (iii)
reclassify any shares of stock of the Company into shares of Senior Stock or
Parity Stock; (iv) authorize any security exchangeable for, convertible into, or
evidencing the right to purchase any shares of Senior Stock or Parity Stock; (v)
amend, alter or repeal the Restated Certificate of Incorporation, as amended, to
alter or change the preferences, rights or powers of the Series A Preferred
Stock so as to affect the Series A Preferred Stock adversely or to increase the
authorized number of shares of Series A Preferred Stock; or (vi) except in
certain circumstances described in the Series A Certificate of Designation,
effect the voluntary liquidation, dissolution or winding up of the Company, or
the sale, lease, conveyance or exchange of all or substantially all of the
assets, property or business of the Company, or the merger or consolidation of
the Company with or into any other corporation.
Covenants. Except after the occurrence of certain extraordinary events
described in the Series A Certificate of Designation, the Company may not,
without the consent of the holders of two-thirds of the outstanding shares of
Series A Preferred Stock, redeem or repurchase or otherwise acquire, or permit
any of its subsidiaries to redeem, repurchase or otherwise acquire, any shares
of Common Stock at a price per share of Common Stock less than the Series A
Conversion Price, unless the Board of Directors determines that the shares of
Common Stock remaining issued and outstanding upon consummation of such
redemption, repurchase or other acquisition will have an aggregate market value,
immediately following consummation of such transaction, greater than
$1,500,000,000. The Company or any of its subsidiaries may, however,
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redeem, repurchase or otherwise acquire (i) up to 15,000,000 shares of Common
Stock, subject to adjustment in certain circumstances, or (ii) any Common Stock
offered for sale to the Company pursuant to the Letter Agreement.
Certain Restrictions. Whenever a Dividend Default, a Distribution Default or
a Redemption Default has occurred, thereafter and until such default is cured,
the Company and its subsidiaries are, subject to certain exceptions, restricted
from paying dividends on, redeeming or repurchasing shares of Junior Stock or
Parity Stock and from purchasing or otherwise acquiring, except in accordance
with the Series A Certificate of Designation or the Letter Agreement, any Series
A Preferred Stock. The Series A Certificate of Designation does not prevent the
Company from (i) declaring a dividend or distribution of any rights to purchase
Junior Stock issued pursuant to any rights agreement adopted by the Company
("Rights" or "Right") or issuing Rights in connection with the issuance of
Junior Stock, Parity Stock or the Series A Preferred Stock or (ii) redeeming
Rights at a price not to exceed $.03 per Right.
The Letter Agreement. In the Letter Agreement, Berkshire Hathaway
represented that it acquired the Series A Preferred Stock for investment and not
with a view to distribution and agreed that (i) Berkshire Hathaway (which, for
purposes of this clause (i) and clauses (ii) through (v) below is defined to
include any company or entity controlling or controlled by or under common
control with Berkshire Hathaway) will not, within ten years after the closing of
the share purchase transaction, acquire Common Stock or other Company securities
having general voting power in the election of directors giving Berkshire
Hathaway directly or indirectly an aggregate of over 14% of the Company's
outstanding voting stock, unless the Board of Directors of the Company has
approved Berkshire Hathaway's acquisition of shares taking it beyond the agreed
14% ownership level; (ii) Berkshire Hathaway for the ten year period after the
closing of the share purchase transaction will not be a member of a group (as
defined in Section 13(d)(3) of the Exchange Act) (other than such a group
composed solely of itself and its affiliates) or a participant in a proxy
solicitation with respect to any securities of the Company or make any public or
private proposal with respect to any extraordinary transaction involving the
Company; (iii) during the 24 month period after the date of the Letter
Agreement, except with respect to sales made into a tender or exchange offer for
all of the Common Stock and except following a Change in Control or a
Prospective Change in Control (as defined below), Berkshire Hathaway will not
sell any of the Company's securities owned by Berkshire Hathaway; (iv) except
following a Change in Control or the public announcement of a tender or exchange
offer by any person for 50% or more of the combined voting power of the then-
outstanding voting stock of the Company, which tender or exchange offer was
approved by the Board of Directors of the Company in advance of such public
announcement (a "Prospective Change in Control") and except for sales made into
a tender or exchange offer for all of the Common Stock, Berkshire Hathaway will
use its best efforts not knowingly to sell any of the Company's securities to
any one entity which would, following such sale, possess in the aggregate over
3% of the general voting power of the Company's outstanding voting securities at
the time of the sale; and (v) Berkshire Hathaway will not sell any of the
Company's securities owned by Berkshire Hathaway without first giving the
Company or its designees a reasonable opportunity to purchase such securities at
the same price and on the same terms and conditions proposed with respect to an
anticipated sale by Berkshire Hathaway to a third party.
In the Letter Agreement, the Company agreed that, at its expense, the Company
will use its best efforts to register under federal and state securities laws
and take such other action as Berkshire Hathaway may reasonably request
(including creating depositary receipts in customary form) to facilitate any
public distributions of (i) the Common Stock into which the Series A Preferred
Stock is convertible and (ii) in certain events, the Series A Preferred Stock.
Description of Series B Preferred Stock
The issuance of Series B Preferred Stock in a single series of 46,000 shares
was authorized on May 24, 1991. The Series B Depositary Shares each represent
1/100 of a share of the Series B Preferred Stock.
The following summary of the terms and provisions of the Series B Preferred
Stock does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the Company's Restated Certificate of Incorporation,
as amended, and the Certificate of Designation for the Series B Preferred Stock
(the "Series B Certificate of Designation"), which are Exhibits to the
Registration Statement of which this Prospectus is a part. The meanings of
capitalized terms defined in this summary shall be applicable to such
capitalized terms only where such terms appear in this summary.
Rank. The Series B Preferred Stock ranks, either as to dividends or upon
liquidation, dissolution or winding up, or both, junior to any series of capital
stock of the Company expressly stated to be senior to the Series B Preferred
Stock, senior to any class of capital stock expressly stated to be junior to the
Series B Preferred Stock, and on a parity with any class
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of capital stock of the Company expressly stated to rank on a parity with the
Series B Preferred Stock. The Series B Preferred Stock ranks (i) senior to the
Common Stock and (ii) junior to the Series A Preferred Stock and the BA
Preferred Stock.
Dividends. Holders of shares of the Series B Preferred Stock are entitled to
receive, when and as declared by the Board of Directors, an annual cash dividend
of $437.50 per share (equivalent to $4.375 per Series B Depositary Share),
payable in quarterly installments on February 15, May 15, August 15 and November
15. Dividends on the Series B Preferred Stock are cumulative from the date of
initial issuance of such Series B Preferred Stock. Dividends are payable, in
arrears, to holders of record as they appear on the stock books of the Company
on such record dates, not more than 60 days nor less than 10 days preceding the
payment dates, as shall be fixed by the Board of Directors. The Series B
Preferred Stock is junior as to dividends to (i) the Series A Preferred Stock
and the BA Preferred Stock, (ii) any Regular Preferred Stock that may be issued
in the future that is expressly senior as to dividends to the Series B Preferred
Stock and (iii) any Senior Preferred Stock that may be issued in the future. If
at any time the Company has failed to pay accrued dividends on any such senior
shares at the time such dividends are payable, the Company may not pay any
dividend on the Series B Preferred Stock or redeem or otherwise repurchase any
shares of Series B Preferred Stock until such accumulated but unpaid dividends
on such senior shares have been paid (or set aside for payment) in full by the
Company. In addition, whenever a Dividend Default, a Distribution Default or a
Redemption Default (as each term is defined above under "Description of Series A
Preferred Stock--Voting Rights") has occurred with respect to the Series A
Preferred Stock, thereafter and until such default is cured, the Company may not
pay dividends on, or redeem or repurchase, any shares of Series B Preferred
Stock.
If dividends are not paid in full upon the Series B Preferred Stock and any
other preferred stock ranking on a parity as to dividends with the Series B
Preferred Stock, all dividends declared upon shares of Series B Preferred Stock
and such other preferred stock will be declared pro rata so that in all cases
the amount of dividends declared per share on the Series B Preferred Stock and
such other preferred stock bear to each other the same ratio that accumulated
but unpaid dividends per share on the Series B Preferred Stock and such other
preferred stock bear to each other. Except as set forth above, unless full
cumulative dividends on the Series B Preferred Stock have been paid, dividends
(other than in Common Stock) may not be paid or declared and set aside for
payment and other distributions may not be made upon the Common Stock or on any
other Regular Preferred Stock of the Company ranking junior to or on a parity
with the Series B Preferred Stock as to dividends, nor may any Common Stock or
such other Regular Preferred Stock of the Company be redeemed, purchased or
otherwise acquired by the Company for any consideration or any payment be made
to or available for a sinking fund for the redemption of any shares of such
stock; provided, however, that any monies theretofore deposited in any sinking
fund with respect to any Regular Preferred Stock in compliance with the
provisions of such sinking fund may thereafter be applied to the purchase or
redemption of such Regular Preferred Stock in accordance with the terms of such
sinking fund regardless of whether at the time of such application full
cumulative dividends upon shares of the Series B Preferred Stock outstanding on
the last dividend payment date shall have been paid or declared and set apart
for payment; and provided, further, that any such junior Regular Preferred Stock
or Common Stock may be converted into or exchanged for stock of the Company
ranking junior to the Series B Preferred Stock as to dividends.
Conversion Rights. The Series B Preferred Stock is convertible at any time,
at the option of the holder, into such number of whole shares of Common Stock as
is equal to the aggregate liquidation preference amount of shares surrendered
for conversion divided by the conversion price, except that, if shares of Series
B Preferred Stock are called for redemption, the conversion right will terminate
at the close of business on the date fixed for such redemption unless the
Company shall default in making payment of the amount payable upon such
redemption.
The conversion price is currently $20.06. The conversion price is subject to
adjustment (under formulae set forth in the Series B Certificate of Designation)
in certain events, including: the issuance of Common Stock as a dividend or
distribution on the Common Stock; subdivisions and combinations of the Common
Stock; the issuance to all holders of Common Stock of certain rights or warrants
entitling them to subscribe for or purchase Common Stock at less than the
current market price (as defined in the Series B Certificate of Designation);
and the distribution to all holders of Common Stock of capital stock (other than
Common Stock) or evidences of indebtedness of the Company or assets (excluding
cash dividends or distributions from retained earnings) or rights or warrants to
subscribe for or purchase any of its securities.
If any of the following events shall occur, namely (i) any reclassification or
change of outstanding shares of Common Stock (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination of the Common Stock), (ii) any
consolidation, merger or combination of the Company with or into another
corporation as a result of which holders of Common Stock shall be entitled to
receive stock, securities or other
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property or assets (including cash) with respect to or in exchange for the
Common Stock, (iii) any sale or conveyance of the properties and assets of the
Company as, or substantially as, an entirety to any other entity as a result of
which holders of Common Stock shall be entitled to receive stock, securities or
other property or assets (including cash) with respect to or in exchange for
such Common Stock, or (iv) any Fundamental Change (as defined below) (including
any event referred to in the foregoing clauses (i), (ii) or (iii) that
constitutes a Fundamental Change), then appropriate provision shall be made so
that the holder of each share of Series B Preferred Stock then outstanding shall
have the right to convert such share into the kind and amount of the shares of
stock and other securities or property or assets (including cash) that would
have been receivable upon such reclassification, change, consolidation, merger,
combination, sale, conveyance or Fundamental Change by a holder of the number of
shares of Common Stock issuable upon conversion of such share of Series B
Preferred Stock immediately prior to such reclassification, change,
consolidation, merger, combination, sale, conveyance or Fundamental Change;
provided, however, that, if the event referred to in clauses (i) through (iv)
above constitutes a Non-Stock Fundamental Change (as defined below), each holder
of Series B Preferred Stock shall be entitled, upon conversion thereof, to
receive such amount of shares of stock, other securities or property or assets
(including cash) as is determined by the number of shares of Common Stock
receivable upon conversion at the conversion price as adjusted in accordance
with clause (i) of the following paragraph; and provided, further, that, if the
event referred to in clauses (i) through (iv) above constitutes a Common Stock
Fundamental Change (as defined below), the foregoing provisions of this
paragraph shall not apply, but each holder of Series B Preferred Stock shall be
entitled, upon conversion thereof at any time following such Common Stock
Fundamental Change, to receive such number of shares of common stock of the
successor or acquiring entity as is determined by use of the conversion price as
adjusted in accordance with clause (ii) of the following paragraph. The
adjustments described in this paragraph shall be subject to further adjustments
as appropriate that shall be as nearly equivalent as may be practicable to the
relevant adjustments provided for in the preceding paragraph and in this
paragraph. If, in the case of any such consolidation, merger, combination,
sale, conveyance or Fundamental Change, the stock or other securities and
property receivable thereupon by a holder of shares of Common Stock includes
shares of stock, securities, or other property or assets (including cash) of an
entity other than the successor or acquiring entity, as the case may be, in such
consolidation, merger, combination, sale, conveyance or Fundamental Change, then
the Company shall enter into an agreement with such other entity for the benefit
of the holders of Series B Preferred Stock that shall contain such provisions to
protect the interests of such holders as the Board of Directors shall reasonably
consider necessary by reason of the foregoing.
For purposes of calculating any adjustment to be made pursuant to the
preceding paragraph in connection with the occurrence of a Fundamental Change:
(i) in the case of a Non-Stock Fundamental Change, the conversion
price of the shares of Series B Preferred Stock shall be deemed to be the
lower of (A) the conversion price in effect immediately prior to such Non-
Stock Fundamental Change and (B) the product of (1) the greater of the
Applicable Price (as defined below) and the Reference Market Price (as defined
below) and (2) a fraction, the numerator of which is $5,000 and the
denominator of which is the amount at which one share of Series B Preferred
Stock would be redeemed by the Company if the redemption date were the date of
such Non-Stock Fundamental Change (such denominator being the sum of (y) the
product of the percentage (expressed as a decimal) set forth in the table
under the caption "Optional Redemption" below and $5,000 and (z) any then-
accrued and then-accumulated and unpaid dividends on the Series B Preferred
Stock); provided, however, that if there were accrued or accumulated and
unpaid dividends with respect to the Series B Preferred Stock at the time of
such Non-Stock Fundamental Change ("Passed Dividends") and if, thereafter, all
(or any portion) of such Passed Dividends are paid by the Company, then, the
conversion price to be used in determining the amount of consideration to
which a holder of Series B Preferred Stock who has not converted his shares of
Series B Preferred Stock shall be entitled upon conversion thereof shall be
deemed to be the conversion price that would have been used in making such
determination if all (or such portion) of such Passed Dividends had not been
accrued or accumulated and unpaid at such time; and
(ii) in the case of a Common Stock Fundamental Change, the conversion
price of the shares of Series B Preferred Stock immediately following such
Common Stock Fundamental Change shall be the conversion price in effect
immediately prior to such Common Stock Fundamental Change multiplied by a
fraction, the numerator of which is the Purchaser Stock Price (as defined
below) and the denominator of which is the Applicable Price.
Depending upon whether the Fundamental Change is a Non-Stock Fundamental
Change or Common Stock Fundamental Change, a holder may receive significantly
different consideration upon conversion. In the event of a Non-Stock
Fundamental Change, the holder has the right to convert shares of Series B
Preferred Stock into the kind and amount of the
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shares of stock and other securities or property or assets (including cash) as
is determined by the number of shares of Common Stock receivable upon conversion
at the conversion price as adjusted in accordance with clause (i) of the
preceding paragraph. However, in the event of a Common Stock Fundamental Change
in which less than 100% by value of the consideration received by a holder of
Common Stock is common stock of the successor, acquiror or other third party, a
holder of a share of Series B Preferred Stock who converts such share following
the Common Stock Fundamental Change will receive consideration in the form of
such common stock only, whereas a holder who converted his share prior to the
Common Stock Fundamental Change received consideration in the form of such
common stock as well as any other securities or assets (which may include cash)
offered by such successor, acquiror or other third party.
The term "Applicable Price" means (i) in the event of a Fundamental Change in
which the holders of the Company's Common Stock receive only cash, the amount of
cash received by a holder of one share of Common Stock and (ii) in the event of
any other Fundamental Change, the average of the reported last sales price for
one share of the Company's Common Stock (determined as provided in the Series B
Certificate of Designation) during the 10 trading days prior to the record date
for the determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Fundamental Change
or, if there is no such record date, prior to the date upon which the holders of
the Common Stock shall have the right to receive such cash, securities, property
or other assets.
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% (by value as determined in good faith by the Board of
Directors) of the consideration received by holders of Common Stock consists of
common stock that, for the 10 trading days prior to such Fundamental Change, has
been admitted for listing on a national securities exchange or quoted on the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotations System.
The term "Fundamental Change" means the occurrence of any transaction or event
in connection with which all or substantially all the Common Stock of the
Company shall be exchanged for, converted into, acquired for or shall constitute
solely the right to receive cash, securities, property or other assets (whether
by means of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise). In the case of a
plan involving more than one such transaction or event, for purposes of
adjustment of the conversion price, such Fundamental Change shall be deemed to
have occurred when substantially all the Common Stock of the Company shall have
been exchanged for, converted into, or acquired for, or shall constitute solely
the right to receive, such cash, securities, property or other assets, but the
adjustment shall be based upon the consideration that the holders of Common
Stock received in the transaction or event as a result of which more than 50% of
the Common Stock of the Company shall have been exchanged for, converted into,
or acquired for, or shall constitute solely the right to receive, such cash,
securities, property or other assets.
The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the reported last sales price for one share
of the common stock received by holders of Common Stock in such Common Stock
Fundamental Change during the 10 trading days prior to the record date for the
determination of the holders of Common Stock entitled to receive such common
stock or, if there is no such record date, prior to the date upon which the
holders of the Common Stock shall have the right to receive such common stock.
The term "Reference Market Price" currently means $11.3333 and, in the event
of any adjustment to the conversion price as described above, the Reference
Market Price shall also be adjusted so that the ratio of the Reference Market
Price to the conversion price after giving effect to any such adjustment shall
always be the same as the ratio of $11.3333 to the initial conversion price of
$20.06.
No adjustment in the conversion price will be required unless such adjustment
would require a change of at least 1% in the conversion price then in effect;
provided, however, that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. The Company reserves the right to make any reduction in the
conversion price in addition to those required in the foregoing provisions as
the Company in its discretion shall determine to be advisable in order that
certain stock-related distributions hereafter made by the Company to its
stockholders shall not be taxable. Except as stated above, the conversion price
will not be adjusted for the issuance of Common Stock or any securities
convertible into or exchangeable for Common Stock or carrying the right to
purchase any of the foregoing.
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Fractional shares of Series B Preferred Stock may be converted into shares of
Common Stock; however, no fractional shares of Common Stock or securities
representing fractional shares of Common Stock will be issued upon conversion.
Any fractional interest in a share of Common Stock resulting from conversion
will be paid in cash based on the reported last sales price of the Common Stock
at the close of business on the trading day next preceding the date of
conversion.
The holders of shares of Series B Preferred Stock at the close of business on
a dividend payment record date shall be entitled to receive the dividend payable
on such shares (except that holders of shares called for redemption on a
redemption date between such record date and the dividend payment date shall not
be entitled to receive such dividend on such dividend payment date) on the
corresponding dividend payment date notwithstanding the subsequent conversion
thereof or the Company's default in payment of the dividend due on such dividend
payment date. However, shares of Series B Preferred Stock surrendered for
conversion during the period between the close of business on any dividend
payment record date and the opening of business on the corresponding dividend
payment date (except shares called for redemption on a redemption date during
such period) must be accompanied by payment of an amount equal to the dividend
payable on such shares on such dividend payment date. A holder of shares of
Series B Preferred Stock on a dividend payment record date who (or whose
transferee) tenders any of such shares for conversion on a dividend payment date
will receive the dividend payable by the Company on such shares of Series B
Preferred Stock on such date, and the converting holder need not include payment
in the amount of such dividend upon surrender of shares of Series B Preferred
Stock for conversion. Except as provided above, the Company shall make no
payment or allowance for unpaid dividends, whether or not in arrears, on
converted shares or for dividends on the shares of Common Stock issued upon
conversion.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, the holders of shares of Series B Preferred Stock will be
entitled to receive out of the assets of the Company available for distribution
to stockholders, before any distribution is made to holders of (i) any shares of
Regular Preferred Stock ranking junior to the Series B Preferred Stock as to
rights upon liquidation, dissolution or winding up which may be issued in the
future and (ii) Common Stock, liquidating distributions in the amount of $5,000
per share (equivalent to $50 per Series B Depositary Share), plus accrued and
accumulated but unpaid dividends to the date of final distribution, but the
holders of the Series B Preferred Stock will not be entitled to receive the
liquidation price of such shares until the liquidation preference of the Series
A Preferred Stock, the BA Preferred Stock and any other shares of the Company's
capital stock ranking senior to the Series B Preferred Stock as to rights upon
liquidation, dissolution or winding up shall have been paid (or a sum set aside
therefor sufficient to provide for payment) in full. If upon any liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Series B Preferred Stock and any other preferred stock ranking as to rights
upon liquidation, dissolution or winding up on a parity with the Series B
Preferred Stock are not paid in full, the holders of the Series B Preferred
Stock and of such other preferred stock will share ratably in any such
distribution in proportion to the full respective preferential amounts to which
they are entitled. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of Series B Preferred Stock
will not be entitled to any further participation in any distribution of assets
by the Company. Neither a consolidation or merger of the Company with or into
another corporation nor a merger of another corporation with or into the Company
nor a sale or transfer of all or part of the Company's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Company.
Redemption. Subject to certain restrictions provided in the Series F
Certificate of Designation, the Series T-1 Certificate of Designation and the
Series T-2 Certificate of Designation, the Series B Preferred Stock is
redeemable at the option of the Company for cash on at least 30 but not more
than 60 days' notice at any time, as a whole or in part; provided, however, that
if any shares of Series A Preferred Stock are outstanding, the Company may not
redeem any shares of Series B Preferred Stock except if all outstanding shares
of Series B Preferred Stock are redeemed and (x) the Company intends the purpose
and reasonably expects the result of such call for redemption to be the
conversion of all or substantially all of the outstanding shares of Series B
Preferred Stock to Common Stock, and (y) in connection with such redemption, the
Company has entered into standby underwriting commitments, with respect to the
sale of the Common Stock issuable upon conversion of the Series B Preferred
Stock should holders of the Series B Preferred Stock not convert, with one or
more investment banking firms of national reputation, the purpose of which is to
arrange for such investment banking firm or firms to purchase and distribute
such Common Stock as is necessary to place the Company in substantially the same
capital structure position as it would have been in had all holders of Series B
Preferred Stock converted their shares prior to such redemption.
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Subject to the preceding paragraph, the Series B Preferred Stock will be
redeemable at the following redemption prices per share (expressed as a
percentage of the $5,000 liquidation preference thereof), if redeemed during the
12-month period beginning on May 15:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1996 104.375%
1997 103.500%
1998 102.625%
1999 101.750%
2000 100.875%
</TABLE>
and 100% if redeemed on or after May 15, 2001, together in each case with
accrued and accumulated but unpaid dividends to but excluding the date fixed for
redemption.
If full cumulative dividends on the Series B Preferred Stock have not been
paid, the Series B Preferred Stock may not be redeemed in part and the Company
may not purchase or acquire any shares of Series B Preferred Stock otherwise
than pursuant to a purchase or exchange offer made on the same terms to all
holders of the Series B Preferred Stock. If fewer than all the outstanding
shares of Series B Preferred Stock are to be redeemed, the Company will select
those to be redeemed by lot or a substantially equivalent method. Any shares of
Series B Preferred Stock for which a notice of redemption has been given may be
converted into shares of Common Stock at any time before the close of business
on the date fixed for the redemption.
Voting Rights. Except as indicated below, the holders of Series B
Preferred Stock have no voting rights except for any voting rights they may be
entitled to under the laws of the State of Delaware. If an amount equal to or
exceeding the aggregate of six quarterly dividends payable on the Series B
Preferred Stock or on any other Regular Preferred Stock ranking on a parity with
the Series B Preferred Stock as to dividends is in arrears, the number of
directors of the Company will be increased by two and the holders of the Series
B Preferred Stock and such other Regular Preferred Stock, voting as a single
class without regard to series, will be entitled to elect the additional two
directors until all cumulative dividends in arrears have been paid or declared
and set apart for payment.
In addition, without the vote or consent of the holders of at least two-
thirds of the number of shares of the Series B Preferred Stock then outstanding,
the Company shall not (i) authorize or create any class or classes of stock
ranking senior to the Series B Preferred Stock either as to dividends or upon
liquidation, dissolution or winding up or increase the authorized number of
shares of any class or classes of capital stock (other than issuances of the
Senior Preferred Stock) ranking senior to the Series B Preferred Stock either as
to dividends or upon liquidation, dissolution or winding up, (ii) amend, alter
or repeal any of the provisions of the Restated Certificate of Incorporation, as
amended, of the Company so as to affect adversely the preferences or rights of
the holders of Series B Preferred Stock (any increase in the number of shares of
authorized Regular Preferred Stock or Common Stock shall not be deemed to
adversely affect such preferences or rights) or (iii) authorize any
reclassification of the Series B Preferred Stock.
Description of Series B Depositary Shares
Each Series B Depositary Share represents 1/100 of a share of Series B
Preferred Stock deposited under the Deposit Agreement, dated as of May 24, 1991
(the "Series B Deposit Agreement"), among the Company, The Chase Manhattan Bank,
N.A., as depositary (the "Series B Depositary"), and the holders from time to
time of depositary receipts issued thereunder. Subject to the terms of the
Series B Deposit Agreement, each owner of a Series B Depositary Share is
entitled, proportionately, to all the rights, preferences and privileges of the
Series B Preferred Stock represented thereby (including dividend, voting,
conversion, redemption and liquidation rights) contained in the Series B
Certificate of Designation summarized above under "Description of Series B
Preferred Stock". There is no public trading market for the Series B Preferred
Stock except as represented by the Series B Depositary Shares.
The Series B Depositary Shares are evidenced by depositary receipts issued
pursuant to the Series B Deposit Agreement (the "Series B Depositary Receipts").
The following summary of the terms and provisions of the Series B Depositary
Shares does not purport to be complete and is subject to, and qualified in its
entirety by, the Series B Deposit
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Agreement (which contains the form of Series B Depositary Receipt), which is an
Exhibit to the Registration Statement of which this Prospectus is a part.
See "Description of Series B Preferred Stock" for a description of the
Series B Preferred Stock underlying the Series B Depositary Shares.
Withdrawal of Shares of Series B Preferred Stock. Upon surrender of the
Series B Depositary Receipts at the Corporate Trust Office (as defined in the
Series B Deposit Agreement) of the Series B Depositary, the owner of the Series
B Depositary Shares evidenced thereby is entitled to delivery at such office of
certificates evidencing the number of shares (including fractional shares) of
Series B Preferred Stock represented by such Series B Depositary Shares. If the
Series B Depositary Receipts delivered by the holder evidence a number of Series
B Depositary Shares in excess of the number of Series B Depositary Shares
representing the number of shares (including fractional shares) of Series B
Preferred Stock to be withdrawn, the Series B Depositary will deliver to such
holder at the same time a new Series B Depositary Receipt evidencing such excess
number of shares (including fractional shares) of Series B Preferred Stock.
Dividends. The Series B Depositary distributes all cash dividends or other
cash distributions received in respect of the Series B Preferred Stock to the
record holders of Series B Depositary Shares in proportion, insofar as possible,
to the number of Series B Depositary Shares owned by such holders.
In the event of a distribution in other than cash, the Series B Depositary
distributes property received by it to the record holders of Series B Depositary
Shares entitled thereto, unless the Series B Depositary determines that it is
not feasible to make such distribution, in which case the Series B Depositary
may, with the approval of the Company, adopt such method as it deems equitable
and practical for the purpose of effecting such distribution, including sale of
such property and distribution of the net proceeds from such sale to such
holders.
The amount distributed in any of the foregoing cases will be reduced by any
amounts required to be withheld by the Company or the Series B Depositary on
account of taxes.
Conversion Rights. The Series B Depositary Shares, as such, are not
convertible into Common Stock or any other securities or property of the
Company. Nevertheless, the Company has agreed, as a matter of convenience, to
accept delivery of Series B Depositary Receipts for purposes of effecting
conversion of the Series B Preferred Stock underlying the Series B Depositary
Shares evidenced by such Series B Depositary Receipts utilizing the same
procedures as those provided for delivery of shares of Series B Preferred Stock
to effect such conversions in accordance with the Series B Certificate of
Designation. If the Series B Depositary Shares evidenced by a Series B
Depositary Receipt are to be converted in part only, a new Series B Depositary
Receipt or Receipts will be issued for any whole Series B Depositary Shares not
to be converted. No fractional shares of Common Stock will be issued upon
conversion, but if such conversion results in a fraction, an amount in respect
thereof will be paid in cash by the Company. See "Description of Series B
Preferred Stock--Conversion Rights".
Redemption. The Series B Depositary Shares will be redeemed, upon not less
than 30 nor more than 60 days' notice, using the cash proceeds received by the
Series B Depositary resulting from the redemption, in whole or in part, at the
Company's option, but subject to the terms and conditions applicable thereto, of
shares of Series B Preferred Stock held by the Series B Depositary. The
redemption price per Series B Depositary Share will be equal to 1/100 of the
redemption price payable with respect to each share of Series B Preferred Stock.
Whenever the Company redeems shares of Series B Preferred Stock held by the
Series B Depositary, the Series B Depositary will redeem as of the same
redemption date the number of Series B Depositary Shares representing the shares
of Series B Preferred Stock so redeemed. If fewer than all the Series B
Depositary Shares are to be redeemed, the Series B Depositary Shares to be
redeemed will be selected by lot or pro rata or in any other equitable manner
determined by the Series B Depositary.
Voting Rights. Upon receipt of notice of any meeting at which the owners
of the Series B Preferred Stock are entitled to vote, the Series B Depositary
will mail the information contained in such notice of meeting to the record
holders of the Series B Depositary Shares. Each record holder of Series B
Depositary Shares on the record date (which will be the same date as the record
date for the Series B Preferred Stock) will be entitled to instruct the Series B
Depositary as to the exercise of the voting rights pertaining to the number of
shares of Series B Preferred Stock represented by such holder's Series B
Depositary Shares. The Series B Depositary will endeavor to vote the number of
shares of Series B Preferred Stock represented by such Series B Depositary
Shares in accordance with such instructions, provided the Series B Depositary
receives
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such instructions sufficiently in advance of such meeting to enable it to so
vote the shares of Series B Preferred Stock, and the Company has agreed to take
all reasonable action which may be deemed necessary by the Series B Depositary
in order to enable the Series B Depositary to do so. The Series B Depositary
will abstain from voting shares of Series B Preferred Stock to the extent it
does not receive specific written instructions from the holders of Series B
Depositary Shares representing such Series B Preferred Stock.
Amendment and Termination of the Series B Deposit Agreement. The form of
Series B Depositary Receipts and any provision of the Series B Deposit Agreement
may at any time be amended by agreement between the Company and the Series B
Depositary. However, any amendment which imposes or increases any fees, taxes
or charges upon holders of Series B Depositary Shares (other than taxes and
other Government charges, fees and other expenses payable by such holders as
stated below under "Charges of Series B Depositary"), or which otherwise
prejudices any substantial existing right of holders of Series B Depositary
Receipts, will not take effect as to outstanding Series B Depositary Shares
until the expiration of 90 days after notice of such amendment has been mailed
to the record holders of outstanding Series B Depositary Receipts, during which
90-day period such holder may withdraw its shares of Series B Preferred Stock as
described above under "Withdrawal of Shares of Series B Preferred Stock". In no
event may any amendment impair the right of any owner of any Series B Depositary
Shares, subject to the conditions specified in the Series B Deposit Agreement,
upon surrender of the Series B Depositary Receipts evidencing such Series B
Depositary Shares to receive Series B Preferred Stock or upon conversion of the
Series B Preferred Stock represented by the Series B Depositary Shares, to
receive shares of Common Stock, and in each case any money or other property
represented thereby, except in order to comply with mandatory provisions of
applicable law.
Whenever directed by the Company, the Series B Depositary will terminate
the Series B Deposit Agreement by mailing notice of such termination to the
holders of all outstanding Series B Depositary Shares at least 30 days prior to
the date of termination. The Series B Depositary may likewise terminate the
Series B Deposit Agreement at any time 45 days after the Series B Depositary has
delivered to the Company a written notice of its election to resign if a
successor depositary has not theretofore been appointed and accepted its
appointment. If any Series B Depositary Receipts remain outstanding after the
date of termination, the Series B Depositary thereafter will discontinue the
transfer of Series B Depositary Receipts, will suspend the distribution of
dividends to the owners thereof, and will not give any further notices (other
than notice of such termination) or perform any further acts under the Series B
Deposit Agreement except as provided below and except that the Series B
Depositary will continue (i) to collect dividends on the Series B Preferred
Stock and any other distributions with respect thereto and (ii) to deliver
Series B Preferred Stock together with such dividends and distributions and the
net proceeds of any sales of rights, preferences, privileges or other property,
without liability for interest thereon, in exchange for Series B Depositary
Receipts surrendered. At any time after the expiration of two years from the
date of termination, the Series B Depositary may sell the Series B Preferred
Stock then held by it at public or private sales, at such place or places and
upon such terms as it deems proper and may thereafter hold the net proceeds of
any such sale, together with any money and other property then held by it,
without liability for interest thereon, for the pro rata benefit of the holders
of Receipts which have not been surrendered. The Company does not intend to
terminate the Series B Deposit Agreement or to permit the resignation of the
Series B Depositary without appointing a successor depositary. In the event the
Series B Deposit Agreement is terminated, the Company will use its best efforts
to list the Series B Preferred Stock on the New York Stock Exchange.
Charges of Series B Depositary. The Company pays all charges of the Series
B Depositary including all charges in connection with withdrawals of shares of
Series B Preferred Stock by the owners of Series B Depositary Shares or
conversions of shares of Series B Preferred Stock, except for taxes (including
transfer taxes, if any) and other government charges and such other charges as
are expressly provided in the Series B Deposit Agreement to be at the expense of
holders of Series B Depositary Receipts or persons depositing shares of Series B
Preferred Stock.
General. The Series B Depositary makes available for inspection by holders
of Series B Depositary Receipts at its Corporate Trust Office in New York, New
York all reports and communications from the Company which are delivered to the
Series B Depositary and made generally available to the holders of Series B
Preferred Stock.
Neither the Series B Depositary nor the Company will be liable if it is
prevented or delayed by law or any circumstance beyond its control in performing
its obligations under the Series B Deposit Agreement. The obligations of the
Company and the Series B Depositary under the Series B Deposit Agreement are
limited to performance with their best judgment and in good faith of their
duties thereunder except that they are liable for negligence in the performance
of their duties thereunder and they are not obligated to prosecute or defend any
legal proceeding in respect of any Series B Depositary Shares or Series B
Preferred Stock unless satisfactory indemnity is furnished. The Company and the
Series B Depositary are
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entitled to rely upon advice of or information from counsel, accountants or
other persons believed to be competent and on documents believed to be genuine.
The Series B Depositary may at any time resign or be removed by the
Company, effective upon the acceptance by its successor of its appointment.
Description of Common Stock
The following summary of the terms and provisions of the Common Stock and
certain terms of the Company's Restated Certificate of Incorporation, as
amended, does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the provisions of the Company's Restated
Certificate of Incorporation, as amended, which is filed as an Exhibit to the
Registration Statement of which this Prospectus is a part. The meanings of
capitalized terms defined in this summary shall be applicable to such
capitalized terms only where such terms appear in this summary.
General. Of the Company's 150,000,000 authorized shares of Common Stock,
approximately 64,567,000 shares were outstanding (exclusive of treasury stock)
on March 31, 1997. Each outstanding share of Common Stock (except shares held in
treasury) is entitled to one vote on all matters submitted to a vote of
stockholders. The Common Stock does not have cumulative voting rights.
Subject to the preferences or other rights of any outstanding shares of
Senior Preferred Stock and Regular Preferred Stock (including the BA Preferred
Stock, the Series A Preferred Stock and the Series B Preferred Stock), dividends
may be paid to the holders of Common Stock when and if declared by the Board of
Directors out of funds legally available for dividends. In addition, the ability
of the Company, as a holding company, to pay dividends on the Common Stock will
be dependent upon the payment of dividends or interest by, or the availability
of other funds from, its subsidiaries to it.
Holders of Common Stock have no conversion, redemption or preemptive
rights. All outstanding Common Stock is, and the Common Stock to be issued upon
conversion of the BA Preferred Stock, the Series A Preferred Stock and the
Series B Preferred Stock will be, fully paid and nonassessable. The Common Stock
is listed on the New York Stock Exchange. In the event of any liquidation,
dissolution or winding up of the affairs of the Company, the holders of Common
Stock would be entitled to share ratably in its assets remaining after provision
for payment of creditors and after payment of the liquidation preferences and
any accrued and accumulated but unpaid dividends with respect to any Senior
Preferred Stock and Regular Preferred Stock (including the BA Preferred Stock,
the Series A Preferred Stock and the Series B Preferred Stock) outstanding at
the time.
Existing Anti-takeover Measures. The Board of Directors of the Company
could under certain circumstances, without the approval of the stockholders,
issue Senior Preferred Stock or Regular Preferred Stock having voting or
conversion rights that could adversely affect the voting power of the holders of
Common Stock and the issuance of Senior Preferred Stock or Regular Preferred
Stock could be used under certain circumstances to render more difficult or
discourage a hostile takeover of the Company. In addition, authorized but
unissued shares of Common Stock could be used to dilute the stock ownership of
persons seeking to obtain control of the Company, and thereby defeat a possible
takeover attempt which, if stockholders were offered a premium over the market
value of their shares, might be viewed as beneficial to stockholders of the
Company.
Article Sixth of the Company's Restated Certificate of Incorporation, as
amended (the "Fair Price Provision"), provides that if an entity acquires more
than 10 percent but less than 60 percent of the outstanding stock of the Company
entitled to vote for directors (the "Voting Stock"), accomplishment of a
subsequent business combination transaction between the Company and such entity
will require the approval of the holders of 80 percent of such Voting Stock. In
addition, under the Fair Price Provision, if an entity acquires 60 percent or
more of the Voting Stock, then accomplishment of a subsequent business
combination transaction between the Company and such entity will require the
approval of the holders of a majority of the Voting Stock not owned by such
entity. The above special voting provisions do not apply if a majority of the
members of the Board of Directors of the Company who are unaffiliated with the
acquiring entity approve the business combination transaction prior to such
entity's acquisition of 10 percent or more of the Voting Stock or if certain
minimum price and procedural requirements are met. The Fair Price Provision is
designed to prevent a purchaser from utilizing "two tier" pricing and similar
inequitable tactics where, for example, a purchaser pays cash to acquire a
controlling equity interest in a company and then utilizes such control to
acquire the remaining equity interest in the company by paying the minority
stock stockholders a price for their shares which is lower and/or inferior in
form to the consideration paid to acquire control. An entity which
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is unwilling to comply with the safeguards in the Fair Price Provision may be
discouraged from establishing an equity position in the Company. The Fair Price
Provision, as a result, may deprive stockholders of the opportunity to receive a
premium for their shares. The Fair Price Provision does not preclude an offeror
from making a tender offer for some of the Voting Stock without proposing a
business combination transaction in which the remaining Voting Stock is
purchased.
Foreign Ownership Restrictions. In connection with British Airways' 1993
investment in the Company, the Company's stockholders approved an amendment to
its Restated Certificate of Incorporation at the 1993 annual meeting that is
designed to prevent the loss of US Airways' operating certificates due to
foreign ownership or control of the Company's voting securities exceeding the
level permitted by relevant Federal law. Under current law, foreign citizens
cannot own or control more than 25% of the Company's outstanding voting
securities.
The Restated Certificate of Incorporation provides that non-U.S. citizens
("Aliens") that acquire beneficial ownership of the Company's voting securities
on or after May 27, 1993 have no voting rights (so long as British Airways
beneficially owns 20% or more of the voting power of the Company's voting
stock), and, under certain circumstances, the Company can redeem or exchange the
voting securities beneficially owned by these Aliens. The independent directors
of the Company, who are those directors other than those employed by or
affiliated with British Airways or the Company, have broad powers to construe
and apply such provisions, including the determination as to whether Aliens have
become the beneficial owners of the Company's voting securities.
See "The Company - Relationship with British Airways" with respect to
recent developments concerning British Airways' investment in US Airways Group
and related matters.
Indemnification of Directors. Delaware Law provides that a corporation may
indemnify directors and officers as well as other employees and agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with specified actions, suits or proceedings, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation -- a "derivative action"), if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred in
connection with the defense or settlement of such action and the statute
requires court approval before there can be any indemnification where the person
seeking indemnification has been adjudged to be liable to the corporation, The
statute provides that it is not exclusive of other indemnification that may be
granted by a corporation's by-laws, disinterested directors vote, stockholder
vote, agreement or otherwise.
The Company's Restated Certificate of Incorporation, as amended, provides
that no director of the Company shall be liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock redemptions
or repurchases under Delaware Law or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of these provisions
will be to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of fiduciary duty as a director (including
breaches resulting from grossly negligent behavior), except in the situations
described above. These provisions will not limit the liability of directors
under federal securities laws. In addition, the Company's By-Laws provide that
the Company shall indemnify its directors to the full extent permitted by
Delaware Law, as amended from time to time.
In addition, the Company has entered into Indemnity Agreements with each of
the officers and directors of the Company providing, in each case, for the
indemnification by the Company of such individuals for all losses and related
expenses (subject to certain limitations) incurred by them arising out of the
discharge of their respective duties as directors and/or officers of the
Company.
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Description of Series F Preferred Stock
The Series F Preferred Stock represented by the Series F Depositary Shares
offered hereby were issued on January 21, 1993 in a single series of 30,000
shares to BritAir pursuant to the Investment Agreement. The following summary of
the terms and provisions of the Series F Preferred Stock and the Investment
Agreement does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the Investment Agreement, the Company's Restated
Certificate of Incorporation, as amended, and the Series F Certificate of
Designation, which are Exhibits to the Registration Statement of which this
Prospectus is a part. The meanings of capitalized terms defined in this summary
shall, except where explicitly stated otherwise, be applicable to such
capitalized terms only where such terms appear in this summary.
Rank. The Series F Preferred Stock ranks, with respect to dividends and
upon distribution of assets in liquidation, dissolution or winding up, (i) pari
----
passu with the Company's Series A Preferred Stock and Series T Preferred Stock
- -----
and (ii) senior to the Company's Series B Preferred Stock and Common Stock.
Dividends. Each holder of Series F Preferred Stock is entitled to receive,
when, as and if declared by the Board of Directors of the Company, in preference
to the holders of Common Stock and to any other capital stock ranking junior to
the Series F Preferred Stock as to payment of dividends, cumulative cash
dividends at the annual rate of $700 per share, payable in equal quarterly
payments on the last Business Day of February, May, August and November. The
Board of Directors may fix a record date for the determination of holders of
shares of Series F Preferred Stock entitled to receive payments of a dividend
declared thereon, which record date shall be no more than 60 days nor less than
10 days prior to the date fixed for the payment thereof. Accumulated but unpaid
dividends and any overdue redemption payments will accrue additional dividends
at (A) an annual rate of 7% or (B) such lesser rate as may be the maximum rate
that is permitted by applicable law (in either case compounded quarterly).
If dividends are paid on the shares of Series F Preferred Stock in an
amount less that the total amount of such dividends at the time accrued and
payable on such shares, such dividends shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. In addition,
if the Company declares, orders, pays or makes a dividend or other distribution
(including any distribution of stock or other securities or property or rights
or warrants to subscribe for securities of the Company or any of its
subsidiaries by way of dividend or spinoff or rights) on its Common Stock, other
than (i) dividends payable in cash in an aggregate amount in any fiscal year
which, when declared, are not expected to exceed the net income of the Company
during such year from continuing operations before extraordinary items or (ii)
any dividend or distribution of shares of Common Stock, then, and in each such
case, the holders of shares of Series F Preferred Stock shall be entitled to
receive from the Company, with respect to each share of Series F Preferred Stock
held, the same dividend or distribution received by a holder of the number of
shares of Common Stock into which such share of Series F Preferred Stock is
convertible on the record date for such dividend or distribution. Any such
dividend or distribution shall be declared, ordered, paid or made on the Series
F Preferred Stock at the same time such dividend or distribution is declared,
ordered, paid or made on the Common Stock.
Conversion Rights. Subject to the restrictions described in the last
sentence of this paragraph, the Series F Preferred Stock is convertible, at the
option of the holder, into that number (the "Conversion Number") of shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) equal, in the aggregate, to $10,000 divided by the conversion price.
Subject to the restrictions described in the last sentence of this paragraph,
each share of Series F Preferred Stock will be convertible on or after January
21, 1998, at the option of the Company, into the Conversion Number of shares of
Common Stock, if the average Closing Price (as defined below) of the Common
Stock during any 30 calendar day period has been at least 133% of the conversion
price; provided, however, that such option must be exercised not later than the
fifth Business Day following the end of such period. The Company must notify
holders of the Series F Preferred Stock of any conversion in the manner
specified in the Series F Certificate of Designation. Notice having been so
given, (i) from and after the date set for conversion in the notice, all
dividends on the Series F Preferred Stock shall cease to accrue, and (ii) from
and after the date set for conversion, all rights of the holders thereof as
holders of Series F Preferred Stock shall cease and terminate, except for the
right to receive certificates representing the shares of Common Stock into which
shares of Series F Preferred Stock have been converted on surrender of
certificates for Series F Preferred Stock. The conversion rights described in
this paragraph are subject to Foreign Ownership Restrictions.
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The term "Closing Price" means the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange. If the Common Stock is not
listed or admitted to trading on the New York Stock Exchange, the "Closing
Price" shall be determined as set forth in the Series F Certificate of
Designation.
The initial conversion price set forth in the Series F Certificate of
Designation was $19.50. The number of shares of Common Stock into which each
share of Series F Preferred Stock is convertible, the number of votes to which
the holder of a share of Series F Preferred Stock is entitled, and the
conversion price are all subject to adjustment (under formulae set forth in the
Series F Certificate of Designation) upon the occurrence of certain events,
including: (i) the issuance of Common Stock as a dividend or a distribution on
Common Stock; (ii) subdivisions, combinations, or reclassifications of Common
Stock; (iii) the issuance of Common Stock (or rights, warrants, or other
securities convertible into or exchangeable for shares of Common Stock) at a
price per share (or having an exercise or conversion price per share) less than
the average Closing Price on the 20 consecutive trading days beginning 30
trading days before the date of issuance (other than in certain circumstances
specified in the Series F Certification of Designation); and (iv) certain
transactions (including a merger, consolidation, sale of all or substantially
all of the Company's assets, liquidation, reclassification or recapitalization
of the Common Stock) in which the previously outstanding Common Stock shall be
changed into or exchanged for different securities of the Company or common
stock or other securities of another entity. Adjustments to the conversion price
may be limited or prohibited if British Airways or its subsidiaries exercise
certain rights to acquire additional securities pursuant to the Investment
Agreement. See "The Company - Relationship with British Airways." As a result of
the partial exercise by British Airways of certain preemptive rights it holds
pursuant to the Investment Agreement in connection with certain issuances of
Common Stock by the Company in 1993, the conversion price was anti-dilutively
adjusted on June 10, 1993 to approximately $19.41 per share (the "Conversion
Price").
In connection with the conversion of any shares of Series F Preferred Stock
into Common Stock, no fractions of shares shall be issued, but in lieu thereof
the Company shall pay a cash adjustment in respect of such fractional interest
in an amount equal to such fractional interest multiplied by the current market
price per share of Common Stock on the day on which such shares of Series F
Preferred Stock are deemed to have been converted.
The Company must at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Series F Preferred Stock, such number of shares of Common
Stock as shall from time to time be sufficient to affect the conversion of all
then outstanding shares of Series F Preferred Stock. If at any time the number
of authorized shares of Common Stock remaining unissued shall not be sufficient
to permit the conversion at such time of all then outstanding shares of Series F
Preferred Stock, the Company must, subject to and in accordance with the
Delaware Law, increase the authorized amount of Common Stock.
If adjustments in the number of shares of any class of capital stock into
which each share of Series F Preferred Stock is convertible have caused the
Conversion Price to be lower than the par value, if any, of that class of
capital stock, upon any conversion of shares of Series F Preferred Stock the
Company must, to the maximum extent it is legally able to do so, issue to the
converting holder the shares of that class of capital stock into which the
shares of Series F Preferred Stock being converted are convertible, and, in
addition, the Company must pay the converting holder an amount in cash equal to
the current market price of the capital stock multiplied by the number of shares
and fractions thereof of capital stock which the converting holder would have
been entitled to receive except for the limitation on lawful issuance described
in this paragraph.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, the holders of Series F Preferred Stock will be entitled to
receive $10,000 per share plus all accrued dividends thereon to the date of such
payment, before any distribution is made to holders of shares of stock ranking
junior to the Series F Preferred Stock with respect to dividends and upon
redemption, liquidation, dissolution or winding up ("Junior Stock"). No
distribution may be made to the holders of shares on a parity with the Series F
Preferred Stock, except distributions made ratably on the Series F Preferred
Stock and all such other stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up of the Company. Neither the consolidation, merger or other business
combination of the Company with or into any other person or persons nor the
sale, lease, exchange or conveyance of all or any part of the property, assets
or business of the Company to a person or persons other than the holders of the
Company's Junior Stock shall be deemed to be a liquidation, dissolution or
winding up of the Company for purposes of these liquidation rights.
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Redemption. The Company is obligated to redeem on January 21, 2008, all
outstanding shares of Series F Preferred Stock at a cash price of $10,000 per
share plus all accrued but unpaid dividends thereon to the date of redemption.
The Company may, at any time, redeem shares of Series F Preferred Stock at
a price per share equal to the higher of (i) the price specified in the above
paragraph and (ii) the product of the Conversion Number at the time of notice of
redemption and the average Closing Price on the 20 consecutive trading days
beginning 30 trading days before the date of notice of redemption.
The Series F Certificate of Designation specifies the manner in which
notice of redemption must be given. Once notice has been given, unless default
shall be made by the Company in providing for the payment of the applicable
redemption price, all dividends on the Series F Preferred Stock thereby called
for redemption shall cease to accrue, and from and after the date specified
therein as the date of redemption, or from that date on which the Company shall
set apart for payment the redemption price, all rights of the holders thereof,
except the right to receive the applicable redemption price (without interest)
plus accrued dividends to the date of redemption and except the right to
exercise any privilege of conversion, shall cease and terminate. If the Company
shall default in providing for the redemption price, dividends on such Series F
Preferred Stock shall continue to accrue and be added to the required redemption
payments.
Voting Rights. Each share of Series F Preferred Stock shall be entitled to
one vote for each share of Common Stock into which it is convertible, subject to
adjustment in the manner set forth in the Series F Certificate of Designation,
provided, however, that the right to exercise any vote shall not exist to the
extent that exercise thereof would violate Foreign Ownership Restrictions, as
reasonably determined from time to time in good faith by the Board of Directors.
Each share of Series F Preferred Stock is currently entitled to 515.295 votes
per share, subject to Foreign Ownership Restrictions. Except as otherwise
provided in the Series F Certificate of Designation, or by the Certificate of
Incorporation, or by law, the shares of Common Stock, Series A Preferred Stock,
Series F Preferred Stock, Series T Preferred Stock, and any other shares of
capital stock or notes of the Company at the time entitled thereto shall vote
together as one class on all matters submitted to a vote of stockholders of the
Company.
Except as provided in the Investment Agreement, the affirmative vote of the
holders of at least two-thirds of the number of then-outstanding shares of
Series F Preferred Stock, voting as a single class (unless the consent or
approval of a greater number of shares shall then be required by law), is
required before the Company may: (i) authorize or create any class or series,
or any shares of any class or series, of stock having any preference or priority
as to dividends or upon redemption, liquidation, dissolution, or winding up over
the Series F Preferred Stock ("Senior Stock"); (ii) except with respect to
Preferred Shares (as defined in the Investment Agreement) issuable by the
Company to British Airways or a subsidiary of British Airways, authorize or
create any class or series, or any shares of any class or series, of stock
ranking on a parity (as to dividends or upon redemption, liquidation,
dissolution or winding up) with the Series F Preferred Stock ("Parity Stock");
provided, however, that no such vote shall be required with respect to the
authorization or creation by the Company of one or more new series of preferred
stock that is Parity Stock if (A) the aggregate purchase price (excluding
transaction-related expenses) of all shares of such series is equal to or
greater than the aggregate liquidation preference of all shares of such series,
(B) the aggregate liquidation preference (excluding accrued but unpaid
dividends) of all shares of such series of preferred stock does not exceed $150
million, and (C) shares of any such new series shall be issued only to an
employee stock ownership plan, employee stock ownership trust or other similar
arrangement organized and maintained by the Company for the benefit of its
employees; (iii) reclassify, convert or exchange any shares of stock of the
Company into shares of Senior Stock or Parity Stock (by amendment to the
Certificate of Incorporation, merger or otherwise); (iv) authorize any security
exchangeable for, convertible into, or evidencing the right to purchase any
shares of Senior Stock or Parity Stock; (v) amend, alter or repeal the
Certificate of Incorporation (by amendment to the Certificate of Incorporation,
merger or otherwise) to alter or change the preferences, rights or powers of the
Series F Preferred Stock so as to affect the Series F Preferred Stock adversely
or to increase the authorized number of shares of Series F Preferred Stock; or
(vi) effect the voluntary liquidation, dissolution or winding up of the Company,
or the sale, lease, conveyance or exchange of all or substantially all of the
assets, property or business of the Company, or the merger or consolidation of
the Company with or into any other person, provided, however, that, except as
otherwise specifically required by the Certificate of Incorporation, no separate
vote of the holders of the Series F Preferred Stock as a class shall be required
in the case of a merger or consolidation or a sale, lease, conveyance or
exchange of all or substantially all of the assets, property or business of the
Company (such transactions being hereinafter referred to as a "reorganization")
if (A) the resulting, surviving or acquiring person will have after such
reorganization no stock either authorized or outstanding ranking senior to, or
on a parity with, the Series F Preferred Stock or the stock of the resulting,
surviving or acquired person issued in exchange therefor (except such stock of
the Company as may have been
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authorized or outstanding immediately preceding such reorganization, or such
stock of the resulting, surviving or acquiring person containing substantially
the same relative rights and preferences as the stock of the Company for which
it may be exchanged ("Exchanged Stock"), which Exchanged Stock was outstanding
immediately preceding such reorganization and at such time ranked senior to, or
on a parity with, the Series F Preferred Stock) and (B) each holder of shares of
Series F Preferred Stock immediately preceding such reorganization will receive
in exchange therefor the same number of shares of stock, with substantially the
same preferences, rights and powers, of the resulting, surviving, or acquiring
person, or if the Company is the surviving person and the Series F Preferred
Stock remains outstanding, without change to its preferences, rights and powers.
Certain Restrictions. Whenever (i) dividends payable on shares of Series F
Preferred Stock shall have been in arrears and not paid in full at or before 30
days following any quarterly dividend payment date, thereafter and until all
accrued and unpaid dividends, whether or not declared, shall have been paid in
full or declared and set apart for payment, or (ii) the Company shall have not
distributed any other dividend or other distribution distributable to the
holders of shares of Series F Preferred Stock as described under "Dividends"
within 5 business days of the date such distribution is required, thereafter and
until all dividends or other distributions distributable shall have been
distributed, or (iii) the Company shall have not redeemed shares of Series F
Preferred Stock within five business days of the date such redemption is
required, thereafter and until all mandatory redemption payments shall have been
made or all necessary funds shall have been set apart for payment, the Company
shall not, nor shall it permit any of its subsidiaries to: (A) declare or pay
dividends, or make any other distributions, on any shares of Common Stock or
other capital stock ranking junior (either as to dividends or upon redemption,
liquidation, dissolution or winding up) to the Series F Preferred Stock, other
than dividends or distributions payable in Junior Stock or in rights; (B)
declare or pay dividends, or make any other distributions, on any shares of
Parity Stock, other than dividends or distributions payable in Junior Stock,
except dividends paid ratably on the Series F Preferred Stock and all Parity
Stock on which dividends are payable or in arrears, in proportion to the total
amounts to which the holders of all such shares are then entitled; or (C) redeem
or purchase or otherwise acquire for consideration (other than Junior Stock) any
shares of Junior Stock or Parity Stock (other than, with respect to Parity
Stock, ratably with the Series F Preferred Stock). The restrictions described
in this paragraph shall not prevent the Company from (i) declaring a dividend or
distribution of rights to purchase Junior Stock issued pursuant to any rights
agreement or issuing rights in connection with the issuance of Junior Stock,
Parity Stock or the Series F Preferred Stock or (ii) redeeming any such rights
at a price not to exceed $.03 per right.
In addition, the Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of capital stock of
the Company unless the Company, pursuant to the paragraph above, could purchase
or otherwise acquire such shares at such time and in such manner.
Investment Agreement. See "The Company - British Airways Investment
Agreement" for a discussion of certain terms of the Investment Agreement
pertaining to the Series F Preferred Stock.
Description of Series T-1 Preferred Stock
The Series T-1 Preferred Stock represented by the Series T-1 Depositary
Shares offered hereby were issued on June 10, 1993 in a single series of 152.1
shares to BritAir pursuant to the Investment Agreement. The following summary of
the terms and provisions of the Series T-1 Preferred Stock and the Investment
Agreement does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the Investment Agreement, the Company's Restated
Certificate of Incorporation, as amended, and the Series T-1 Certificate of
Designation, which are Exhibits to the Registration Statement of which this
Prospectus is a part. The meanings of capitalized terms defined in this summary
shall be applicable to such capitalized terms only where such terms appear in
this summary.
Rank. Series T-1 Preferred Stock ranks, with respect to dividends and upon
distribution of assets in liquidation, dissolution or winding up, (a) pari passu
---- -----
with the Company's (i) Series A Preferred Stock, (ii) Series F Preferred Stock
and (iii) Series T-2 Preferred Stock and (b) senior to the Company's (x) Series
B Preferred Stock and (y) Common Stock.
Dividends. Each holder of Series T-1 Preferred Stock is entitled to
receive, when, as and if declared by the Board of Directors of the Company, in
preference to the holders of non-preferred stock and to any other capital stock
of the Company ranking junior to the Series T-1 Preferred Stock as to the
payment of dividends, cumulative cash dividends payable quarterly in an amount
equal to $10,000 multiplied by the Dividend Rate (as defined below) and divided
by four. Such dividends are payable on the last
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Business Day of February, May, August and November in each year. The Board of
Directors may fix a record date for the determination of holders of shares of
Series T-1 Preferred Stock entitled to receive payments of a dividend declared
thereon, which record date shall be no more than 60 days nor less than 10 days
prior to the date fixed for payment thereof. Any applicable dividend payment or
redemption payment not made on a quarterly dividend payment date or the date set
for redemption, shall accrue additional dividends at (A) the Dividend Rate from
time to time in effect or (B) such lesser rate as may be the maximum rate that
is permitted by applicable law (in either case compounded quarterly).
The term "Dividend Rate" means, for any period ending on a quarterly
dividend payment date (an "Interest Period"), 50 basis points (.50%) over (x)
the rate per annum determined two Business Days prior to the commencement of the
Interest Period to be the rate for such Interest Period (rounded upwards, if
necessary, to the next multiple of 1/16 of 1%) quoted as "London Eurodollar
Deposits 1100 Hours Offered Side," shown at June 10, 1993 on Telerate page 3807
or subsequent page, or (y) if such quotation is no longer available, the rate
per annum determined in good faith by the Corporation two business days prior to
the first day of the Interest Period in the London Interbank Market, Offered
Side, for U.S. Dollars, in either case for deposits of not less than $1,000,000
in immediately available funds for a period as nearly as possible equal to the
Interest Period.
If the Company declares, orders, pays or makes a dividend or other
distribution (including, without limitation, any distribution of stock or other
securities or property or rights or warrants to subscribe for securities of the
Company or any of its subsidiaries by way of dividend or spinoff or rights), on
its non-preferred stock, other than (i) dividends payable in cash in an
aggregate amount in any fiscal year which, when declared, are not expected to
exceed the net income of the Company during such year from continuing operations
before extraordinary items or (ii) any dividend or distribution of shares of
non-preferred stock, then, and in each such case the holders of shares of Series
T-1 Preferred Stock shall be entitled to receive from the Company, with respect
to each share of Series T-1 Preferred Stock held, the same dividend or
distribution received by a holder of the number of shares of non-preferred stock
into which such share of Series T-1 Preferred Stock is convertible on the record
date for such dividend or distribution. Any such dividend or distribution shall
be declared, ordered, paid or made on the Series T-1 Preferred Stock at the same
time such dividend or distribution is declared, ordered, paid or made on the
non-preferred stock.
Conversion Rights. Each holder of a share of Series T-1 Preferred Stock
shall have the right, at his option, at any time, to convert such share into
that number (the "Conversion Number") of fully paid and non-assessable shares of
Common Stock (calculated in either case as to each conversion to the nearest
1/100th of a share) equal, in the aggregate, to $10,000 divided by a conversion
price of $20.50 per share. Each share of Series T-1 Preferred Stock may be
converted, at the option of the Company, at any time after January 21, 1998,
into the Conversion Number of shares of Common Stock at any time after (i) the
Company has exercised its right to cause mandatory conversion of the Series F
Preferred Stock, pursuant to the Series F Certificate of Designation, or
mandatory conversion of certain other series of preferred stock of the Company
(no shares of any of which other series have been issued) which British Airways
was entitled to purchase pursuant to the Investment Agreement and which may be
held only by British Airways (such series, the "Unpurchased BA Series"),
pursuant to the applicable Certificate of Designation (a "Mandatory
Conversion"), or (ii) if all the Series F Preferred Stock and certain of the
Unpurchased BA Series previously have been converted at the option of the
holder, at any time after the Company would have been entitled to effect a
mandatory conversion of the Series F Preferred Stock and certain of the
Unpurchased BA Series pursuant to their respective Certificates of Designation.
The Company must notify holders of the Series T-1 Preferred Stock of any
conversion in the manner specified in the Series T-1 Certificate of Designation.
Notice having been so given, (i) from and after the date set for conversion in
the notice, all dividends on the Series T-1 Preferred Stock shall cease to
accrue, and (ii) from and after the date set for conversion, all rights of the
holders thereof as holders of Series T-1 Preferred Stock shall cease and
terminate, except for the right to receive certificates representing the shares
of Common Stock into which shares of Series T-1 Preferred Stock have been
converted on surrender of certificates for Series T-1 Preferred Stock. The
conversion rights described in this paragraph are subject to the Foreign
Ownership Restrictions, as more fully described below and in the Series T-1
Certificate of Designation.
The conversion price, the number of shares of Common Stock into which each
share of Series T-1 Preferred Stock is convertible and the number of votes to
which the holder of a share of Series T-1 Preferred Stock is entitled are each
subject to adjustment (under formulae set forth in the Series T-1 Certificate of
Designation) upon the occurrence of certain events, including: (i) the issuance
of Common Stock as a dividend or a distribution on Common Stock; (ii)
subdivisions, combinations, or reclassifications of Common Stock; (iii) the
issuance of shares of Common Stock (or rights or warrants or other securities
convertible into or exchangeable for shares of Common Stock) at a price per
share (or having an exercise or conversion price
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per share) less than the average closing price on the 20 consecutive trading
days beginning 30 trading days before the date of issuance (other than in
certain circumstances specified in the Series T-1 Certification of Designation);
or (iv) certain transactions (including a merger, consolidation, sale of all or
substantially all of the Company's assets, liquidation, reclassification or
recapitalization of the Common Stock) in which the previously outstanding Common
Stock shall be changed into or, pursuant to the operation of law or the terms of
the transaction to which the Company is a party, exchanged, or would have been
changed or exchanged as required by the Certificate of Incorporation if such
Common Stock were outstanding, for different securities of the Company or common
stock or other securities of another corporation or interests in a non-corporate
entity or other property (including cash) or any combination of any of the
foregoing. Adjustments may be limited or prohibited if British Airways or its
subsidiary exercise certain rights to acquire additional securities pursuant to
the Investment Agreement. See "The Company - Relationship with British
Airways."
In connection with the conversion of any shares of Series T-1 Preferred
Stock into Common Stock, no fractions of shares shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the
current market price per share of Common Stock on the day on which such shares
of Series T-1 Preferred Stock are deemed to have been converted.
The Company must at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Series T-1 Preferred Stock, such number of shares of Common
Stock as must from time to time be sufficient to effect the conversion of all
then outstanding shares of Series T-1 Preferred Stock. If at any time the number
of authorized shares of Common Stock remaining unissued shall not be sufficient
to permit the conversion at such time of all then outstanding shares of Series
T-1 Preferred Stock, the Company must, subject to and in accordance with
Delaware Law, increase the authorized amount of Common Stock.
If adjustments in the number of shares of any class of capital stock into
which each share of Series T-1 Preferred Stock is convertible have caused the
Conversion Price to be lower than the par value, if any, of that class of
capital stock, upon any conversion of shares of Series T-1 Preferred Stock the
Company will, to the maximum extent it is legally able to do so, issue to the
converting holder the shares of that class of capital stock into which the
shares of Series T-1 Preferred Stock being converted are convertible, and, in
addition, the Company shall pay the converting holder an amount in cash equal to
the current market price of the capital stock multiplied by the number of shares
and fractions thereof of capital stock which the converting holder would have
been entitled to receive except for the limitation on lawful issuance described
in this paragraph.
At the option of a holder of shares of Series T-1 Preferred Stock, to the
extent Non-Voting Class ET Common Stock is issuable at the time by the Company
pursuant to its Restated Certificate of Incorporation, such shares are
convertible into Non-Voting Class ET Common Stock. Shares of Series T-1
Preferred Stock may not be converted into Common Stock, and, to the extent Non-
Voting Class ET Common Stock is issuable at the time by the Company pursuant to
its Restated Certificate of Incorporation, shall instead be converted into Non-
Voting Class ET Common Stock, to the extent necessary to comply with Foreign
Ownership Restrictions.
Exchanges. The shares of Series T-1 Preferred Stock are exchangeable in
whole or in part, out of funds legally available therefor, at the option of the
Company, for that principal amount of Floating Rate Convertible Subordinated
Notes of the Company (the "T Notes") equal to the liquidation preference of the
shares to be exchanged and bearing interest at the dividend rate. The T Notes
will have terms consistent in all respects with the terms of the Series T-1
Preferred Stock as established in the Series T-1 Certificate of Designation.
Accrued dividends on the shares of Series T-1 Preferred Stock to be exchanged
shall be treated as accrued interest on the T Notes.
The Series T-1 Certificate of Designation specifies the manner in which the
Company must provide notice of its intention to exchange shares of Series T-1
Preferred Stock. Upon the mailing of such notice, from and after the exchange
date (unless the Company defaults in issuing T Notes in exchange for the
designated shares of Series T-1 Preferred Stock on the exchange date), dividends
on the shares of Series T-1 Preferred Stock shall cease to accrue, said shares
will no longer be deemed issued and outstanding, and all rights of the holders
thereof as stockholders of the Company (except the right to receive the T-Notes
from the Company) shall cease and terminate. Upon surrender in accordance with
said notice of the certificates for any shares of Series T Preferred Stock so
exchanged (properly endorsed or assigned for transfer, if the Company shall so
require and the notice shall so state), such shares shall be exchanged by the
Company for T Notes.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, the holders of shares of Series T-1 Preferred Stock
will be entitled to receive $10,000 per share plus an amount equal to all
accrued dividends thereon to the date of such payment, before any distribution
is made to the holders of shares of stock ranking junior to the Series T-1
Preferred Stock with respect to dividends and upon redemption, liquidation,
dissolution or winding up ("Junior Stock"). No distribution may be made to
the holders of shares of Parity Stock (as defined below), except distributions
made ratably on the Series T-1
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Preferred Stock and all such Parity Stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up of the Company. Neither the consolidation, merger or
other business combination of the Company with or into any other Person of
Persons nor the sale, lease, exchange or conveyance of all or any part of the
property, assets or business of the Company to a person or persons other than
the holders of the Company's Junior Stock shall be deemed to be a liquidation,
dissolution or winding up of the Company for purposes of these liquidation
rights.
Redemption. The Company is obligated to redeem on June 10, 2008 all
outstanding shares of Series T-1 Preferred Stock at a cash price of $10,000 plus
all accrued but unpaid dividends thereon to the date of redemption (the
"Redemption Price").
The Company may, at any time, redeem shares of Series T-1 Preferred Stock
at a price per share equal to the higher of (i) the price specified in the above
paragraph and (ii) the product of the Conversion Number at the time of notice of
redemption and the average closing price on the 20 consecutive trading days
beginning 30 trading days before the date of notice of redemption.
Any shares of Series T-1 Preferred Stock held by any person other than
British Airways or any of its direct or indirect wholly owned subsidiaries may
be redeemed for cash at any time at the option of the Company at the Redemption
Price, plus a redemption premium per share equal to the annual redemption factor
(the "Annual Redemption Factor"). The Annual Redemption Factor was $700 from the
date of original issuance of the Series T-1 Preferred Stock, June 10, 1993,
until the first anniversary thereof and is reduced by $46.67 on each subsequent
anniversary.
Upon any proposed Mandatory Conversion, the holders of shares of Series T-1
Preferred have the option (subject to the restrictions described under
"Conversions"), exercisable within 10 Business Days following the mailing by the
Company of the notice indicating its election to declare a Mandatory Conversion,
to cause the Company to redeem all outstanding shares of Series T-1 Preferred in
exchange for the number of shares of Common Stock equal to the Redemption Price,
divided by the current market price as of the date of the mailing of such notice
of redemption election; provided, however, that any holder may elect, within 10
Business Days following the date on which the holder elects to require the
Company to redeem the shares of Series T-1 Preferred Stock, to receive cash out
of funds legally available therefor in respect of the portion of the Redemption
Price representing the excess over the amount represented by the number of
shares of non-preferred stock into which the Series T-1 Preferred is then
convertible, multiplied by the current market price as of the date of the
mailing of such notice of redemption election of the Common Stock.
The Series T-1 Certificate of Designation specifies the manner in which
notice (other than in the case of a Mandatory Conversion) must be given. Once
notice has been given, unless default shall be made by the Company in providing
for the payment of the applicable redemption price, all dividends on the Series
T-1 Preferred Stock thereby called for redemption shall cease to accrue,
and from and after the date specified therein as the date of redemption, or from
and after the date on which the Company shall set apart for payment the
redemption price, all rights of the holders thereof, except the right to receive
the applicable redemption price (without interest) plus accrued dividends to the
date of redemption and except the right to exercise any privilege of conversion,
shall cease and terminate. If the Company shall default in providing for the
redemption price, dividends on such Series T-1 Preferred Stock shall continue to
accrue and be added to the required redemption payments.
Voting Rights. Each share of Series T-1 Preferred Stock shall be entitled
to one vote for each share of Common Stock into which it is convertible, subject
to adjustment in the manner set forth in the Series T-1 Certificate of
Designation, provided, however, that the right to exercise any vote as described
in this paragraph shall not exist to the extent that exercise thereof would
violate Foreign Ownership Restrictions, as reasonably determined from time to
time in good faith by the Board of Directors. Each share of Series T-1 Preferred
Stock is currently entitled to 487.805 votes per share, subject to Foreign
Ownership Restrictions. Except as otherwise provided in the Series T-1
Certificate of Designation, or by the Certificate of Incorporation, or by law,
the shares of Common Stock, Series A Preferred Stock, Series F Preferred Stock,
Series T Preferred Stock and any other shares of capital stock or notes of the
Company, at the time entitled thereto, shall vote together as one class on all
matters submitted to a vote of stockholders of the Company, including the
election of directors of the Company as set forth in Section 4 of Article FOURTH
of the Certificate of Incorporation.
The affirmative vote of the holders of at least two-thirds of the number of
then-outstanding shares of Series T-1 Preferred Stock, voting as a single class
(unless the consent or approval of a greater number of shares shall then be
required
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by law), is required before the Company may: (i) authorize or create any class
or series, or any shares of any class or series, of stock having any preference
or priority as to dividends or upon redemption, liquidation, dissolution, or
winding up over the Series T-1 Preferred Stock ("Senior Stock"); (ii) except
with respect to the Preferred Shares, as defined in the Investment Agreement,
issuable by the Company to British Airways or a subsidiary of British Airways,
authorize or create any class or series, or any shares of any class or series,
of stock ranking on a parity (as to dividends or upon redemption, liquidation,
dissolution or winding up) with the Series T-1 Preferred Stock ("Parity Stock");
provided, however, that no such vote shall be required with respect to the
authorization or creation by the Company of one or more new series of preferred
stock that is Parity Stock if (A) the aggregate purchase price (excluding
transaction-related expenses) of all shares of such series is equal to or
greater than the aggregate liquidation preference of all shares of such series,
(B) the aggregate liquidation preference (excluding accrued but unpaid
dividends) of all shares of such series of preferred stock does not exceed $150
million, and (C) shares of any such new series shall be issued only to an
employee stock ownership plan, employee stock ownership trust or other similar
arrangement organized and maintained by the Company for the benefit of its
employees; (iii) reclassify, convert or exchange any shares of stock of the
Company into shares of Senior Stock or Parity Stock (by amendment to the
Certificate of Incorporation, merger or otherwise); (iv) authorize any security
exchangeable for, convertible into, or evidencing the right to purchase any
shares of Senior Stock or Parity Stock; (v) amend, alter or repeal the
Certificate of Incorporation (by amendment to the Certificate of Incorporation,
merger or otherwise) to alter or change the preferences, rights or powers of the
Series T-1 Preferred Stock so as to affect the Series T-1 Preferred Stock
adversely or to increase the authorized number of shares of Series T-1 Preferred
Stock; or (vi) effect the voluntary liquidation, dissolution or winding up of
the Company, or the sale, lease, conveyance or exchange of all or substantially
all of the assets, property or business of the Company, or the merger or
consolidation of the Company with or into any other person; provided, however,
that, except as otherwise specifically required by the Certificate of
Incorporation, no separate vote of the holders of the Series T-1 Preferred Stock
as a class shall be required in the case of a merger or consolidation or a sale,
lease, conveyance or exchange of all or substantially all of the assets,
property or business of the Company (such transactions being hereinafter
referred to as a "reorganization") if (A) the resulting, surviving or acquiring
person will have after such reorganization no stock either authorized or
outstanding ranking senior to, or on a parity with, the Series T-1 Preferred
Stock or the stock of the resulting, surviving or acquired person issued in
exchange therefor (except such stock of the Company as may have been authorized
or outstanding immediately preceding such reorganization, or such stock of the
resulting, surviving or acquiring person containing substantially the same
relative rights and preferences as the stock of the Company for which it may be
exchanged ("Exchanged Stock"), which Exchanged Stock was outstanding immediately
preceding such reorganization and at such time ranked senior to, or on a parity
with, the Series T-1 Preferred Stock) and (B) each holder of shares of Series
T-1 Preferred Stock immediately preceding such reorganization will receive in
exchange therefor the same number of shares of stock, with substantially the
same preferences, rights and powers, of the resulting, surviving, or acquiring
Person, or if the Company is the surviving Person and the Series T-1 Preferred
Stock remains outstanding, without change to its preferences, rights and powers.
Certain Restrictions. Whenever (i) dividends payable on shares of Series
T-1 Preferred Stock shall have been in arrears and not paid in full at or before
30 days following any quarterly dividend payment date, thereafter and until all
accrued and unpaid dividends, whether or not declared, shall have been paid in
full or declared and set apart for payment, or (ii) the Company shall have not
distributed any dividend or other distribution distributable to the holders of
shares of Series T-1 Preferred Stock as described under "Dividends" within five
business days of the date such distribution is required, thereafter and until
all dividends or other distributions distributable shall have been distributed,
or (iii) the Company shall have not redeemed shares of Series T-1 Preferred
Stock within five business days of the date such redemption is required,
thereafter and until all mandatory redemption payments shall have been made or
all necessary funds shall have been set apart for payment, the Company shall
not, nor shall it permit any of its subsidiaries to: (A) declare or pay
dividends, or make any other distributions, on any shares of non-preferred stock
or other capital stock of the Company ranking junior (either as to dividends or
upon redemption, liquidation, dissolution or winding up) to the Series T-1
Preferred Stock, other than dividends or distributions payable in Junior Stock;
(B) declare or pay dividends, or make any other distributions, on any shares of
Parity Stock, other than dividends or distributions payable in Junior Stock,
except dividends paid ratably on the Series T-1 Preferred Stock and all Parity
Stock on which dividends are payable or in arrears, in proportion to the total
amounts to which the holders of all such shares are then entitled; or (C) redeem
or purchase or otherwise acquire for consideration (other than Junior Stock) any
shares of Junior Stock or Parity Stock. Notwithstanding this paragraph, nothing
herein shall prevent the Company from (i) declaring a dividend or distribution
of rights to purchase Junior Stock issued pursuant to any rights agreement, or
issuing rights in connection with the issuance of Junior Stock, Parity Stock or
the Series T-1 Preferred Stock or (ii) redeeming any such rights at a price not
to exceed $.03 per right.
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In addition, the Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of capital stock of
the Company unless the Company, pursuant to the paragraph above, could purchase
or otherwise acquire such shares at such time and in such manner.
Description of Series T-2 Preferred Stock
The Series T-2 Preferred Stock represented by the Series T-2 Depositary
Shares offered hereby were issued on June 10, 1993 in a single series of 9,919.8
shares to BritAir pursuant to the Investment Agreement. The following summary of
the terms and provisions of the Series T-2 Preferred Stock and the Investment
Agreement does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the Investment Agreement, the Company's Restated
Certificate of Incorporation, as amended, and the Series T-2 Certificate of
Designation, which are Exhibits to the Registration Statement of which this
Prospectus is a part. The meanings of capitalized terms defined in this summary
shall be applicable to such capitalized terms only where such terms appear in
this summary.
Rank. Series T-2 Preferred Stock ranks, with respect to dividends and upon
distribution of assets in liquidation, dissolution or winding up, (a) pari passu
---- -----
with the Company's (i) Series A Preferred Stock, (ii) Series F Preferred Stock
and (iii) Series T-1 Preferred Stock and (b) senior to the Company's (x) Series
B Preferred Stock and (y) Common Stock.
Dividends. Each holder of Series T-2 Preferred Stock is entitled to
receive, when, as and if declared by the Board of Directors of the Company, in
preference to the holders of non-preferred stock and to any other capital stock
of the Company ranking junior to the Series T-2 Preferred Stock as to the
payment of dividends, cumulative cash dividends payable quarterly in an amount
equal to $10,000 multiplied by the Dividend Rate (as defined below) and divided
by four. Such dividends are payable on the last Business Day of February, May,
August and November in each year. The Board of Directors may fix a record date
for the determination of holders of shares of Series T-2 Preferred Stock
entitled to receive payments of a dividend declared thereon, which record date
shall be no more than 60 days nor less than 10 days prior to the date fixed for
payment thereof. Any applicable dividend payment or redemption payment not made
on a quarterly dividend payment date or the date set for redemption, shall
accrue additional dividends at (A) the Dividend Rate from time to time in effect
or (B) such lesser rate as may be the maximum rate that is permitted by
applicable law (in either case compounded quarterly) until all such dividend
payments and redemption payments shall have been paid in full or declared and
funds sufficient therefor set aside for payment.
The term "Dividend Rate" as used herein means, for any period ending on a
quarterly dividend payment date (an "Interest Period"), 50 basis points (.50%)
over (x) the rate per annum determined two Business Days prior to the
commencement of the Interest Period to be the rate for such Interest Period
(rounded upwards, if necessary, to the next multiple of 1/16 of 1%) quoted as
"London Eurodollar Deposits 1100 Hours Offered Side," shown at June 10, 1993 on
Telerate page 3807 or subsequent page, or (y) if such quotation is no longer
available, the rate per annum determined in good faith by the Corporation two
business days prior to the first day of the Interest Period in the London
Interbank Market, Offered Side, for U.S. Dollars, in either case for deposits of
not less than $1,000,000 in immediately available funds for a period as nearly
as possible equal to the Interest Period.
If the Company declares, orders, pays or makes a dividend or other
distribution (including, without limitation, any distribution of stock or other
securities or property or rights or warrants to subscribe for securities of the
Company or any of its subsidiaries by way of dividend or spinoff or rights), on
its non-preferred stock, other than (i) dividends payable in cash in an
aggregate amount in any fiscal year which, when declared, are not expected to
exceed the net income of the Company during such year from continuing operations
before extraordinary items or (ii) any dividend or distribution of shares of
non-preferred stock, then, and in each such case the holders of shares of Series
T-2 Preferred Stock shall be entitled to receive from the Company, with respect
to each share of Series T-2 Preferred Stock held, the same dividend or
distribution received by a holder of the number of shares of non-preferred stock
into which such share of Series T-2 Preferred Stock is convertible on the record
date for such dividend or distribution. Any such dividend or distribution shall
be declared, ordered, paid or made on the Series T-2 Preferred Stock at the same
time such dividend or distribution is declared, ordered, paid or made on the
non-preferred stock.
Conversion Rights. Each holder of a share of Series T-2 Preferred Stock
shall have the right, at his option, at any time, to convert such share into
that number (the "Conversion Number") of fully paid and non-assessable shares of
Common Stock (calculated in either case as to each conversion to the nearest
1/100th of a share) equal, in the aggregate, to $10,000
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divided by a conversion price of $26.40 per share. Each share of Series T-2
Preferred Stock may be converted, at the option of the Company, at any time
after January 21, 1998, into the Conversion Number of shares of Common Stock at
any time after (i) the Company has exercised its right to cause mandatory
conversion of the Series F Preferred Stock, pursuant to the Series F Certificate
of Designation, or mandatory conversion of certain other series of preferred
stock of the Company (no shares of any of which other series have been issued)
which British Airways was entitled to purchase pursuant to the Investment
Agreement and which may be held only by British Airways (such series, the
"Unpurchased BA Series"), pursuant to the applicable Certificate of Designation
(a "Mandatory Conversion"), or (ii) if all the Series F Preferred Stock and
certain of the Unpurchased BA Series previously have been converted at the
option of the holder, at any time after the Company would have been entitled to
effect a mandatory conversion of the Series F Preferred Stock and certain of the
Unpurchased BA Series pursuant to their respective Certificates of Designation.
The Company must notify holders of the Series T-2 Preferred Stock of any
conversion in the manner specified in the Series T-2 Certificate of Designation.
Notice having been so given, (i) from and after the date set for conversion in
the notice, all dividends on the Series T-2 Preferred Stock shall cease to
accrue, and (ii) from and after the date set for conversion, all rights of the
holders thereof as holders of Series T-2 Preferred Stock shall cease and
terminate, except for the right to receive certificates representing the shares
of Common Stock into which shares of Series T-2 Preferred Stock have been
converted on surrender of certificates for Series T-2 Preferred Stock. The
conversion rights described in this paragraph are subject to the Foreign
Ownership Restrictions, as is more fully described below and in the Series T-2
Certificate of Designation.
The conversion price, the number of shares of Common Stock into which each
share of Series T-2 Preferred Stock is convertible and the number of votes to
which the holder of a share of Series T-2 Preferred Stock is entitled are each
subject to adjustment (under formulae set forth in the Series T-2 Certificate of
Designation) in certain events, including: (i) the issuance of Common Stock as a
dividend or distribution on Common Stock; (ii) subdivisions, combinations, or
reclassifications of Common Stock; (iii) the issuance of shares of Common Stock
(or rights or warrants or other securities convertible into or exchangeable for
shares of Common Stock) at a price per share (or having an exercise or
conversion price per share) less than the average closing price on the 20
consecutive trading days beginning 30 trading days before the date of issuance
(other than in certain circumstances specified in the Series T-2 Certification
of Designation); or (iv) certain transactions (including, merger, consolidation,
sale of all or substantially all of the Company's assets, liquidation,
reclassification or recapitalization of the Common Stock) in which the
previously outstanding Common Stock shall be changed into or, pursuant to the
operation of law or the terms of the transaction to which the Company is a
party, exchanged, or would have been changed or exchanged as required by the
Certificate of Incorporation if such Common Stock were outstanding, for
different securities of the Company or common stock or other securities of
another corporation or interests in a non-corporate entity or other property
(including cash) or any combination of any of the foregoing. Adjustments may be
limited or prohibited if British Airways or its subsidiary exercise certain
rights to acquire additional securities pursuant to the Investment Agreement.
See "The Company - Relationship with British Airways."
In connection with the conversion of any shares of Series T-2 Preferred
Stock into Common Stock, no fractions of shares shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the
current market price per share of Common Stock on the day on which such shares
of Series T-2 Preferred Stock are deemed to have been converted.
The Company must at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Series T-2 Preferred Stock, such number of shares of Common
Stock as must from time to time be sufficient to effect the conversion of all
then outstanding shares of Series T-2 Preferred Stock. If at any time the number
of authorized shares of Common Stock remaining unissued shall not be sufficient
to permit the conversion at such time of all then outstanding shares of Series
T-2 Preferred Stock, the Company shall, subject to and in accordance with
Delaware Law, increase the authorized amount of Common Stock.
If adjustments in the number of shares of any class of capital stock into
which each share of Series T-2 Preferred Stock is convertible have caused the
Conversion Price to be lower than the par value, if any, of that class of
capital stock, upon any conversion of shares of Series T-2 Preferred Stock the
Company will, to the maximum extent it is legally able to do so, issue to the
converting holder the shares of that class of capital stock into which the
shares of Series T-2 Preferred Stock being converted are convertible, and, in
addition, the Company shall pay the converting holder an amount in cash equal to
the current market price of the capital stock multiplied by the number of shares
and fractions thereof of capital stock which the converting holder would have
been entitled to receive except for the limitation on lawful issuance described
in this paragraph.
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At the option of a holder of shares of Series T-2 Preferred Stock, to the
extent Non-Voting Class ET Common Stock is issuable at the time by the Company
pursuant to its Restated Certificate of Incorporation, such shares are
convertible into Non-Voting Class ET Common Stock. Shares of Series T-2
Preferred Stock may not be converted into Common Stock, and, to the extent Non-
Voting Class ET Common Stock is issuable at the time by the Company pursuant to
its Restated Certificate of Incorporation, shall instead be converted into Non-
Voting Class ET Common Stock, to the extent necessary to comply with Foreign
Ownership Restrictions.
Exchanges. The shares of Series T-2 Preferred Stock are exchangeable in
whole or in part, out of funds legally available therefor, at the option of the
Company, for that principal amount of Floating Rate Convertible Subordinated
Notes of the Company (the "T Notes") equal to the liquidation preference of the
shares to be exchanged and bearing interest at the dividend rate. The T Notes
will have terms consistent in all respects with the terms of the Series T-2
Preferred Stock as established in the Series T-2 Certificate of Designation.
Accrued dividends on the shares of Series T-2 Preferred Stock to be exchanged
shall be treated as accrued interest on the T Notes.
The Series T-2 Certificate of Designation specifies the manner in which the
Company must provide notice of its intention to exchange shares of Series T-2
Preferred Stock. Upon the mailing of such notice, from and after the exchange
date (unless the Company defaults in issuing T Notes in exchange for the
designated shares of Series T-2 Preferred Stock on the exchange date), dividends
on the shares of Series T-2 Preferred Stock shall cease to accrue, said shares
will no longer be deemed issued and outstanding, and all rights of the holders
thereof as stockholders of the Company (except the right to receive the T-Notes
from the Company) shall cease and terminate. Upon surrender in accordance with
said notice of the certificates for any shares of Series T Preferred Stock so
exchanged (properly endorsed or assigned for transfer, if the Company shall so
require and the notice shall so state), such shares shall be exchanged by the
Company for T Notes.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, the holders of shares of Series T-2 Preferred Stock
will be entitled to receive $10,000 per share plus an amount equal to all
accrued dividends thereon to the date of such payment, before any distribution
is made to the holders of shares of stock ranking junior to the Series T-2
Preferred Stock with respect to dividends and upon redemption, liquidation,
dissolution or winding up ("Junior Stock"). No distribution may be made to
the holders of shares of Parity Stock (as defined below), except distributions
made ratably on the Series T-2 Preferred Stock and all such Parity Stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up of the Company.
Neither the consolidation, merger or other business combination of the Company
with or into any other Person of Persons nor the sale, lease, exchange or
conveyance of all or any part of the property, assets or business of the Company
to a person or persons other than the holders of the Company's Junior Stock
shall be deemed to be a liquidation, dissolution or winding up of the Company
for purposes of these liquidation rights.
Redemption. The Company is obligated to redeem on June 10, 2008 all
outstanding shares of Series T-2 Preferred Stock at a cash price of $10,000 plus
all accrued but unpaid dividends thereon to the date of redemption (the
"Redemption Price").
The Company may, at any time, redeem shares of Series T-2 Preferred Stock
at a price per share equal to the higher of (i) the price specified in the above
paragraph and (ii) the product of the Conversion Number at the time of notice of
redemption and the average closing price on the 20 consecutive trading days
beginning 30 trading days before the date of notice of redemption.
Any shares of Series T-2 Preferred Stock held by any person other than
British Airways or any of its direct or indirect wholly owned subsidiaries may
be redeemed for cash at any time at the option of the Company at the Redemption
Price, plus a redemption premium per share equal to the Annual Redemption
Factor. The Annual Redemption Factor on the Series T-2 Preferred Stock was $700
from the date of original issuance of the Series T-2 Preferred Stock, June 10,
1993, until the first anniversary thereof and is reduced by $46.67 on each
subsequent anniversary.
Upon any proposed Mandatory Conversion, the holders of shares of Series T-2
Preferred have the option (subject to the restrictions described under
"Conversion Rights"), exercisable within 10 Business Days following the mailing
by the Company of the notice indicating its election to declare a Mandatory
Conversion, to cause the Company to redeem all outstanding shares of Series T-2
Preferred in exchange for the number of shares of Common Stock equal to the
Redemption Price, divided by the current market price as of the date of the
mailing of such notice of redemption election; provided, however, that any
holder may elect, within 10 business days following the date on which the holder
elects to require the Company to redeem the shares of Series T-2 Preferred
Stock, to receive cash out of funds legally available therefor in respect of the
portion of the Redemption Price representing the excess over the amount
represented by the number of shares of non-preferred stock into
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which the Series T-2 Preferred is then convertible, multiplied by the current
market price as of the date of the mailing of such notice of redemption election
of the Common Stock.
The Series T-2 Certificate of Designation specifies the manner in which
notice (other than in the case of a Mandatory Conversion) must be given. Once
notice has been given, unless default shall be made by the Company in providing
for the payment of the applicable redemption price, all dividends on the Series
T-2 Preferred Stock thereby called for redemption shall cease to accrue, and
from and after the date specified therein as the date of redemption, or from and
after the date on which the Company shall set apart for payment the redemption
price, all rights of the holders thereof, except the right to receive the
applicable redemption price (without interest) plus accrued dividends to the
date of redemption and except the right to exercise any privilege of conversion,
shall cease and terminate. If the Company shall default in providing for the
redemption price, dividends on such Series T-2 Preferred Stock shall continue to
accrue and be added to the required redemption payments.
Voting Rights. Each share of Series T-2 Preferred Stock shall be entitled
to one vote for each share of Common Stock into which it is convertible, subject
to adjustment in the manner set forth in the Series T-2 Certificate of
Designation, provided, however, that the right to exercise any vote as described
in this paragraph shall not exist to the extent that exercise thereof would
violate Foreign Ownership Restrictions, as reasonably determined from time to
time in good faith by the Board of Directors. Each share of Series T-2 Preferred
Stock is currently entitled to 378.788 votes per share, subject to Foreign
Ownership Restrictions. Except as otherwise provided in the Series T-2
Certificate of Designation, or by the Certificate of Incorporation, or by law,
the shares of Common Stock, Series A Preferred Stock, Series F Preferred Stock,
Series T Preferred Stock and any other shares of capital stock or notes of the
Company, at the time entitled thereto, shall vote together as one class on all
matters submitted to a vote of stockholders of the Company, including the
election of directors of the Company as set forth in Section 4 of Article FOURTH
of the Certificate of Incorporation.
The affirmative vote of the holders of at least two-thirds of the number of
then-outstanding shares of Series T-2 Preferred Stock, voting as a single class
(unless the consent or approval of a greater number of shares shall then be
required by law), is required before the Company may: (i) authorize or create
any class or series, or any shares of any class or series, of stock having any
preference or priority as to dividends or upon redemption, liquidation,
dissolution, or winding up over the Series T-2 Preferred Stock ("Senior Stock");
(ii) except with respect to the Preferred Shares, as defined in the Investment
Agreement, issuable by the Company to British Airways or a subsidiary of British
Airways, authorize or create any class or series, or any shares of any class or
series, of stock ranking on a parity (either as to dividends or upon redemption,
liquidation, dissolution or winding up) with the Series T-2 Preferred Stock
("Parity Stock"); provided, however, that no such vote shall be required with
respect to the authorization or creation by the Company of one or more new
series of preferred stock that is Parity Stock if (A) the aggregate purchase
price (excluding transaction-related expenses) of all shares of such series is
equal to or greater than the aggregate liquidation preference of all shares of
such series, (B) the aggregate liquidation preference (excluding accrued but
unpaid dividends) of all shares of such series of preferred stock does not
exceed $150 million, and (C) shares of any such new series shall be issued only
to an employee stock ownership plan, employee stock ownership trust or other
similar arrangement organized and maintained by the Company for the benefit of
its employees; (iii) reclassify, convert or exchange any shares of stock of the
Company into shares of Senior Stock or Parity Stock (by amendment to the
Certificate of Incorporation, merger or otherwise); (iv) authorize any security
exchangeable for, convertible into, or evidencing the right to purchase any
shares of Senior Stock or Parity Stock; (v) amend, alter or repeal the
Certificate of Incorporation (by amendment to the Certificate of Incorporation,
merger or otherwise) to alter or change the preferences, rights or powers of the
Series T-2 Preferred Stock so as to affect the Series T-2 Preferred Stock
adversely or to increase the authorized number of shares of Series T-2 Preferred
Stock; or (vi) effect the voluntary liquidation, dissolution or winding up of
the Company, or the sale, lease, conveyance or exchange of all or substantially
all of the assets, property or business of the Company, or the merger or
consolidation of the Company with or into any other person; provided, however,
that, except as otherwise specifically required by the Certificate of
Incorporation, no separate vote of the holders of the Series T-2 Preferred Stock
as a class shall be required in the case of a merger or consolidation or a sale,
lease, conveyance or exchange of all or substantially all of the assets,
property or business of the Company (such transactions being hereinafter
referred to as a "reorganization") if (A) the resulting, surviving or acquiring
person will have after such reorganization no stock either authorized or
outstanding ranking senior to, or on a parity with, the Series T-2 Preferred
Stock or the stock of the resulting, surviving or acquired person issued in
exchange therefor (except such stock of the Company as may have been authorized
or outstanding immediately preceding such reorganization, or such stock of the
resulting, surviving or acquiring person containing substantially the same
relative rights and preferences as the stock of the Company for which it may be
exchanged ("Exchanged Stock"), which Exchanged Stock was outstanding immediately
preceding such reorganization and at such time ranked senior to, or on a parity
with, the Series T-2 Preferred Stock) and (B) each holder of shares of Series T-
2 Preferred Stock immediately preceding such
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reorganization will receive in exchange therefor the same number of shares of
stock, with substantially the same preferences, rights and powers, of the
resulting, surviving, or acquiring Person, or if the Company is the surviving
Person and the Series T-2 Preferred Stock remains outstanding, without change to
its preferences, rights and powers.
Certain Restrictions. Whenever (i) dividends payable on shares of Series
T-2 Preferred Stock shall have been in arrears and not paid in full at or before
30 days following any quarterly dividend payment date, thereafter and until all
accrued and unpaid dividends, whether or not declared, shall have been paid in
full or declared and set apart for payment, or (ii) the Company shall have not
distributed any dividend or other distribution distributable to the holders of
shares of Series T-2 Preferred Stock as described under "Dividends" within five
business days of the date such distribution is required, thereafter and until
all dividends or other distributions distributable shall have been distributed,
or (iii) the Company shall have not redeemed shares of Series T-2 Preferred
Stock within five business days of the date such redemption is required,
thereafter and until all mandatory redemption payments shall have been made or
all necessary funds shall have been set apart for payment, the Company shall
not, nor shall it permit any of its subsidiaries to: (A) declare or pay
dividends, or make any other distributions, on any shares of non-preferred stock
or other capital stock of the Company ranking junior (either as to dividends or
upon redemption, liquidation, dissolution or winding up) to the Series T-2
Preferred Stock, other than dividends or distributions payable in Junior Stock;
(B) declare or pay dividends, or make any other distributions, on any shares of
Parity Stock, other than dividends or distributions payable in Junior Stock,
except dividends paid ratably on the Series T-2 Preferred Stock and all Parity
Stock on which dividends are payable or in arrears, in proportion to the total
amounts to which the holders of all such shares are then entitled; or (C) redeem
or purchase or otherwise acquire for consideration (other than Junior Stock) any
shares of Junior Stock or Parity Stock. Notwithstanding this paragraph, nothing
herein shall prevent the Company from (i) declaring a dividend or distribution
of rights to purchase Junior Stock issued pursuant to any rights agreement, or
issuing rights in connection with the issuance of Junior Stock, Parity Stock or
the Series T-2 Preferred Stock or (ii) redeeming any such rights at a price not
to exceed $.03 per right.
In addition, the Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of capital stock of
the Company unless the Company, pursuant to the paragraph above, could purchase
or otherwise acquire such shares at such time and in such manner.
DESCRIPTION OF DEPOSITARY SHARES
Each Depositary Share will represent 1/200 of a share of the corresponding
series of BA Preferred Stock. The BA Preferred Stock will be deposited with the
Depositary under a Deposit Agreement (the "Deposit Agreement") among the
Company, the Depositary and the holders from time to time of depositary receipts
issued thereunder. Subject to the terms of the Deposit Agreement, each owner of
a Depositary Share will be entitled, proportionately, to all the rights,
preferences and privileges of the BA Preferred Stock represented thereby
(including dividend, voting, conversion, redemption and liquidation rights)
contained in the applicable Certificate of Designation, each as summarized
above. There will be no public trading market for the BA Preferred Stock except
as represented by the Depositary Shares.
The Depositary Shares will be evidenced by depositary receipts issued
pursuant to the Deposit Agreement (the "Depositary Receipts"). The following
summary of the terms and provisions of the Depositary Shares does not purport to
be complete and is subject to, and qualified in its entirety by, the Deposit
Agreement (which will contain the form of Depositary Receipt), which is an
Exhibit to the Registration Statement of which this Prospectus is a part.
See "Description of Series F Preferred Stock," "Description of Series T-1
Preferred Stock" and "Description of Series T-2 Preferred Stock" for a
description of the BA Preferred Stock underlying the Depositary Shares.
Withdrawal of Shares of BA Preferred Stock. Upon surrender of the
Depositary Receipts at the Corporate Trust Office (as defined in the Deposit
Agreement) of the Depositary, the owner of the Depositary Shares evidenced
thereby is entitled to delivery at such office of certificates evidencing the
number of shares (including fractional shares) of the applicable series of BA
Preferred Stock represented by such Depositary Shares. If the Depositary
Receipts delivered by the holder evidence a number of Depositary Shares in
excess of the number of Depositary Shares representing the number of shares
(including fractional shares) of the applicable series of BA Preferred Stock to
be withdrawn, the Depositary will deliver to such holder at the same time a new
Depositary Receipt evidencing such excess number of shares (including fractional
shares) of the applicable series of BA Preferred Stock.
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Dividends. The Depositary will distribute all cash dividends or other cash
distributions received in respect of BA Preferred Stock to the record holders of
the applicable series of Depositary Shares in proportion, insofar as possible,
to the number of Depositary Shares owned by such holders.
In the event of a distribution in other than cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may, with the approval of
the Company, adopt such method as it deems equitable and practical for the
purpose of effecting such distribution, including sale of such property and
distribution of the net proceeds from such sale to such holders.
The amount distributed in any of the foregoing cases will be reduced by any
amounts required to be withheld by the Company or the Depositary on account of
taxes.
Conversion Rights. The Depositary Shares, as such, are not convertible into
Common Stock or any other securities or property of the Company. Never theless,
the Company has agreed, as a matter of convenience, to accept delivery of
Depositary Receipts for purposes of effecting conversion of the applicable
series of BA Preferred Stock underlying the Depositary Shares evidenced by such
Depositary Receipts utilizing the same procedures as those provided for delivery
of shares of the applicable series of BA Preferred Stock to effect such
conversions in accordance with the applicable Certificate of Designation. If the
Depositary Shares evidenced by a Depositary Receipt are to be converted in part
only, a new Depositary Receipt or Receipts will be issued for any whole
Depositary Shares not to be converted. No fractional shares of Common Stock will
be issued upon conversion, but if such conversion results in a fraction, an
amount in respect thereof will be paid in cash by the Company. See "Description
of Series F Preferred Stock - Conversion Rights," "Description of Series T-1
Preferred Stock -Conversion Rights" and "Description of Series T-2 Preferred
Stock -Conversion Rights".
Redemption. The Depositary Shares will be redeemed, upon not less than 30
nor more than 60 days' notice, using the cash proceeds received by the
Depositary resulting from the redemption, in whole or in part, at the Company's
option, but subject to the terms and conditions applicable thereto, of shares of
the applicable series of BA Preferred Stock held by the Depositary. The
redemption price per Depositary Share will be equal to 1/200 of the redemption
price payable with respect to each share of the applicable series of BA
Preferred Stock. Whenever the Company redeems shares of BA Preferred Stock held
by the Depositary, the Depositary will redeem as of the same redemption date the
number of Depositary Shares representing the shares of the applicable series of
BA Preferred Stock so redeemed. If fewer than all the Depositary Shares of a
series of BA Preferred Stock are to be redeemed, the Depositary Shares to be
redeemed will be selected by lot or pro rata or in any other equitable manner
determined by the Depositary.
Voting Rights. Upon receipt of notice of any meeting at which the owners of
a series of BA Preferred Stock are entitled to vote, the Depositary will mail
the information contained in such notice of meeting to the record holders of the
applicable Depositary Shares. Each record holder of Depositary Shares on the
record date (which will be the same date as the record date for the applicable
series of BA Preferred Stock) will be entitled to instruct the Depositary as to
the exercise of the voting rights pertaining to the number of shares of the
applicable series of BA Preferred Stock represented by such holder's Depositary
Shares. The Depositary will endeavor to vote the number of shares of the
applicable series of BA Preferred Stock represented by such Depositary Shares in
accordance with such instructions, provided the Depositary receives such
instructions sufficiently in advance of such meeting to enable it to so vote the
shares of such BA Preferred Stock, and the Company has agreed to take all
reasonable action which may be deemed necessary by the Depositary in order to
enable the Depositary to do so. The Depositary will abstain from voting shares
of a series of BA Preferred Stock to the extent it does not receive specific
written instructions from the holders of the Depositary Shares representing such
BA Preferred Stock.
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Amendment and Termination of the Deposit Agreement. The form of Depositary
Receipts and any provision of the Deposit Agreement may at any time be amended
by agreement between the Company and the Depositary. However, any amendment
which imposes or increases any fees, taxes or charges upon holders of Depositary
Shares (other than taxes and other Government charges, fees and other expenses
payable by such holders as stated below under "Charges of Depositary"), or which
otherwise prejudices any substantial existing right of holders of Depositary
Receipts, will not take effect as to outstanding Depositary Shares until the
expiration of 90 days after notice of such amendment has been mailed to the
record holders of outstanding Depositary Receipts, during which 90-day period
such holder may withdraw its shares of the applicable series of BA Preferred
Stock as described above under "Withdrawal of Shares of BA Preferred Stock". In
no event may any amendment impair the right of any owner of any Depositary
Shares, subject to the conditions specified in the Deposit Agreement, upon
surrender of the Depositary Receipts evidencing such Depositary Shares to
receive shares of the applicable series of BA Preferred Stock or upon conversion
of shares of a series of the BA Preferred Stock represented by the Depositary
Shares, to receive shares of Common Stock, and in each case any money or other
property represented thereby, except in order to comply with mandatory
provisions of applicable law.
Whenever directed by the Company, the Depositary will terminate the Deposit
Agreement by mailing notice of such termination to the holders of all
outstanding Depositary Shares at least 30 days prior to the date of termination.
The Depositary may likewise terminate the Deposit Agreement at any time 45 days
after the Depositary has delivered to the Company a written notice of its
election to resign if a successor depositary has not theretofore been appointed
and accepted its appointment. If any Depositary Receipts remain outstanding
after the date of termination, the Depositary thereafter will discontinue the
transfer of Depositary Receipts, will suspend the distribution of dividends to
the owners thereof, and will not give any further notices (other than notice of
such termination) or perform any further acts under the Deposit Agreement
except as provided below and except that the Depositary will continue (i) to
collect dividends on the BA Preferred Stock and any other distributions with
respect thereto and (ii) to deliver BA Preferred Stock together with such
dividends and distributions and the net proceeds of any sales of rights,
preferences, privileges or other property, without liability for interest
thereon, in exchange for Depositary Receipts surrendered. At any time after
the expiration of two years from the date of termination, the Depositary may
sell the BA Preferred Stock then held by it at public or private sales, at such
place or places and upon such terms as it deems proper and may thereafter hold
the net proceeds of any such sale, together with any money and other property
then held by it, without liability for interest thereon, for the pro rata
benefit of the holders of Depositary Receipts which have not been surrendered.
The Company does not intend to terminate the Deposit Agreement or to permit the
resignation of the Depositary without appointing a successor depositary.
Charges of Depositary. The Company will pay all charges of the Depositary
including all charges in connection with withdrawals of shares of BA Preferred
Stock by the owners of Depositary Shares or conversions of shares of
BA Preferred Stock, except for taxes (including transfer taxes, if any) and
other government charges and such other charges as are expressly provided in the
Deposit Agreement to be at the expense of holders of Depositary Receipts or
persons depositing shares of BA Preferred Stock.
General. The Depositary will make available for inspection by holders of
Depositary Receipts at its Corporate Trust Office in New York, New York all
reports and communications from the Company which are delivered to the
Depositary and made generally available to the holders of BA Preferred Stock.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement will be limited to performance with their
best judgment and in good faith of their duties thereunder except that they will
be liable for negligence in the performance of their duties thereunder and they
will not be obligated to prosecute or defend any legal proceeding in respect of
any Depositary Shares or BA Preferred Stock unless satisfactory indemnity is
furnished. The Company and the Depositary will be entitled to rely upon advice
of or information from counsel, accountants or other persons believed to be
compe tent and on documents believed to be genuine.
The Depositary may at any time resign or be removed by the Company,
effective upon the acceptance by its successor of its appointment.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax considerations relevant to the ownership, disposition and conversion
of the BA Preferred Stock and the Depositary Shares based thereon, but does not
purport to be a complete analysis of all the potential tax considerations
relating thereto. This discussion is based upon the Code, Treasury Regulations,
Internal Revenue Service ("IRS") rulings and judicial decisions now in effect,
all of which are subject to change (possibly with retroactive effect). This
discussion does not purport to address all aspects of federal income taxation
that may be relevant to a particular investor's decision to purchase the BA
Preferred Stock and the Depositary Shares based thereon, and it is not intended
to apply to all categories of investors, some of which, such as dealers in
securities, banks, insurance companies and tax-exempt organizations, and non-
United States persons, may be subject to special rules. In addition, this
discussion is limited to persons that will hold the BA Preferred Stock and the
Depositary Shares based thereon as a "capital asset" (within the meaning of Code
Section 1221).
ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
OWNERSHIP, CONVERSION AND DISPOSITION OF THE BA PREFERRED STOCK AND THE
DEPOSITARY SHARES BASED THEREON (OR THE COMMON STOCK ISSUED UPON CONVERSION
THEREOF).
Treatment of Depositary Shares
Holders of the Depositary Shares will be treated as holders of the
underlying BA Preferred Stock (and any cash, property or other securities held
by the Depositary on behalf of the holders) represented by such Depositary
Shares for federal income tax purposes and will be taxed as if they held such BA
Preferred Stock (or such cash, property or other securities held by the
Depositary on behalf of the holders) directly. References below to holders of
the BA Preferred Stock include holders of the applicable Depositary Shares.
Dividends on BA Preferred Stock
Dividend distributions paid on the BA Preferred Stock will be taxable as
ordinary income to the extent of the Company's current and accumulated earnings
and profits for federal income tax purposes. To the extent that the amount of
such a distribution exceeds the Company's earnings and profits allocable to the
holder, the distribution will be treated first as a tax-free return of capital
to the extent of the holder's basis in the BA Preferred Stock and thereafter as
capital gain. Such gain will be a long-term capital gain if the holding period
for the BA Preferred Stock exceeds one year.
The Company believes that as of its taxable year ending December 31, 1996,
it did not have accumulated earnings and profits but did have current earnings
and profits to pay dividends for tax purposes. There can be no assurance that
the
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Company will have sufficient current or accumulated earnings and profits in the
future such that any quarterly cash payments will constitute dividends for
federal income tax purposes.
Dividends paid out of the Company's earnings and profits to corporate
holders may be eligible for a 70% dividends-received deduction, subject to the
minimum holding period requirement under Code Section 246(c) (generally, at
least 46 days) and other applicable requirements. Under Code Section 246A, the
dividends-received deduction may be reduced or eliminated if the holder's shares
of BA Preferred Stock are wholly or partially debt-financed. Under certain
circumstances, a corporate holder may be subject to the alternative minimum tax
with respect to a portion of its dividends-received deduction. Under President
Clinton's Fiscal Year 1998 Budget Proposal, as submitted to the Congress on
February 6, 1997, the 70% dividends-received deduction, where available, would
be reduced to a 50% dividends-received deduction, and the minimum holding period
would be required to be satisfied over a period immediately before or
immediately after the taxpayer becomes entitled to receive the dividend. The
President's proposals, if enacted in their present form, are proposed to apply
to dividends received or accrued more than 30 days after enactment of the
proposals. It is not possible to predict whether either proposal will be enacted
into law.
Under certain circumstances, a corporate holder of the BA Preferred Stock
that received an "extraordinary dividend," as defined in Code Section 1059(c),
will be required to reduce its basis in the BA Preferred Stock by the portion of
such dividend that is not taxed pursuant to the dividends-received deduction
if the holder does not meet minimum holding period requirements (generally, more
than two years). In most circumstances, quarterly dividends on the BA Preferred
Stock, if not in arrears, would not constitute extraordinary dividends under
Code Section 1059(c). In addition, under Code Section 1059(f), any dividend with
respect to "disqualified preferred stock" is treated as an "extraordinary
dividend," regardless of the holder's holding period. The Company believes that
the BA Preferred Stock will not constitute "disqualified preferred stock."
Redemption of BA Preferred Stock
A redemption of the BA Preferred Stock will be treated under Code Section
302 as a distribution that is taxable as a dividend (to the extent of the
Company's current or accumulated earnings and profits) rather than as a sale or
exchange of the BA Preferred Stock unless the redemption (i) results in a
complete termination of the holder's stock interest in the Company under Code
Section 302(b)(3), (ii) is "substantially disproportionate" with respect to the
holder under Code Section 302(b)(2), (iii) is "not essentially equivalent to a
dividend" with respect to the holder under Code Section 302(b)(1), or (iv) in
the case of a holder who is not a corporation, is in a partial liquidation of
the Company under Code Section 302(b)(4). In determining whether any of these
tests has been met, shares of stock considered to be owned by the holder
(including shares receivable upon conversion of the BA Preferred Stock) by
reason of certain constructive ownership rules set forth in Code Section 318, as
well as shares actually owned, generally must be taken into account.
A redemption will be "substantially disproportionate" with respect to a
stockholder if the stockholder's percentage interest in all voting and common
stock of the corporation (by value) is each reduced by more than 20%, and the
stockholder owns less than 50% of the total combined voting power of all classes
of stock entitled to vote after the redemption.
A redemption will be "not essentially equivalent to a dividend" with
respect to a stockholder if the stockholder experiences a "meaningful reduction"
in his proportionate interest in the corporation. The IRS has ruled that even a
small reduction in the proportionate interest of a small minority stockholder
who does not exercise any control over company affairs may constitute a
"meaningful reduction" in the stockholder's interest in the Company.
If the redemption satisfies any of the Code Section 302(b) tests, it will
be treated as a sale or exchange of the BA Preferred Stock, resulting in capital
gain or loss to the extent of the difference between the amount received and the
holder's basis for the shares redeemed. Such gain will be a long-term capital
gain if the holding period for the redeemed BA Preferred Stock exceeds one year.
Any portion of the amount received attributable to accumulated and declared but
unpaid dividends will be taxable as ordinary income to the extent of the
Company's earnings and profits.
Each holder is urged to consult his own tax advisor with respect to the
question of whether a redemption of BA Preferred Stock will be treated as a sale
or exchange under Code Section 302(b).
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If the redemption does not satisfy any of the Code Section 302 tests, it
will be treated as a dividend in the amount of the lesser of (x) the amount of
cash received and (y) the Company's current and accumulated earnings and
profits, as described under "Dividends on BA Preferred Stock," above. If the
redemption does not satisfy any of the Code Section 302 tests, and if the holder
retains ownership of any type of stock in the Company, the tax basis in the
redeemed BA Preferred Stock (reduced, for corporate holders, by any amounts
treated as extraordinary dividends, as discussed below, or as a return of
capital) would be added to the basis of the retained stock. If the holder does
not retain any stock of the Company, the tax basis may be lost or possibly added
to the basis of any shares of stock of the Company owned by a related person.
Under certain limited circumstances, an amount treated as a dividend in the
case of a redemption that is not pro-rata as to all shareholders or that is part
of a partial liquidation (within the meaning of Code Section 302(e)) of the
redeeming corporation may be treated as an "extraordinary dividend" under Code
Section 1059, regardless of the holder's holding period for the redeemed stock
or the size of the distribution. See the discussion under "Dividends on BA
Preferred Stock," above.
Conversion of BA Preferred Stock Into Common Stock
In general, no gain or loss will be recognized for federal income tax
purposes on conversion of the BA Preferred Stock solely into Common Stock. The
tax basis for the Common Stock received upon conversion will be equal to the tax
basis of the BA Preferred Stock (reduced by the portion of such basis allocable
to any fractional interest exchanged for cash). The holding period of the Common
Stock will include the holding period of the BA Preferred Stock converted. Gain
or loss may be recognized at the time of the conversion, however, upon the
receipt of cash paid in lieu of fractional shares of Common Stock or upon
receipt of cash, if any, in respect of dividends declared but not previously
included in income.
The conversion of the BA Preferred Stock into cash, property or securities
other than stock of the Company (or stock of a successor to the Company) will be
treated as a redemption of the BA Preferred Stock. See the discussion under
"Redemption of BA Preferred Stock," above.
Adjustment of Conversion Price
Treasury Regulations promulgated under Code Section 305 may treat holders
of convertible stock as having received a constructive distribution where the
conversion ratio of such convertible stock is adjusted if (i) as a result, the
proportionate interest of the holders of such convertible stock in the assets or
earnings and profits of the issuer is increased and (ii) the adjustment is not
made pursuant to a bona fide, reasonable antidilution formula. An adjustment in
the conversion ratio is not considered to be made pursuant to such a formula
where the adjustment is made to compensate for certain taxable distributions
with respect to the stock into which such stock is convertible. Thus, under
certain circumstances, a reduction in the conversion price for the BA Preferred
Stock is likely to be taxable to the holders thereof as a dividend to the extent
of the earnings and profits of the Company. In the case of a corporate holder,
it is possible that such a dividend (and other dividends within the applicable
85, and in certain circumstances, 365 day period, including regular quarterly
dividends) could be treated as an "extraordinary dividend" under Code Section
1059. See the discussion under "Dividends on BA Preferred Stock," above.
Section 382 Limitation
As of December 31, 1996, the Company had approximately $1.5 billion of NOL
carryforwards available for Federal tax purposes, which can be deducted against
future taxable income, and which expire in the years 2006 and 2009. The Company
also has available, to reduce future taxes payable, $375 million alternative
minimum tax net operating losses expiring in the years 2008 to 2009, $50 million
of investment tax credits expiring in 2002 to 2003, and $33 million of
alternative minimum tax credits which do not expire. Under Code Section 382, the
Company's use of any NOL carryforwards is limited if there is an increase of
more than 50 percentage points in the ownership interests of certain current or
future shareholders within a three-year period (an "ownership change"). In
addition, under Code Section 383, if there is an ownership change, the Company's
use of AMT credits would be limited. The Company believes that the sale of BA
Preferred Stock should not, by itself or with other increases in the past three
years, cause the Section 382 or Section 383 limitations to apply. The sale of BA
Preferred Stock, however, when combined with other transactions over which the
Company may or may not have control, including the issuance of additional shares
of the Company's capital stock in connection with an acquisition or otherwise,
may produce an ownership change sufficient to result in the Company's NOL
carryforwards and AMT credits becoming subject to the annual limitations of
Section 382 and Section 383.
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Backup Withholding and United States Information Reporting
Certain non-corporate holders of the BA Preferred Stock or Common Stock are
subject to information reporting and may be subject to backup withholding at the
rate of 31% with respect to dividends on the BA Preferred Stock and Common Stock
and certain consideration received upon the conversion or redemption of the BA
Preferred Stock. Generally, backup withholding applies only when the taxpayer
(i) fails to furnish or certify his correct taxpayer identification number to
the payor in the manner required, (ii) is notified by the IRS that he has failed
to report payments or dividends or interest properly or (iii) under certain
circumstances, fails to certify that he has not been notified by the IRS that he
is subject to backup withholding for failure to report dividends. Holders
should consult their tax advisors regarding their qualification for exemption
from backup withholding and the procedure for obtaining any applicable
exemption.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among the
Company, BritAir and the Underwriters named below, (the "Underwriting
Agreement"), BritAir has agreed to sell to each of the Underwriters named below,
and each of the Underwriters has severally agreed to purchase from BritAir, the
respective number of Depositary Shares set forth opposite its name below.
Series F Series T-1 Series T-2
Underwriter Depositary Shares Depositary Shares Depositary Shares*
------------- ----------------- ----------------- -----------------
_________________________
* Until May 14, 1997, the Company has certain rights to purchase the
Series T-2 Preferred Stock underlying the Series T-2 Depositary Shares
which may be offered hereby. Accordingly, unless and until the Company
expressly declines to exercise such rights, or such rights expire
unexercised, no Series T-2 Depositary Shares will be issued and no sales
of Series T-2 Depositary Shares may be made pursuant hereto.
Under the terms and conditions of the Underwriting Agreement, the Underwriters
are committed to take and pay for all the Depositary Shares offered hereby, if
any are taken (subject to the restriction described in the footnote above).
The Underwriters propose to offer the Depositary Shares in part directly to
the public at the respective initial public offering prices set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $.[ ] per Depositary Share [break-out, if necessary].
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $.[ ] per Depositary Share [break-out, if necessary] to certain
brokers and dealers. After the Depositary Shares are released for sale to the
public, the offering price and the selling terms may from time to time be varied
by the Underwriters.
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The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock, preferred stock or other capital stock of the Company for a
period of 90 days after the date of this Prospectus without the prior written
consent of the Underwriters and British Airways, except for the Depositary
Shares offered in connection with the Offering.
Prior to the Offering, there has been no public market for the BA Preferred
Stock or for the Depositary Shares. The initial public offering price was
negotiated among BritAir and the Underwriters. Among the factors considered in
determining the respective initial public offering prices of the Depositary
Shares, in addition to prevailing market conditions, were the Company's
historical performance, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuations of companies
in related businesses.
Application will be made to list the Depositary Shares on the New York Stock
Exchange.
The Company has agreed to indemnify BritAir, British Airways and the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
In connection with the Offering, the Underwriters may purchase and sell the
Depositary Shares or the Common Stock in the open market. These transactions may
include over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the Offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Depositary Shares
or the Common Stock; and short positions created by the Underwriters involve the
sale of a greater number of Depositary Shares than they are required to purchase
from BritAir in the Offering. The Underwriters also may impose a penalty bid,
whereby selling concessions allowed to broker-dealers in respect of the
securities sold in the Offering may be reclaimed by the Underwriters if such
Depositary Shares are repurchased by the Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
respective market prices of the Depositary Shares and the Common Stock, which
may be higher than the price that might otherwise prevail in the open market;
and these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the New York Stock Exchange, in the over-the-
counter market or otherwise.
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LEGAL MATTERS
Certain legal matters with respect to the BA Preferred Stock and the
Depositary Shares will be passed upon for the Company by Lawrence M. Nagin,
Esq., Executive Vice President-Corporate Affairs and General Counsel of the
Company, and for the Underwriters by __________.
EXPERTS
The Consolidated Financial Statements and schedules of the Company and of US
Airways as of December 31, 1994, 1995 and 1996 appearing in this Prospectus and
elsewhere in the Registration Statement have been audited by KPMG Peat Marwick
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of said firm as experts in accounting and auditing.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
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US Airways Group, Inc. Audited Consolidated Financial Statements:
Report of Independent Auditors F-2
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-3
Consolidated Balance Sheets as of December 31, 1995 and
1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 F-6
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years December 31, 1994, 1995 and 1996 F-8
Notes to Consolidated Financial Statements F-10
US Airways, Inc. Audited Consolidated Financial Statements:
Report of Independent Auditors F-48
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-49
Consolidated Balance Sheets as of December 31, 1995 and
1996 F-50
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 F-52
Consolidated Statements of Changes in Stockholder's Equity
(Deficit) for the years December 31, 1994, 1995 and 1996 F-54
Notes to Consolidated Financial Statements F-55
F-1
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Consolidated Financial Statements and Supplementary Information for
US Airways Group, Inc.
Independent Auditors' Report
The Stockholders and Board of Directors
US Airways Group, Inc.:
We have audited the consolidated balance sheets of US Airways Group, Inc.
(formerly USAir Group, Inc.) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, cash flows, and changes
in stockholders' equity (deficit) for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of US Airways Group,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D. C.
February 26, 1997, except as to note 4(c) and note 4(d)
which are as of March 13, 1997
F-2
<PAGE>
US Airways Group, Inc. (Formerly USAir Group, Inc.)
Consolidated Statements of Operations
Years Ended December 31,
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Operating Revenues
Passenger transportation $7,370,888 $6,748,564 $6,357,547
Cargo and freight 162,704 157,262 163,598
Other 608,821 568,522 476,049
---------- ---------- ----------
Total Operating Revenues 8,142,413 7,474,348 6,997,194
Operating Expenses
Personnel costs 3,195,463 2,887,115 2,889,764
Aviation fuel 824,745 677,621 703,949
Commissions 586,226 563,037 583,158
Aircraft rent 436,873 437,649 563,572
Other rent and landing fees 412,275 404,158 436,540
Aircraft maintenance 372,997 346,854 392,181
Depreciation and amortization 316,043 352,447 408,587
Other, net 1,560,298 1,483,780 1,510,799
---------- ---------- ----------
Total Operating Expenses 7,704,920 7,152,661 7,488,550
---------- ---------- ----------
Operating Income (Loss) 437,493 321,687 (491,356)
Other Income (Expense)
Interest income 74,819 51,624 27,088
Interest expense (267,122) (302,593) (284,034)
Interest capitalized 8,398 8,781 13,760
Equity in earnings (loss) of affiliates 36,602 34,546 26,535
Other, net (14,708) 14,227 23,084
---------- ---------- ----------
Other Income (Expense), Net (162,011) (193,415) (193,567)
---------- ---------- ----------
Income (Loss) Before Taxes 275,482 128,272 (684,923)
Provision (Credit) for Income Taxes 12,109 8,985 -
---------- ---------- ----------
Net Income (Loss) 263,373 119,287 (684,923)
Preferred Dividend Requirement (88,775) (84,904) (78,036)
---------- ---------- ----------
Net Income (Loss) Applicable to Common
Stockholders $ 174,598 $ 34,383 $ (762,959)
========== ========== ==========
Income (Loss) per Common Share
Primary $ 2.69 $ 0.55 $ (12.73)
Fully-diluted $ 2.33 $ 0.55 $ (12.73)
Shares Used for Computation (000)
Primary 64,919 62,430 59,915
Fully-diluted 95,516 62,526 59,915
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
US Airways Group, Inc. (Formerly USAir Group, Inc.)
Consolidated Balance Sheets
December 31,
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 950,966 $ 881,854
Short-term investments 635,839 19,831
Receivables, net 337,025 322,122
Materials and supplies, net 248,774 248,144
Prepaid expenses and other 137,590 111,131
----------- -----------
Total Current Assets 2,310,194 1,583,082
Property and Equipment
Flight equipment 5,202,057 5,251,742
Ground property and equipment 1,108,648 1,073,720
Less accumulated depreciation and amortization (2,470,337) (2,301,059)
----------- -----------
3,840,368 4,024,403
Purchase deposits 77,620 17,026
----------- -----------
Total Property and Equipment, Net 3,917,988 4,041,429
Other Assets
Goodwill, net 494,511 510,562
Other intangibles, net 283,309 312,786
Other assets, net 525,409 507,149
----------- -----------
Total Other Assets 1,303,229 1,330,497
----------- -----------
$ 7,531,411 $ 6,955,008
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 84,259 $ 80,721
Accounts payable 438,951 325,330
Traffic balances payable and unused tickets 715,576 607,170
Accrued aircraft rent 510,752 495,489
Accrued expenses 1,099,181 975,986
----------- -----------
Total Current Liabilities 2,848,719 2,484,696
Long-term Debt, Net of Current Maturities 2,615,780 2,717,085
Deferred Credits and Other Liabilities
Deferred gains, net 359,748 386,947
Postretirement benefits other than pensions,
non-current 1,093,519 1,015,623
Non-current employee benefit liabilities and other 439,308 427,726
----------- -----------
Total Deferred Credits and Other Liabilities 1,892,575 1,830,296
</TABLE>
(continued on next page)
F-4
<PAGE>
US Airways Group, Inc. (Formerly USAir Group, Inc.)
Consolidated Balance Sheets (Continued)
December 31,
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Commitments and Contingencies
Redeemable Cumulative Convertible Preferred Stock
Series A, 358,000 shares issued, no par value 358,000 358,000
(redemption value of $404,675 at December 31, 1996)
Series F, 30,000 shares issued, no par value 300,000 300,000
(redemption value of $323,361 at December 31, 1996)
Series T, 10,000 shares issued, no par value 100,719 100,719
(redemption value of $107,602 at December 31, 1996)
Stockholders' Equity (Deficit)
Series B cumulative convertible preferred stock, 213,128 213,153
no par value, 4,263,000 depositary shares
issued (liquidation preference of $255,088 at
December 31, 1996)
Common stock, par value $1 per share, authorized 64,306 63,449
150,000,000 shares, issued and outstanding
64,306,000 and 63,449,000 shares, respectively
Paid-in capital 1,386,557 1,362,756
Retained earnings (deficit) (2,117,838) (2,298,211)
Common stock held in treasury - -
Deferred compensation (95,326) (98,847)
Adjustment for minimum pension liability (35,209) (78,088)
----------- -----------
Total Stockholders' Equity (Deficit) (584,382) (835,788)
----------- -----------
$ 7,531,411 $ 6,955,008
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
US Airways Group, Inc. (Formerly USAir Group, Inc.)
Consolidated Statements of Cash Flows
Years Ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents beginning of year $ 881,854 $429,538 $ 368,347
--------- ------- --------
Cash flows from operating activities
Net income (loss) 263,373 119,287 (684,923)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities
Depreciation and amortization 316,043 352,447 408,587
Loss (gain) on disposition of property 748 (17,043) (24,099)
Amortization of deferred gains and credits (27,668) (27,817) (27,396)
Other 38,048 6,294 (11,605)
Changes in certain assets and liabilities
Decrease (increase) in receivables (14,903) 2,417 41,101
Decrease (increase) in materials, supplies,
prepaid expenses and intangible
pension assets (45,455) (74,980) 74,663
Increase (decrease) in traffic balances
payable and unused tickets 108,406 38,955 (61,932)
Increase (decrease) in accounts payable, accrued
aircraft rent and accrued expenses 315,440 120,422 235,105
Increase (decrease) in postretirement
benefits other than pensions, non-current 77,896 56,667 51,613
--------- ------- --------
Net cash provided by (used for)
operating activities 1,031,928 576,649 1,114
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net (52,854) (61,689) (46,022)
Additions to other property (127,875) (84,980) (134,086)
Proceeds from disposition of property 24,903 222,325 75,075
Decrease (increase) in short-term investments (603,593) 2,430 (21,994)
Decrease (increase) in restricted cash and investments 11,086 71,980 2,578
Other (5,497) (1,134) 1,110
--------- ------- --------
Net cash provided by (used for) investing
activities (753,830) 148,932 (123,339)
</TABLE>
(continued on next page)
F-6
<PAGE>
US Airways Group, Inc. (Formerly USAir Group, Inc.)
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Issuance of debt 103,002 1,162 308,856
Reduction of debt (235,500) (283,160) (87,073)
Issuance of common stock 3,882 8,733 52
Sale of treasury stock 2,630 - 11,244
Dividends paid (83,000) - (49,663)
--------- --------- ---------
Net cash provided by (used for) financing
activities (208,986) (273,265) 183,416
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 69,112 452,316 61,191
--------- --------- ---------
Cash and cash equivalents end of year $ 950,966 $ 881,854 $ 429,538
========= ========= =========
Noncash investing and financing activities
Issuance of debt - refinancing of debt secured
by aircraft $ 159,998 $ - $ -
========= ========= =========
Reduction of debt - refinancing of debt
secured by aircraft $ 154,422 $ - $ -
========= ========= =========
Issuance of debt - aircraft acquisitions $ 29,155 $ 169,725 $ 224,614
========= ========= =========
Reduction of debt - aircraft purchase deposits $ - $ 70,837 $ -
========= ========= =========
Underwriter's fees - refinancing of debt
secured by aircraft $ 2,488 $ - $ -
========= ========= =========
Treasury stock acquired for tax withholding on
employee stock grants $ 2,630 $ - $ -
========= ========= =========
Supplemental Information
Cash paid during the year for interest, net
of amounts capitalized $ 260,625 $ 299,871 $ 251,943
========= ========= =========
Net cash received (paid) during the year
for income taxes $ (12,325) $ (6,637) $ 317
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
US Airways Group, Inc. (Formerly USAir Group, Inc.)
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Three Years Ended December 31, 1996
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Adjustment
For
Retained Deferred Minimum
Preferred Common Paid In Earnings Treasury Compen- Pension
Stock B Stock Capital (Deficit) Stock sation Liability Total
-------- ------ ------- --------- -------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 $213,153 $61,080 $1,417,346 $(1,682,912) $(83,891) $(94,957) $(42,395) $(212,576)
Reversion of 4,000 shares of
restricted stock previously
granted - (4) (28) - - 58 - 26
Sale of 12,400 shares of
common stock - 12 40 - - - - 52
Exercise of 5,000 options - - (177) - 225 - - 48
Sale of 1,859,000 shares of
treasury stock - - (72,470) - 83,666 - - 11,196
Dividends declared (preferred stock)
Series A-$46.25 per share - - - (16,557) - - - (16,557)
Series B-$3.28 per depositary share - - - (13,988) - - - (13,988)
Series F-$525 per share - - - (15,750) - - - (15,750)
Series T-$334.38 per share - - - (3,368) - - - (3,368)
Amortization of deferred compensation - - (375) - - 3,934 - 3,559
Adjustment for minimum pension
liability - - - - - - 35,378 35,378
Net loss - - - (684,923) - - - (684,923)
-------- ------- ---------- ----------- -------- -------- -------- ---------
Balance December 31, 1994 $213,153 $61,088 $1,344,336 $(2,417,498) $ - $(90,965) $ (7,017) $(896,903)
Sale of 1,384,000 shares of
common stock - 1,384 6,929 - - - - 8,313
Grant of 934,600 shares of
restricted stock - 934 10,982 - - (11,916) - -
Exercise of 42,775 options - 43 377 - - - - 420
Amortization of deferred compensation - - 132 - - 4,034 - 4,166
Adjustment for minimum
pension liability - - - - - - (71,071) (71,071)
Net income - - - 119,287 - - - 119,287
-------- ------- ---------- ----------- -------- -------- -------- ---------
Balance December 31, 1995 $213,153 $63,449 $1,362,756 $(2,298,211) $ - $(98,847) $(78,088) $(835,788)
</TABLE>
(Continued on next page)
F-8
<PAGE>
US Airways Group, Inc. (Formerly USAir Group, Inc.)
Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Continued)
Three Years Ended December 31, 1996
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Adjustment
For
Retained Deferred Minimum
Preferred Common Paid In Earnings Treasury Compen- Pension
Stock B Stock Capital (Deficit) Stock sation Liability Total
--------- ------- ------- --------- -------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $213,153 $63,449 $1,362,756 $(2,298,211) $ - $(98,847) $(78,088) $(835,788)
Grant of 635,000 shares of
restricted stock and 2,415,000
options - 635 20,668 - - (21,303) - -
Acquisition of 118,156 shares of
common stock from certain
employees - - - - (2,630) - - (2,630)
Exercise of 434,876 options - 317 4,241 - 2,630 - - 7,188
Conversion of 500 depositary
shares (25) 1 24 - - - - -
Reversion of 96,310 shares of
restricted stock previously
granted - (96) (1,132) - - 1,228 - -
Dividends declared (preferred
stock)
Series A - $133.74 per share - - - (47,879) - - - (47,879)
Series F - $902.14 per share - - - (27,064) - - - (27,064)
Series T - $799.91 per share - - - (8,057) - - - (8,057)
Amortization of deferred
compensation - - - - - 23,596 - 23,596
Adjustment for minimum
pension liability - - - - - - 42,879 42,879
Net income - - - 263,373 - - - 263,373
-------- ------- ---------- ----------- ------- -------- -------- ---------
Balance December 31, 1996 $213,128 $64,306 $1,386,557 $(2,117,838) $ - $(95,326) $(35,209) $(584,382)
======== ======= ========== =========== ======= ======== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-9
<PAGE>
US Airways Group, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
(a) Basis of Presentation and Nature of Operations
The accompanying Consolidated Financial Statements include the accounts of
US Airways Group, Inc. ("US Airways Group" or the "Company") (formerly USAir
Group, Inc.) and its wholly-owned subsidiaries US Airways, Inc. ("US Airways")
(formerly USAir, Inc.), Piedmont Airlines, Inc. ("Piedmont"), PSA Airlines, Inc.
("PSA") (formerly Jetstream International Airlines, Inc.), Allegheny Airlines,
Inc. ("Allegheny"), USAir Leasing and Services, Inc. ("USAir Leasing and
Services"), USAir Fuel Corporation ("Fuel Corp."), Material Services Company,
Inc. ("MSC") and The OR Group, Inc. ("OR Group"). All significant intercompany
accounts and transactions have been eliminated.
US Airways is the Company's principal subsidiary and accounted for
approximately 92% of its operating revenues in 1996. US Airways' results include
the results of its wholly-owned subsidiary USAM Corp. ("USAM"). US Airways is a
major United States air carrier whose primary business is transporting
passengers, property and mail. US Airways enplaned 56.9 million passengers
during 1996 and is currently the fifth largest domestic air carrier, as measured
by revenue passenger miles ("RPMs"). US Airways operates predominantly in the
eastern U.S. with primary hubs at the major airports in Pittsburgh,
Pennsylvania, Charlotte, North Carolina, Philadelphia, Pennsylvania and at
Baltimore/Washington International Airport. US Airways also maintains
significant operations at the major airports in Boston, Massachusetts, New York,
New York and Washington, D.C.
USAM owns 11% of the Galileo International Partnership ("GIP") which owns
and operates the Galileo Computer Reservation System ("Galileo CRS"),
approximately 11% of the Galileo Japan Partnership ("GJP") which markets the
Galileo CRS in Japan, and approximately 21% of the Apollo Travel Services
Partnership ("ATS") which markets the Galileo CRS in the U.S. and Mexico. USAM
accounts for these investments using the equity method because it is represented
on the board of directors of each of the partnerships and therefore participates
in policy making processes.
Piedmont, PSA and Allegheny are regional air carriers that, along with seven
non-owned regional airline franchisees, form "US Airways Express" (formerly
doing business as "USAir Express"). US Airways Express also has a majority of
its operations in the eastern U.S. US Airways Express air carriers enplaned 10.6
million passengers in 1996 (5.6 million passengers enplaned by Piedmont, PSA,
and Allegheny), approximately half of whom connected to US Airways flights.
Fuel Corp. was established in 1987 primarily to serve as a fuel wholesaler
to US Airways, in certain circumstances. MSC performs a function similar to Fuel
Corp., selling aviation fuel to US Airways Express carriers and also assisting
the US Airways Express carriers with major maintenance and procurement
contracts. USAir Leasing and Services' main function is remarketing US Airways'
surplus or inactive aircraft.
OR Group was a wholly-owned subsidiary of US Airways Group that was
incorporated in February 1996 and dissolved in the fourth quarter of 1996. The
OR Group provided resource allocation consulting services and decision-making
support systems to US Airways, which assumed these activities upon OR Group's
dissolution.
F-10
<PAGE>
US Airways terminated its Airline Technical Services, LLC joint venture with
a subsidiary of British Airways plc ("British Airways"), effective January 1997.
Amounts related to this joint venture (accounted for using the equity method)
included in the Company's financial results for the years ended 1996 and 1995
are immaterial and no material charges resulted from its termination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's principal operating subsidiary, US Airways, and its three
regional airline subsidiaries operate within one industry (air transportation);
therefore, no segment information is provided.
Certain 1995 and 1994 amounts have been reclassified to conform with 1996
classifications.
(b) Cash and Cash Equivalents and Short-Term Investments
For financial statement purposes, the Company considers all highly liquid
investments purchased within three months of maturity to be cash equivalents.
Cash and cash equivalents are stated at cost, which approximates market value.
Short-term investments consist of certificates of deposit and commercial paper
purchased with maturities greater than three months but less than one year.
In 1994, the Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). Under this statement, the Company has classified its entire short-term
investment portfolio as "available-for-sale." As of December 31, 1996 and 1995,
there were no material differences between estimated fair values and carrying
amounts for cash equivalents and short-term investments.
(c) Materials and Supplies
Inventories of materials and supplies are valued at the lower of cost or
market value. Costs are determined using average costing methods and are charged
to operations as consumed. An allowance for obsolescence is provided for flight
equipment expendable and repairable parts.
(d) Property and Equipment
Property and equipment is stated at cost or, if acquired under capital
leases, at the lower of the present value of minimum lease payments or fair
market value at the inception of the lease. Maintenance and repairs, including
the overhaul of aircraft components, are charged to operating expense as
incurred and costs of major improvements are capitalized for both owned and
leased assets. Interest related to deposits on aircraft purchase contracts and
facility and equipment construction projects is capitalized as additional cost
of the asset or as leasehold improvement if the asset is leased. Depreciation
and amortization for principle asset classifications is provided on a
straight-line basis to estimated residual values over estimated depreciable
lives. Estimated depreciable lives and residual values are periodically reviewed
for reasonableness and estimates are revised, if necessary.
F-11
<PAGE>
<TABLE>
<CAPTION>
Depreciable Residual
Assets Lives Values
------ ----------- --------
(years) (in millions)
<S> <C> <C>
Aircraft
Boeing 767-200ER 20 $14.0
Boeing 757-200 20 8.0
Boeing 737-300/400 20 7.5
Boeing 737-200 5-17 0.6-5.0
McDonnell Douglas MD-80 20 7.5
Douglas DC-9-30 17 3.0
Fokker 100 20 5.0
Fokker F28-4000 8 2.0
Fokker F28-1000 6 1.0
Turboprop aircraft 11-17 1.2-1.5
Improvements to leased aircraft life of lease -
Ground property, equipment and leasehold 1-10 or
improvements life of lease -
Buildings 25-30 -
</TABLE>
Property acquired under capital lease is amortized on a straight-line basis
over the term of the lease and charged to Depreciation and amortization expense.
When property and equipment is sold or retired, the cost and accumulated
depreciation is removed from the accounts and any gain or loss recognized as
Other, net, a component of Other Income (Expense).
(e) Goodwill and Other Intangibles
Goodwill, the cost in excess of fair value of identified net assets
acquired, is being amortized on a straight-line basis over 40 years. The $629.5
million goodwill resulting from the acquisition of Pacific Southwest Airlines
("Pacific Southwest") and Piedmont Aviation, Inc. ("Piedmont Aviation"), both in
1987, is being amortized as Depreciation and amortization expense. As of
Dec-ember 31, 1996 and 1995, accumulated amortization related to the Pacific
Southwest and Piedmont Aviation acquisitions was $144.1 million and $128.3
million, respectively. The $11.4 million goodwill resulting from USAM's computer
reservation system investments is being amortized as a component of Other Income
(Expense), consistent with the classification of the related income or loss on
the investments. As of December 31, 1996 and 1995, USAM's related accumulated
amortization was $2.3 million and $2.0 million, respectively. US Airways
periodically evaluates whether goodwill is impaired by comparing the goodwill
balances with estimated future undiscounted cash flows which, in US Airways'
judgment, are attributable to the goodwill. This analysis is performed
separately for the goodwill which resulted from each acquisition.
Intangible assets consist mainly of purchased operating rights at various
airports, purchased route authorities, capitalized software costs and the
intangible asset associated with the underfunded amounts of certain pension
plans ("Intangible Pension Asset"). The operating rights, route authorities and
capitalized software costs are being amortized on a straight-line basis over the
expected periods of benefit as Depreciation and amortization expense. The
operating rights, valued at purchase cost or appraised value if acquired with
Pacific Southwest or Piedmont Aviation, are being amortized over periods ranging
from ten to 25 years, the route authorities are being amortized over 25 years
and capitalized software costs are being amortized over five years. The
Intangible Pension Asset is recognized in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions" ("SFAS 87")
(see Note 10(a) for additional information). As of December 31, 1996 and 1995,
accumulated amortization related to intangible assets
F-12
<PAGE>
was $129.3 million and $105.0 million, respectively.
Based on the most recent analyses, US Airways believes that goodwill and
other intangible assets were not impaired as of December 31, 1996.
(f) Other Assets
Other Assets consists primarily of non-current pension assets, restricted
cash and investments and a long-term receivable from British Airways. Restricted
cash and investments are deposits in trust accounts to collateralize letters of
credit and workers' compensation policies. The long-term receivable from British
Airways resulted from the relinquishment by US Airways of three U.S. to London
routes.
In November 1995, US Airways entered into a five-year transaction with a
third party pursuant to which US Airways agreed to pledge to such third party
from time to time certain flight equipment and simulators as collateral for up
to $70 million aggregate principal amount of letters of credit to be issued by
the third party with respect to certain workers' compensation obligations of US
Airways. On December 15, 1995, US Airways pledged ten aircraft to the third
party, resulting in the release of $67.2 million in cash and securities that had
been previously pledged by US Airways to letter of credit providers.
(g) Deferred Gains on Sale and Leaseback Transactions
Gains on aircraft sale and leaseback transactions are deferred and amortized
over the term of the leases as a reduction of the related aircraft rent expense.
(h) Recognition of Passenger Transportation Revenues
Passenger ticket sales are recognized as revenue when the transportation
service is rendered or the ticket otherwise expires. At the time of sale, a
liability is established (Traffic balances payable and unused tickets) and
subsequently eliminated either through carriage of the passenger, through
billing from another air carrier which renders the service or by refund to the
passenger.
(i) Frequent Traveler Awards
US Airways accrues the estimated incremental cost of travel awards earned by
participants in its frequent traveler program when requisite mileage award
levels are achieved.
(j) Investment Tax Credit
Investment tax credit benefits were recorded using the "flow-through" method
as a reduction of the Federal income tax provision. No new investment tax
credits were generated during 1996, 1995 or 1994.
(k) Advertising Costs
Advertising costs are expensed when incurred as other operating expense.
Advertising expense for 1996, 1995 and 1994 was $51.2 million, $66.6 million and
$63.4 million, respectively.
F-13
<PAGE>
(l) Income (Loss) Per Common Share
Primary income (loss) per common share is computed by dividing net income or
loss, after deducting all preferred stock dividend requirements, by the weighted
average number of shares of US Airways Group, Inc. Common Stock, $1 par value
("Common Stock"), outstanding, after giving effect to dilutive stock option
common stock equivalents. The Company uses the treasury stock method to compute
dilutive stock option common stock equivalents. Stock option common stock
equivalents were dilutive for 1996 and 1995, but were anti-dilutive for 1994.
Therefore, stock option common stock equivalents of approximately 898,000 shares
and 78,000 shares were added to the weighted average common shares outstanding
in the calculation of primary income (loss) per common share calculation for
1996 and 1995, respectively. None of the Company's outstanding preferred stock
issuances (see Notes 7 and 8(c)), all of which are convertible under certain
conditions into Common Stock, are considered common stock equivalents;
accordingly, they were excluded from the Company's primary income (loss) per
common share calculations.
Fully diluted income (loss) per common share reflects the maximum dilution
that would result after giving effect to dilutive stock option common stock
equivalents and to the assumed conversion of all dilutive convertible preferred
stock issuances. Stock option common stock equivalents were dilutive for the
years 1996 and 1995, but were anti-dilutive for 1994. Therefore, stock option
common stock equivalents of approximately 1,580,000 shares and 174,000 shares
were added to the weighted average common shares outstanding in the calculation
of fully diluted income (loss) per common share calculation for 1996 and 1995,
respectively. The assumed conversions of the Series B, Series F and Series T
Preferred Stock had a dilutive effect on fully diluted income (loss) per share
for 1996. The income and share effects of these assumed conversions were
approximately $48.3 million and 29,915,000 shares, respectively. The assumed
conversion of the Series A had an anti-dilutive effect on fully diluted income
(loss) per share for 1996 and was accordingly excluded from the calculation. For
1995 and 1994, the assumed conversions of all preferred stock issuances had an
anti-dilutive effect and were accordingly excluded from the fully diluted income
(loss) per share calculations. See Note 9 regarding Common Stock held in trust
for US Airways' Employee Stock Ownership Plan ("ESOP").
2. Financial Instruments
(a) Terms of Certain Financial Instruments
US Airways has entered into hedging arrangements designed to reduce its
exposure to fluctuations in the price of aviation fuel. Under these
arrangements, US Airways receives or makes payments based on the difference
between a fixed price and the market price for specified petroleum products. Net
settlements are recorded as adjustments to Aviation fuel expense. The total
notional gallons under hedging arrangements were 84 million and 38 million as of
December 31, 1996 and 1995, respectively (US Airways entered into arrangements
prior to December 31, 1996 which effectively closed certain hedging arrangements
covering approximately 22 million gallons). For hedging arrangements open as of
December 31, 1996, US Airways will pay fixed prices ranging from $0.553 to
$0.700 per notional gallon and receive a floating rate per gallon based on
current market prices. The open hedging arrangements, all of which expire during
1997, represent approximately 6% of US Airways' expected 1997 fuel consumption.
For arrangements open as of December 31, 1995, US Airways paid fixed prices
ranging from $0.499 to $0.548 per notional gallon and received a floating rate
based on market prices. Although these hedging arrangements expose the Company
to credit loss in the event of non-performance by the other parties to the
agreements, the Company does not anticipate such non-performance because of the
favorable creditworthiness of the other parties. The Company may continue to
enter into such
F-14
<PAGE>
arrangements, depending on market conditions.
An aggregate of $32 million of future principal payments of US Airways'
long-term debt due 1998 through 2000 is payable in Japanese Yen. This foreign
currency exposure has been hedged to maturity by US Airways' participation in
foreign currency contracts. Net settlements will be recorded as adjustments to
Interest expense. Although the Company is exposed to credit loss in the event of
non-performance by the counterparty to the contracts, the Company does not
anticipate such non-performance because of the favorable creditworthiness of the
other party.
(b) Fair Value of Financial Instruments
Unless a quoted market price indicates otherwise, the fair values of
short-term investments generally approximates carrying values because of the
short maturity of these instruments. The Company has estimated the fair value of
long-term debt and the long-term note receivable by discounting future cash
flows using current rates offered to the Company for debt and note receivables
of similar maturities. The estimated fair values of the Company's outstanding
redeemable preferred stock issuances (See Note 7) are obtained from an
independent external valuation source. The fair values of energy swap agreements
and foreign currency contracts are obtained from dealer quotes. These values
represent the estimated amount the Company would receive or pay to terminate
such agreements.
The estimated fair values of the Company's financial instruments, none of
which are held for trading purposes, are summarized as follows (brackets denote
a liability):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Short-term investments $ 635,839 $ 635,605 $ 19,831 $ 19,822
Restricted cash and investments (1) 87,783 87,843 98,742 98,539
Long-term note receivable (1) 40,733 30,080 45,433 33,277
Other long-term investments (1) (2) 20,606 22,126 4,607 4,008
Long-term debt (excludes
capital lease obligations) (2,650,659) (2,698,431) (2,732,310) (2,543,340)
Redeemable preferred stock (758,719) (894,400) (758,719) (604,478)
Energy swap agreements:
In a net receivable position - 3,550 - 1,845
Foreign currency contracts:
In a net receivable position - 963 - 4,050
</TABLE>
(1) Amounts included in Other Assets on the Company's Consolidated Balance
Sheets.
(2) Classified as "held-to-maturity" under SFAS 115.
(this space intentionally left blank)
F-15
<PAGE>
3. Long-Term Debt
Details of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Senior Debt:
10% Senior Notes due 2003 $ 300,000 $ 300,000
9 5/8% Senior Notes due 2001 175,000 175,000
5.7% to 12% Equipment Financing Agreements,
Installments due 1997 to 2016 2,117,834 2,226,318
8.6% Airport Facility Revenue Bond due 2022 27,620 27,620
7 1/4% Aircraft Purchase Deposit Financing due 1998* 29,155 -
Other 1,050 3,372
----------- -----------
2,650,659 2,732,310
Capital Lease Obligations 49,380 65,496
----------- -----------
Total 2,700,039 2,797,806
Less Current Maturities 84,259 80,721
----------- -----------
$ 2,615,780 $ 2,717,085
=========== ===========
</TABLE>
* See Note 4(d) for additional information with respect to aircraft US Airways
has scheduled for delivery in 1998.
Maturities of long-term debt and debt under capital leases for the next
five years:
<TABLE>
<CAPTION>
<S> <C>
(in thousands)
1997 $ 84,259
1998 184,788
1999 77,454
2000 122,681
2001 246,494
Thereafter 1,984,363
</TABLE>
Interest rates on $242 million principal amount of long-term debt as of
December 31, 1996 are subject to adjustment to reflect prime rate and other rate
changes.
Equipment financings totaling $2.2 billion were collateralized by aircraft
and engines with a net book value of approximately $2.3 billion as of December
31, 1996.
4. Commitments and Contingencies
(a) Operating Environment
The Company's improved financial results for 1996 are primarily attributable
to favorable capacity and pricing trends in markets served by the Company's
airline subsidiaries, continued stable domestic economic conditions and the
positive influence of US Airways' revenue enhancement and cost reduction
initiatives. However, the Company's financial condition, results of operations
and future prospects are more susceptible to an economic downturn and
competitive influences than most of its major competitors due to US Airways'
high cost structure amid the growing low cost, low fare environment in the
domestic airline industry.
F-16
<PAGE>
Most of the Company's airline subsidiaries operate in competitive markets,
predominantly in the Eastern U.S. In recent years, air carriers with low costs
of operations and fare structures have initiated and or expanded into markets
served by the Company's airline subsidiaries. In addition, several of the
larger, mature air carriers have developed or indicated their intention to
develop similar low cost, low fare operations. In an effort to preserve market
share, US Airways has typically responded to the entry of a low cost, low fare
competitor into its markets by matching fares and increasing the frequency of
service in related markets, generally with the result of diluting US Airways'
yield in those markets. US Airways' currently has the highest unit operating
costs among the major domestic air carriers and the growth and expansion of low
cost, low fare air carriers or operations in US Airways' markets has put
considerable pressure on US Airways to reduce operating costs in order to
maintain competitiveness.
US Airways was able to reduce certain non-labor related operating costs
during 1996 and 1995 through various organizational changes, process
reengineering and reducing or eliminating capacity in unprofitable markets;
however, US Airways has not been successful to date in achieving meaningful
reductions in its largest expense category, Personnel costs. The Company
believes that US Airways' long-term financial viability depends on its success
in further reducing its cost of operations, including its Personnel costs.
As of December 31, 1996, the Company's various subsidiaries employed
approximately 43,500 full-time equivalent employees. Approximately 28,200, or
65%, of these employees are covered by collective bargaining agreements with
various unions, or will be covered by collective bargaining agreements for which
initial negotiations are in progress. US Airways' contracts with the
International Association of Machinists and Aerospace Workers ("IAM"), which
represents US Airways' machinists group, the Air Line Pilots Association
("ALPA"), which represents US Airways' pilots, and the Association of Flight
Attendants ("AFA"), which represents US Airways' flight attendants, are open for
negotiation and collective bargaining talks are underway. US Airways has not yet
reached an initial contract with its fleet service employees, a class of
approximately 5,700 employees who are also represented by the IAM. The Company
cannot predict the ultimate outcome of its negotiations with US Airways' unions
or if the Company will be successful in achieving meaningful wage and benefit
concessions from US Airways' employees.
Although a competitive strength in some regards, the concentration of
significant operations in the Eastern U.S. results in US Airways being
susceptible to changes in certain regional conditions that may have an adverse
effect on the Company's financial condition and results of operations. For
example, geographically isolated inclement weather and the partial Federal
government shutdowns which both occurred during the first quarter of 1996,
adversely affected the Company's operating revenues and expenses to a greater
degree than some of the Company's competitors.
The operations of the Company's airline subsidiaries are dependent on the
availability of aviation fuel. The availability and price of aviation fuel is
largely determined by the actions of the nations which compose the Organization
of Petroleum Exporting Countries ("OPEC") cartel. OPEC, which currently controls
a significant amount of the world's known crude oil reserves, can affect the
availability and price of aviation fuel through its production and
price-targeting actions. In addition, aviation fuel prices are affected by
political events, seasonal factors and other factors generally outside of the
Company's control. US Airways has a diversified aviation fuel supplier network
and participates in fuel hedging transactions (see Note 2) in order to ensure
aviation fuel availability and partially protect US Airways from temporary
aviation fuel price fluctuations.
F-17
<PAGE>
(b) Leases
The Company's airline subsidiaries lease certain aircraft, engines,
computer and ground equipment, in addition to the majority of their ground
facilities. Ground facilities include executive offices, overhaul and
maintenance bases and ticket and administrative offices. Public airports are
utilized for flight operations under lease arrangements with the municipalities
or agencies owning or controlling such airports. Substantially all leases
provide that the lessee shall pay taxes, maintenance, insurance and certain
other operating expenses applicable to the leased property. Some leases also
include renewal and purchase options.
In addition, the Company subleases certain leased aircraft and ground
facilities under noncancelable operating leases expiring in various years
through 2021.
The following amounts applicable to capital leases are included in property
and equipment:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- -----
(in thousands)
<S> <C> <C>
Flight equipment $167,308 $192,775
Ground property and equipment 406 4,767
------- -------
167,714 197,542
Less accumulated amortization 125,568 140,212
------- -------
$ 42,146 $ 57,330
======= =======
</TABLE>
As of December 31, 1996, obligations under capital and noncancelable
operating leases for future minimum lease payments were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(in thousands)
<S> <C> <C>
1997 $21,304 $ 771,684
1998 10,294 732,658
1999 10,295 686,805
2000 7,193 664,614
2001 4,703 659,716
Thereafter 14,109 5,844,431
------ ---------
Total minimum lease payments 67,898 9,359,908
Less sublease rental receipts - 185,973
---------
Total minimum operating lease payments $9,173,935
=========
Less amount representing interest 18,518
------
Present value of future minimum capital lease payments 49,380
Less current obligations under capital leases 15,912
------
Long-term obligations under capital leases $33,468
======
</TABLE>
Rental expense under operating leases for 1996, 1995 and 1994 was $787
million, $773 million and $748 million, respectively. The $787 million rental
expense for 1996 excludes a credit of $22.5 million related to US Airways'
subleasing of eleven non-operating British Aerospace BAe-146-200 ("BAe-146")
aircraft. The $773 million rental expense for 1995 excludes a credit of $4.1
million related to US Airways' subleasing of three non-operating BAe-146
aircraft. The $748 million rental
F-18
<PAGE>
expense for 1994 excludes charges of $103 million related to US Airways'
grounded BAe-146 fleet and $13 million primarily related to US Airways' decision
to cease operations of its remaining Boeing 727-200 aircraft in 1995. See Note
16 for additional information related to US Airways' non-operating BAe-146
aircraft.
The Company's airline subsidiaries also lease certain owned aircraft under
noncancelable operating leases which expire in various years through the year
2000. The minimum future rentals to be received by the Company on these leases
are: $6.6 million - 1997; $2.9 million - 1998; $1.2 million - 1999; and $0.3
million - 2000.
The following amounts are applicable to aircraft leased under such
agreements as reflected in flight equipment:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Flight equipment $ 49,358 $158,688
Less accumulated amortization 24,711 64,690
-------- -------
$ 24,647 $ 93,998
======== =======
</TABLE>
(c) Legal Proceedings
US Airways is involved in legal proceedings arising out of its two aircraft
accidents that occurred in July and September 1994 near Charlotte, North
Carolina and Pittsburgh, Pennsylvania, respectively. The National Transportation
Safety Board ("NTSB") held hearings beginning in September 1994 relating to the
July accident and January and November of 1995 relating to the September
accident. In April 1995, the NTSB issued its finding of probable causes with
respect to the accident near Charlotte. It assigned as probable causes flight
crew errors and the failure of air traffic control to convey weather and
windshear hazard information. The NTSB has not yet issued its final accident
investigation report for the accident near Pittsburgh. The NTSB has indicated
that a determination of the cause of the accident is not likely until sometime
in 1997. US Airways expects that it will be at least two to three years before
the accident litigation and related settlements will be concluded. Litigation
resulting from the July 1994 accident in Charlotte was recently tried in U.S.
District Court in Columbia, South Carolina. The jury found US Airways was liable
for compensatory damages but was not liable for punitive damages. The
compensatory damages trials have not been concluded and US Airways cannot
estimate possible compensatory damages. However, US Airways believes that it is
fully insured with respect to this litigation. Therefore, the Company believes
that the litigation will not have a material adverse effect on the Company's
financial condition or results of operations.
On July 30, 1996, the Company and US Airways initiated a lawsuit in U.S.
District Court for the Southern District of New York against British Airways,
BritAir Acquisition Corp., Inc., American Airlines Inc. ("American") and
American's parent company, AMR Corp. The Company and US Airways claim that
British Airways, in pursuit of an alliance with American, is responsible for
breaches of fiduciary duty to the Company and US Airways and violated certain
provisions of the January 21, 1993 Investment Agreement between the Company and
British Airways. The lawsuit also claims that the defendants are in violation of
U.S. Antitrust laws that prohibit conduct that harms competition. Although the
defendants filed motions to dismiss the lawsuit following the filing of the
complaint, these motions became superseded on March 5, 1997 when the Company
filed an Amended Complaint with the Court based on information
F-19
<PAGE>
gathered in the pre-trial discovery process. The defendants have informed
the Company that, in response to the Amended Complaint, they intend to file new
motions to dismiss shortly. The Company is unable to predict at this time the
ultimate outcome of this lawsuit.
In December 1995, US Airways received a Civil Investigative Demand ("CID")
from the U.S. Department of Justice relating to US Airways' compliance with the
terms of a consent decree entered into in December 1992, as amended in September
1994. The consent decree was entered into to resolve litigation concerning US
Airways' methods of disseminating fare data to the Airline Tariff Publishing
Company. 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. The CID issued in December 1995 seeks information concerning US Airways'
use of travel dates in its fare filings, among other things. Although US Airways
believes there will be no further action stemming from this CID, the
investigation has not been fully closed.
In February and March 1995, 39 class action lawsuits were filed in various
federal district courts by travel agencies and a travel agency trade association
alleging that seven of the major U.S. airlines, including US Airways, violated
the antitrust laws when they individually capped travel agent base commissions
at $50 for round-trip domestic tickets with base fares above $500 and at $25 for
one-way domestic tickets with base fares above $250. The lawsuits were
consolidated in the federal district of Minnesota. The plaintiffs sought
unspecified treble damages for restraint of trade. In September of 1996 the case
against US Airways, and subsequently the cases against the other airlines, were
settled. While US Airways believes that its actions in establishing a commission
cap were in full compliance with the antitrust laws, the uncertainty and expense
of litigation prompted a settlement of the claims. US Airways paid $9.5 million,
as part of a total settlement of $85.8 million for all of the defendants. US
Airways did not admit liability or wrongdoing and the settlement allowed the
commission cap to remain in place. The settlement was approved by the court in
January of 1997.
In October 1995, US Airways terminated for cause an agreement with
In-Flight Phone Corporation ("IFPC"). IFPC was US Airways' provider of on-board
telephone and interactive data systems (the "IFPC System"). The agreement
contemplated the eventual installation of the IFPC System on substantially all
of US Airways' aircraft. The IFPC System had been installed on approximately 80
aircraft prior to the date of termination of the agreement. On December 6, 1995,
IFPC filed suit against US Airways in Illinois state court seeking equitable
relief and damages in excess of $186 million. US Airways believes that its
termination of its agreement with IFPC was appropriate and that it is owed
significant damages from IFPC. On December 7, 1995, US Airways successfully
defended IFPC's emergency motion for a temporary restraining order. On December
13, 1995, IFPC's motion for a preliminary injunction was denied and IFPC has
relinquished its right to appeal that decision. IFPC's claim for damages remains
pending. In June 1996, US Airways filed a counterclaim against IFPC seeking
compensatory damages in excess of $25 million and punitive damages in excess of
$25 million. In January 1997, IFPC filed for protection from its creditors under
Chapter 11 of the Bankruptcy Code. The parties stipulated to lift the automatic
stay provided for in the Bankruptcy Code which could allow IFPC's and US
Airways' claims to be fully litigated. The Company is unable to predict at this
time the ultimate resolution or potential financial impact on the Company's
financial condition and results of operations of these proceedings.
In May 1995, the Company, US Airways and the Retirement Income Plan for
Pilots of USAir, Inc. (the "Pilots' Pension Plan") were sued in federal district
court for the District of Columbia by 481 active and retired US Airways pilots
alleging violations of the Employee Retirement Income Security Act ("ERISA") by
erroneously calculating benefits under the Pilots' Pension Plan. The
F-20
<PAGE>
plaintiffs sought, among other things, damages in excess of $70 million. In May
1996, the court issued a decision in the lawsuit granting US Airways' Motion to
Dismiss the majority of the complaint for lack of subject matter jurisdiction,
deciding that the dispute must be resolved through the arbitration process. The
court retained jurisdiction over one count of the complaint alleging a violation
of a disclosure requirement of ERISA. There are no significant penalties or
damages which can result from this remaining claim. The plaintiffs appealed the
court's decision, however, in the opinion of US Airways' counsel, the appeal is
unlikely to be successful.
The Equal Employment Opportunity Commission and various state and local
fair employment practices agencies are investigating charges by certain job
applicants, employees and former employees of the Company's subsidiaries
involving allegations of employment discrimination in violation of Federal and
state laws. The plaintiffs in these cases generally seek declaratory and
injunctive relief and monetary damages, including back pay. In some instances
they also seek classification adjustment, compensatory damages and punitive
damages. Such proceedings are in various stages of litigation and investigation,
and the outcome of these proceedings is difficult to predict. In the Company's
opinion, however, the disposition of these matters is not likely to have a
material adverse effect on its financial condition or results of operations.
(d) Aircraft Commitments
In June 1995, US Airways entered into agreements with The Boeing Company
("Boeing") and Rolls Royce plc ("Rolls Royce") deferring the delivery of eight
757-200 aircraft from 1996 to 1998. As part of the agreements, the due dates for
progress payments associated with the 1996 deliveries were likewise rescheduled.
Accordingly, approximately $71 million of progress payments that had been paid
by US Airways were refunded to US Airways in the third quarter of 1995. The
related long-term debt which financed the deposits was dissolved.
The following schedule of US Airways' new aircraft deliveries and scheduled
payments as of December 31, 1996 (including progress payments, payments at
delivery, buyer furnished equip-ment, spares, and capitalized interest) reflects
US Airways' current agreements with Boeing and Rolls Royce as discussed above
(dollars in millions):
<TABLE>
<CAPTION>
Delivery Period - Firm Orders
-------------------------------------------------------------------------------
There-
1997 1998 1999 2000 2001 after Total
---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Boeing
757-200 - 8 - - - - 8
737-Series* - - - - - 40 40
---- --- ------ ------ ---- ----- -----
Total - 8 - - - 40 48
==== === ====== ====== ==== ===== =====
Payments $ 74 $254 $ - $ - $ 52 $1,803 $2,183
==== === ====== ====== ==== ===== =====
</TABLE>
* Purchase agreement includes a provision allowing US Airways to purchase any
other Boeing commercial aircraft type in satisfaction of its obligation to
purchase forty 737-Series aircraft. Such satisfaction would be accomplished
on an "equivalent-seat" basis.
The above aircraft commitments do not include any amounts related to a
contingent contract to acquire up to 400 aircraft from Airbus Industrie. The
contract is contingent upon US Airways achieving a competitive cost structure
and approval of definitive documentation by US Airways' board of directors.
F-21
<PAGE>
During the fourth quarter of 1996, US Airways advised Boeing and Rolls
Royce that it does not plan to accept delivery of the eight Boeing 757-200
aircraft that it presently has on firm order and suspended progress payments
related to these aircraft. As of December 31, 1996, US Airways had made $58.3
million in progress payments for these aircraft. Subsequently, Boeing alleged,
among other things, that US Airways is in default of the 757-200 purchase
agreement and that US Airways has also repudiated the purchase agreement related
to the 737-Series aircraft scheduled for delivery commencing in 2003. Boeing has
purported to terminate both such 757-200 and 737-Series purchase agreements, an
action which US Airways believes is not supported by law or the facts, and has
claimed almost $450 million as damages for US Airways' alleged breach of such
agreements. US Airways subsequently advised Boeing, among other things, that US
Airways rejects Boeing's asserted legal basis for termination of such
agreements. In addition, US Airways stated that it would hold Boeing responsible
for any damages incurred as a result of Boeing's unlawful termination and
demanded immediate return of all payments made by US Airways in furtherance of
the 737-Series purchase agreement, together with interest from the date of
payment. US Airways also expressed its belief that Boeing is legally committed
to pursue contract resolutions in good faith. Notwithstanding the formal legal
positions of the parties, both sides have expressed a desire to resolve this
dispute on a mutually satisfactory basis. US Airways cannot predict whether
Boeing will seek to exercise remedies against US Airways and if so, whether the
effect on US Airways' financial condition or results of operations would be
material.
US Airways has a commitment to purchase hush kits for certain of its
Douglas DC-9-30 and Boeing 737-200 aircraft. The installation of these hush kits
will bring the aircraft into compliance with Federal Aviation Administration
Stage 3 noise level requirements. The projected payments associated with the
purchase of the hush kits are $19.7 million during 1997 and $32.1 million during
1998 and 1999.
(e) Concentration of Credit Risk
The Company invests available cash in money market securities of various
banks, commercial paper of financial institutions and other companies with high
credit ratings and securities backed by the United States government.
As of December 31, 1996, most of the Company's receivables related to
tickets sold to individual passengers through the use of major credit cards
(43%) or to tickets sold by other airlines (17%) and used by passengers on US
Airways or the Company's regional airline subsidiaries. These receivables are
short-term, generally being settled within 14 days after sale. Bad debt losses,
which have been minimal in the past, have been considered in establishing
allowances for doubtful accounts. The Company does not believe it is subject to
any significant concentration of credit risk.
(f) Guarantees
US Airways guarantees the payment of principal and interest on special
facility revenue bonds issued by certain municipalities to build or improve
airport and maintenance facilities. Under related lease arrangements, US Airways
is required to make rental payments sufficient to pay maturing principal and
interest payments on the bonds. As of December 31, 1996 the principal amount of
these bonds outstanding was $77.5 million.
F-22
<PAGE>
5. Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 required a change from the deferred method under Accounting Principles Board
Opinion No. 11 to the asset and liability method of accounting for income taxes.
The Company files a consolidated Federal income tax return with its
wholly-owned subsidiaries.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current provision:
Federal $ 6,423 $ 6,081 $ -
State 3,000 831 -
----- ---- --
Total current provision 9,423 6,912 0
------ ------ --
Deferred provision:
Federal - - -
State 2,686 2,073 -
------ ------ --
Total deferred provision 2,686 2,073 0
------ ------ --
Provision for income taxes $12,109 $ 8,985 $ 0
====== ====== ==
</TABLE>
In 1996, the Company was not subject to regular Federal income tax as a
result of using $418 million in Federal net operating loss carryforwards.
However, the Company was subject to Federal alternative minimum tax ("AMT").
Approximately $409 million in AMT net operating loss carry-forwards and
approximately $151 million in state net operating loss carryforwards were
utilized to reduce the Federal and state liabilities.
The significant components of deferred income tax expense (benefit) for the
years ended December 31, 1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Deferred tax expense (benefit) (exclusive
of the other components listed below) $ 114,906 $ 51,511 $(240,336)
Increase (decrease) for the year in the
valuation allowance for deferred tax
assets (112,220) (49,438) 240,336
-------- -------- --------
Total $ 2,686 $ 2,073 $ 0
======== ======== =========
</TABLE>
(this space intentionally left blank)
F-23
<PAGE>
A reconciliation of taxes computed at the statutory Federal tax rate on
earnings before income taxes to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Tax provision (credit) computed at Federal
statutory rate $ 96,419 $ 44,895 $(239,723)
Book expenses not deductible for tax purposes 17,628 16,064 17,257
Limitation in recognizing unused net operating
loss/credits - - 222,466
Utilization of Federal net operating loss which
reduced valuation allowance (146,472) (38,177) -
State income tax provision, net of Federal
tax benefit 4,636 1,888 -
Current year temporary differences which
increased (reduced) valuation allowance 33,475 (22,492) -
Alternative minimum tax which increased
valuation allowance 9,097 3,794 -
Other (2,674) 3,013 -
------- ------ --------
Provision for income taxes $ 12,109 $ 8,985 $ 0
======= ====== ========
Effective tax rate 4% 7% 0%
======= ====== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1996,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Deferred tax assets:
Leasing transactions $ 154,732 $ 169,840 $ 167,772
Tax benefits purchased/sold 43,441 55,284 63,557
Gain on sale and leaseback transactions 135,308 147,930 156,127
Employee benefits 608,948 512,568 501,599
Net operating loss carryforwards 540,495 685,597 723,275
Alternative minimum tax credit carryforwards 33,459 24,940 21,146
Investment tax credit carryforwards 49,802 49,802 49,802
Other deferred tax assets 82,744 61,591 67,718
--------- --------- ---------
Total gross deferred tax assets 1,648,929 1,707,552 1,750,996
Less valuation allowance (643,546) (755,766) (805,204)
--------- ---------- ---------
Net deferred tax assets 1,005,383 951,786 945,792
Deferred tax liabilities:
Equipment depreciation and amortization 966,874 908,917 909,353
Other deferred tax liabilities 45,415 44,942 36,439
--------- --------- ---------
Total deferred tax liabilities 1,012,289 953,859 945,792
--------- --------- ---------
Net deferred tax liabilities $ 6,906 $ 2,073 $ 0
========= ========= =========
</TABLE>
The valuation allowance for deferred tax assets decreased approximately $112
million in 1996, decreased approximately $49 million in 1995, and increased
approximately $240 million in 1994.
As of December 31, 1996, the Company had unused net operating losses of
$1.5 billion for Federal tax purposes, which expire in the years 2006 to 2009.
The Company also has available, to
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reduce future taxes payable, $375 million alternative minimum tax net operating
losses expiring in the years 2008 to 2009, $50 million of investment tax credits
expiring in 2002 to 2003, and $33 million of alternative minimum tax credits
which do not expire. The Federal income tax returns of the Company through 1986
have been examined and settled with the Internal Revenue Service.
6. British Airways Plc Investment
On January 21, 1993, US Airways Group and British Airways entered into an
investment agreement (the "Investment Agreement") under which a wholly-owned
subsidiary of British Airways purchased certain series of redeemable convertible
preferred stock during 1993 and British Airways entered into code sharing and
wet lease arrangements with US Airways.
As of December 31, 1996, the preferred stock held by British Airways
constituted approximately 23% of the total voting interest in the Company. These
holdings included the Company's Series F Cumulative Convertible Senior Preferred
Stock, without par value ("Series F Preferred Stock"), the Series T-1 Cumulative
Convertible Exchangeable Senior Preferred Stock, without par value ("Series T-1
Preferred Stock"), and the Series T-2 Cumulative Convertible Exchangeable Senior
Preferred Stock, without par value ("Series T-2 Preferred Stock"). The Series
T-1 Preferred Stock and the Series T-2 Preferred Stock are collectively referred
to herein as the "Series T Preferred Stock," and, together with the Series F
Preferred Stock, the "BA Preferred Stock." See Notes 7(b) and 7(c) for
additional information related to the preferred stock issuances held by British
Airways and Note 7(d) for information related to the Company's deferral of
dividends on its outstanding preferred stock issuances. To the extent permitted
by foreign ownership restrictions which are applicable by statute regulations or
interpretation by regulatory authorities, including the United States Department
of Transportation ("DOT") ("Foreign Ownership Restrictions"), the preferred
stock owned by British Airways votes on all matters presented to the Company's
stockholders for a vote and has voting power equal to the underlying shares of
Common Stock. Pursuant to the Investment Agreement, on January 21, 1993, British
Airways designated three of its officers to serve on the Company's and US
Airways' boards of directors.
On March 15, 1993, the DOT issued an order ("DOT Order") stating, among
other things, that British Airways' initial investment of $300 million does not
impair the Company's citizenship under current Foreign Ownership Restrictions.
However, the DOT instituted a proceeding to consider whether the Company would
remain a U.S. citizen if the transactions and acts contemplated by the
Investment Agreement, including the possible sale of Series C Cumulative
Convertible Senior Preferred Stock, without par value ("Series C Preferred
Stock"), and Series E Cumulative Convertible Exchangeable Preferred Stock,
without par value ("Series E Preferred Stock") to British Airways, are
consummated. The DOT has indefinitely suspended the period for comments from
interested parties pending its resolution of requests by other airlines for
production of additional documents from US Airways Group. The DOT Order states
that the DOT expects and advises the Company and British Airways not to proceed
with the closing of the purchase of the Series C Preferred Stock or the Series E
Preferred Stock until the DOT has completed its review of the Company's
citizenship.
On March 7, 1994, British Airways announced it would not make any
additional investments in the Company until the outcome of measures by the
Company to reduce costs and improve financial results was known. Under the terms
of the Investment Agreement, assuming the Series F Preferred Stock or any shares
issued upon conversion thereof were outstanding and British Airways had not sold
any shares of the BA Preferred Stock or any common stock or other securities
received upon conversion or exchange of the BA Preferred Stock. British Airways
was entitled at its option to elect to purchase, on or prior to January 21,
1996, 50,000 shares of Series C Preferred Stock at a
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purchase price of $10,000 per share, to be paid by British Airways' surrender of
the Series F Preferred Stock and payment of $200 million. The Investment
Agreement also provides that, on or prior to January 21, 1998, assuming that
British Airways had purchased (or was purchasing simultaneously in accordance
with the terms of the Investment Agreement) Series C Preferred Stock, British
Airways would have the option to purchase 25,000 shares of Series E Preferred
Stock, at a purchase price of $10,000 per share. Because British Airways did not
elect to purchase the Series C Preferred Stock on or prior to January 21, 1996,
British Airways cannot purchase the Series E Preferred Stock, except that if the
DOT approves all the transactions and acts contemplated by the Investment
Agreement on or prior to January 21, 1998, British Airways' purchase of the
Series C Preferred Stock and Series E Preferred Stock must be consummated under
certain circumstances at the election of either British Airways (provided that
British Airways had not sold any of the BA Preferred Stock) or the Company
(provided that the Company had not repurchased or redeemed any of the BA
Preferred Stock). In addition, because British Airways did not elect to purchase
the Series C Preferred Stock on or prior to January 21, 1996, the Company has
the right to redeem, in whole or in part, Series F Preferred Stock and a like
percentage of Series T Preferred Stock at the higher of market value or the
price of $10,000 per share, plus accrued dividends. Under Delaware law, the
Company may be subject to certain legal restrictions on its ability to
repurchase or redeem its own shares of capital stock. Based on British Airways'
actions described below, the Company does not expect that the Second Purchase
and Final Purchase will be consummated. In addition, assuming British Airways
sells the BA Preferred Stock in accordance with the procedures described below,
the Company does not expect that it will repurchase or redeem the BA Preferred
Stock.
On July 30, 1996, the Company and US Airways initiated a lawsuit in the
U.S. District Court for the Southern District of New York against British
Airways, BritAir Acquisition Corp., Inc., American Airlines, Inc. ("American")
and American's parent company, AMR Corp. The Company and US Airways claim that
British Airways, in pursuit of an alliance with American, is responsible for
breaches of fiduciary duty to the Company and US Airways and violated certain
provisions of the Investment Agreement. The lawsuit also claims that the
defendants are in violation of U.S. antitrust laws that prohibit conduct that
harms competition. Although the defendants filed motions to dismiss the lawsuit
following the filing of the complaint, these motions became superseded on March
5, 1997 when the Company filed an Amended Complaint with the Court based on
information gathered in the pre-trial discovery process. The defendants have
informed the Company that, in response to the Amended Complaint, they intend to
file new motions to dismiss shortly. See Note 4(c) for additional information
related to this lawsuit.
On October 24, 1996, US Airways notified British Airways that it is
terminating the code sharing and frequent traveler agreements between the two
companies effective March 29, 1997 following British Airways' decision to enter
into an alliance with American. Under the wet lease arrangements, US Airways
leased three 767-200ER aircraft, along with cockpit and cabin crews, to British
Airways for three routes between the U.S. and London. US Airways terminated the
wet lease arrangements with British Airways in a phased approach with one of the
three aircraft returned to US Airways in December 1995, a second in February
1996 and the third in May 1996.
On December 17, 1996, British Airways delivered a notice (the "Sale
Notice") to the Company of its intent to sell in one or more underwritten public
offerings or privately negotiated transactions, all of the shares of the BA
Preferred Stock. Under the Investment Agreement, the Sale Notice triggered (i) a
right of first offer of the Company to purchase all (or in certain
circumstances, any portion) of such shares at prices set forth in the Sale
Notice (the "Right of First Offer") and (ii) a public offering registration
procedure (the "Public Offering Registration Procedure"). The Company did not
exercise its right to purchase the BA Preferred Stock prior to the expiration of
the
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Right of First Offer on February 15, 1997.
Because the Company elected not to exercise the Right of First Offer with
respect to the BA Preferred Stock, subject to certain limitations, British
Airways is free to complete a sale on terms no less favorable to British Airways
than those set forth in the Sale Notice, provided that (i) such sale is closed
by August 14, 1997 (or 180 days following the initial filing of the Company's
registration statement in conjunction with the Public Offering Registration
Procedure), (ii) in the case of a public offering, the sale price may be higher
or lower than the price offered in the Sale Notice and (iii) in the case of a
privately negotiated transaction, the price must be equal to or higher than the
price offered in the Sale Notice.
In the Sale Notice, British Airways also exercised the Public Offering
Registration Procedure under the Investment Agreement to cause the Company to
use its "reasonable efforts" to register the BA Preferred Stock for sale in an
underwritten public offering at British Airways' request on up to three
occasions. The registration procedures provide that the Company shall prepare
and file with the U.S. Securities and Exchange Commission and use its reasonable
efforts to cause to become effective a registration statement under the
Securities Act by April 16, 1997, provided, however, that the Company's
obligation may be deferred in certain circumstances for up to 180 days.
Under the terms of the Investment Agreement, British Airways has a right to
maintain its proportionate representation on the Company's board of directors.
As of the date of this report, the holders of Series A Preferred Stock and the
holders of the Series B Preferred Stock each have the right to elect two
additional directors to the Company's board of directors. If the holders of the
Series A and Series B Preferred Stock were to exercise their right to elect
additional directors, British Airways would have the right to elect an
additional director to the Company's board of directors. On January 28, 1997,
the Company received notice that British Airways' representatives, Messrs.
Ayling, Stevens and Maynard, resigned as directors of US Airways Group and on
February 12, 1997, the Company received notice that such individuals resigned as
directors of US Airways. In the letter of resignation, British Airways waived
its current and future rights under the Investment Agreement to US Airways Group
board representation.
Based on such resignations, British Airways may take the position that
British Airways is no longer an affiliate of US Airways Group and, therefore,
upon the expiration of the third month following such change in status, is able
to sell the BA Preferred Stock without registration under the Securities Act of
1933 in compliance with an exemption thereunder.
See Note 7(a) and 8(c) for additional information related to the Series A
and Series B Preferred Stock, respectively, and Note 7(d) related to the
Company's deferral of dividends on its outstanding preferred stock issuances.
Based on British Airways' announcement that it does not intend to complete
the purchase of the Series C Preferred Stock and its actions in connection with
its proposed sale of the BA Preferred Stock, the Company does not expect that
the sale of Series C and Series E Preferred Stock to British Airways will be
consummated. In addition, assuming British Airways continues to pursue the sale
of the BA Preferred Stock in accordance with the procedures described above, the
Company does not expect that it will address the issue of repurchasing or
redeeming the BA Preferred Stock. The Company cannot predict the outcome of its
lawsuit against British Airways. As discussed under Note 7(d), the Company may
be subject to certain legal restrictions on its ability to repurchase or redeem
its own shares of capital stock.
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7. Redeemable Preferred Stock and Deferral of Dividends
(a) Series A Preferred Stock
As of December 31, 1996, the Company had 358,000 shares of its 9 1/4%
Series A Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred
Stock"), without par value, out-standing which were convertible into 9,239,944
shares of Common Stock at a conversion price of approximately $38.74 per share.
The Series A Preferred Stock ranks pari passu with the Series F and Series T
Preferred Stock and is senior to the Series B Cumulative Convertible Preferred
Stock ("Series B Preferred Stock"), without par value, and the Common Stock,
with respect to dividend payments and the distribution of assets. As of December
31, 1996, each share of Series A Preferred Stock was entitled to approximately
25.8099 votes per share (a total of 9,239,944 votes) and votes together with the
Series F Preferred Stock, Series T Preferred Stock and the Common Stock, on all
matters submitted to a vote of stockholders of the Company.
The Series A Preferred Stock is mandatorily redeemable on August 7, 1999 at
$1,000 per share, plus accrued dividends. The Company has the right to redeem
the stock at a 10% premium plus accrued dividends until that time. The agreement
relating to the sale of the Series A Preferred Stock imposes certain
restrictions on the purchaser's ability to increase its ownership of, and to
transfer, its stock in US Airways Group. In addition, the holders of the Series
A Preferred Stock, affiliates of Berkshire Hathaway Inc. ("Berkshire"), can
require the Company to redeem the stock if, under certain conditions, a
non-affiliated entity purchases fifty percent or more of the combined voting
power of the Company's then outstanding voting stock. There have been no changes
in the balance sheet value of the Series A Preferred Stock since its issuance in
1989.
The Company paid dividends of $25.7 million and $22.2 million to the
holders of the Series A Preferred Stock during August 1996 and October 1996,
respectively. The Company had previously deferred dividend payments on all its
outstanding series of preferred stock beginning with payments due September 30,
1994. As of December 31, 1996, deferred dividends and additional dividends
(interest) thereon of $46.7 million remained in arrears on the Series A
Preferred Stock. On January 31, 1997, the Company paid dividends of $30.4
million to the holders of its Series A Preferred Stock. After this payment,
deferred dividends and additional dividends (interest) thereon of $16.8 million
remained in arrears on the Series A Preferred Stock and its redemption value was
$374.8 million. As long as its dividends are deferred, the Series A Preferred
Stock will continue to accumulate dividends at its stated dividend rate of 9.25%
plus additional dividends (interest) on the balance of the deferred dividends at
the higher of the stated dividend rate or the prime rate plus five percentage
points. As of December 31, 1996, the redemption value of the Series A Preferred
Stock was $404.7 million (the face amount of the issuance of $358.0 million plus
unpaid dividends and additional dividends (interest) thereon of $46.7 million).
The annual dividends on the Series A Preferred Stock amount to approximately
$33.1 million (exclusive of additional dividends (interest) on deferred
dividends).
Under the terms of the Series A Preferred Stock, Berkshire has the
exclusive right to elect two directors to the Company's board of directors after
a scheduled dividend payment has not been paid for thirty days. Berkshire has
informed the Company that it does not intend to exercise this right at this
time.
See Note 7(d) for additional information with respect to deferred dividends
and potential restrictions on the Company's ability to pay dividends on or
repurchase or redeem its own shares of capital stock.
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(b) Series F Preferred Stock
As of December 31, 1996, the Company had 30,000 shares of its 7% Series F
Preferred Stock outstanding which were convertible into 15,458,851 shares of
Common Stock at a conversion price of approximately $19.41 per share. The Series
F Preferred Stock, owned by an affiliate of British Airways, ranks pari passu
----------
with the Series A and Series T Preferred Stock and is senior to the Series B
Preferred Stock and the Common Stock, with respect to dividend payments and the
distribution of assets. As of December 31, 1996, each share of Series F
Preferred Stock was entitled to 515.295 votes per share (a total of 15,458,851
votes) to the extent permitted by the existing Foreign Ownership Restrictions
and votes together with the Series A Preferred Stock, Series T Preferred Stock
and Common Stock, on all matters submitted to a vote of stockholders of the
Company. Under Foreign Ownership Restrictions, no more than 25% of the Company's
voting interest may be held by persons other than U.S. citizens. In accordance
with the terms of any BA Preferred Stock, conversion rights and voting rights
may not be exercised to the extent that doing so would result in a loss of the
Company's or any of its airline subsidiaries' operating certificates or
authorities under Foreign Ownership Restrictions, and it is assumed for this
purpose that Series F Preferred Stock will be fully converted before any other
BA Preferred Stock.
The Series F Preferred Stock is convertible at the option of the holder at
any time on or after January 21, 1997 to the extent that such conversion would
not violate Foreign Ownership Restrictions. The Series F Preferred Stock may be
converted at the option of the Company 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 is mandatorily redeemable on January 21, 2008 at $10,000 per share, plus
accrued dividends. The deadline for British Airways' election to purchase the
Series C Preferred Stock and therefore, to elect to make any further investment
in the Company pursuant to the Investment Agreement, was January 21, 1996.
Because British Airways declined to exercise its right to purchase the Series C
Preferred Stock on or before this date, the Company may at its option redeem, in
whole or in part, the Series F Preferred Stock and a like percentage of Series T
Preferred Stock at the higher of market value or the price of $10,000 per share,
plus accrued dividends. There have been no changes in the balance sheet value of
the Series F Preferred Stock since its issuance in 1993.
The Company paid dividends of $13.3 million and $13.7 million on the Series
F Preferred Stock during August 1996 and October 1996, respectively. The Company
had previously deferred dividend payments on all its outstanding series of
preferred stock beginning with payments due September 30, 1994. As of December
31, 1996, deferred dividends and additional dividends (interest) thereon of
$23.4 million remained in arrears on the Series F Preferred Stock. As of
December 31, 1996, the redemption value of the Series F Preferred Stock was
$323.4 million (the face amount of the issuance of $300.0 million plus unpaid
dividends and additional dividends (interest) thereon of $23.4 million).
On January 31, 1997, the Company paid dividends of $15.2 million to the
holder of its Series F Preferred Stock. After this payment, deferred dividends
and additional dividends (interest) thereon of $8.3 million remained in arrears
on the Series F Preferred Stock and its redemption value was $308.3 million. The
annual dividends on the Series F Preferred Stock amount to approximately $21.0
million (exclusive of additional dividends (interest) on deferred dividends). As
long as its dividends are deferred, the Series F Preferred Stock will continue
to accumulate dividends at its stated dividend rate of 7.0% plus additional
dividends (interest) on the balance of the deferred dividends at the stated
dividend rate.
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See Note 6 for additional information related to British Airways'
investment in US Airways Group and Note 7(d) for additional information with
respect to deferred dividends and potential restrictions on the Company's
ability to pay dividends on or repurchase or redeem its own shares of capital
stock.
(c) Series T Preferred Stock
Under the Investment Agreement, British Airways has preemptive and optional
purchase rights to maintain its proportionate ownership of the Company's Common
Stock and convertible securities, measured in terms of the British Airways
percentage ("BA Percentage"), which approximates British Airways' fully-diluted
ownership percentage based on British Airways' current and potential holdings in
the Company. The BA Percentage is calculated without regard to Foreign Ownership
Restrictions at the time of the calculation. British Airways may exercise such
preemptive or optional purchase rights by purchasing, from time to time, a
series of Series T Preferred Stock.
As of December 31, 1996, the Company had two series of the Series T
Preferred Stock outstanding. On June 10, 1993, British Airways exercised its
preemptive purchase right by purchasing 9,919.8 shares of Series T-2 Preferred
Stock for approximately $99.2 million and exercised its optional purchase right
by purchasing 152.1 shares of a series of Series T-1 Preferred Stock for
approximately $1.5 million. British Airways' preemptive right was triggered by
the issuance of Common Stock and British Airways' optional purchase rights were
triggered by the Company's issuance of additional shares of Common Stock as a
result of option exercises under various employee stock option plans and through
the sale of Common Stock to certain defined contribution plans during the period
January 21, 1993 to March 31, 1993. British Airways has advised the Company that
it will not exercise its optional purchase rights to buy additional series of
Series T Preferred Stock triggered by the Company's issuance of Common Stock
pursuant to certain employee benefit plans and the exercise of options and grant
of restricted Common Stock under various employee stock option and incentive
plans that have occurred between March 31, 1993 and March 31, 1996.
The terms of both outstanding series of Series T Preferred Stock are
substantially similar to those of the Series F Preferred Stock, except as noted.
Each share of Series T-2 Preferred Stock carries a conversion price of $26.40
and is convertible into approximately 378.7879 shares of Common Stock or
Non-Voting Class ET stock. Each share of Series T-1 Preferred Stock has a
conversion price of $20.50 and is convertible into approximately 487.8049 shares
of Common Stock or Non-Voting Class ET stock. As of December 31, 1996, each
share of Series T-2 Preferred Stock was entitled to approximately 378.7879 votes
(a total of 3,757,500 votes) and each share of Series T-1 Preferred Stock was
entitled to approximately 487.8049 votes (a total of 74,195 votes). Dividends
are payable quarterly in arrears, at 50 basis points over the three month LIBOR
rate. The Series T Preferred Stock is mandatorily redeemable on June 10, 2008 at
$10,000 per share, plus accrued dividends. Any shares of Series T Preferred
Stock held by any person other than British Airways or its subsidiaries may be
redeemed for cash at any time at the option of the Company at $10,000, plus
accrued dividends, plus a redemption premium equal to $700 from the date of
issue until the first anniversary thereof and reduced by $46.67 on each
anniversary thereafter. There has been no change in the balance sheet value of
the Series T Preferred Stock since 1993.
The Series T Preferred Stock is exchangeable, at the option of the Company,
for that principal amount of floating rate convertible subordinated notes of the
Company ("T Notes") equal to the redemption value of the shares to be exchanged
and bearing interest at the dividend rate. Any accrued dividends on the Series T
Preferred Stock to be exchanged will be treated as accrued
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interest on the T Notes. Each $10,000 aggregate principal amount of such T Notes
will be entitled to a number of votes equal to the number of votes to which each
share of Series T Preferred Stock was entitled at the time of its exchange for
T Notes, subject to adjustment. If issued, T Notes will have terms otherwise
consistent with the terms of the Series T Preferred Stock.
The Company paid dividends of $4.0 million and $4.1 million to the holder
of the Series T Preferred Stock during August 1996 and October 1996,
respectively. The Company had previously deferred dividend payments on all its
outstanding series of preferred stock beginning with payments due September 30,
1994. As of December 31, 1996, deferred dividends and additional dividends
(interest) thereon of $6.9 million remained in arrears on the Series T Preferred
Stock. As of December 31, 1996, the redemption value of the Series T Preferred
Stock was $107.6 million (the face amount of the issuance of $100.7 million plus
unpaid dividends and additional dividends (interest) thereon of $6.9 million).
On January 31, 1997, the Company paid dividends of $4.5 million to the
holder of the Series T Preferred Stock. After this payment, deferred dividends
and additional dividends (interest) thereon of $2.5 million remained in arrears
on the Series T Preferred Stock and its redemption value was $103.2 million. The
annual dividends on the Series T Preferred Stock currently amount to
approximately $6.0 million. As long as preferred dividends are deferred, the
Series T Preferred Stock will continue to accumulate dividends at its dividend
rate of the three-month LIBOR rate plus one-half of a percentage point plus
additional dividends (interest) on the balance of the deferred dividends at the
dividend rate.
See Notes 6 and 7(b) for additional information related to British Airways'
investment in US Airways Group and Note 7(d) for additional information related
to deferred dividends and potential restrictions on the Company's ability to pay
dividends on or repurchase or redeem its own shares of capital stock.
(d) Deferral of Dividends on Preferred Stock
On September 29, 1994, the Company announced that it was deferring the
quarterly dividend payment due September 30, 1994 to holders of its Series A
Preferred Stock. At that time, the Company, organized under the laws of the
State of Delaware, believed that it was legally prohibited from paying dividends
on or repurchasing or redeeming its capital stock due to the provisions of
Sections 160 and 170 of the Delaware General Corporation Law ("Delaware Law").
Delaware Law requires a company to maintain a capital surplus in order to pay
dividends on or repurchase or redeem its capital stock. The Company also
deferred quarterly dividend payments to holders of all its other outstanding
series of preferred stock, including the Series F and Series T Preferred Stock
and the publicly-held Series B Preferred Stock.
During 1996, the Company's capital surplus position, as calculated under
Delaware Law and based on the Company's Consolidated Balance Sheets, improved
(became positive) and the Company made two dividend payments totaling $83.0
million to holders of its Senior Preferred Stock. On January 31, 1997, the
Company made an additional dividend payment of $50.0 million to holders of its
Senior Preferred Stock.
After the January 31, 1997 dividend payment, deferred dividends remained
outstanding on all of the Company's outstanding preferred stock issuances, each
of which has a cumulative dividend feature. So long as dividends are deferred,
the Series A, Series F, Series T and Series B Preferred Stock will each
accumulate dividends at their stated rate. In addition, the Series A, Series F
and Series T Preferred Stock accumulate additional dividends (interest) on the
balance of any deferred
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dividends.
There can be no assurance that the Company will be able to maintain or
further increase its capital surplus or when or if the Company will make
additional dividend payments on its preferred stock.
See also Notes 7(a), 7(b), 7(c) and 8(c) for information regarding each of
the Company's outstanding preferred stock issuances.
8. Stockholders' Equity
(a) Common Stock
As of December 31, 1996 and 1995, the Company had 150,000,000 authorized
shares of Common Stock, par value $1. If British Airways purchases the Series C
Preferred Stock the number of authorized shares of various classes of Common
Stock will increase to 300,000,000. As discussed in Note 6, British Airways has
indicated, however, that it will not make any additional investments in the
Company. As of December 31, 1996, approximately 51,073,000 Common Stock shares
were reserved for issuance upon the conversion of preferred stock and for
offerings under employee stock purchase, stock option, stock incentive and
retirement plans.
The Company has not paid dividends on its Common Stock since the second
quarter of 1990. There can be no assurance when or if dividend payments will
resume. See discussion of deferred dividends above in Note 7(d).
(b) Preferred Stock and Senior Preferred Stock
As of December 31, 1996, the Company had 5,000,000 authorized shares of
preferred stock, without nominal or par value, of which 358,000 shares were
issued as Series A Preferred Stock, and approximately 43,000 shares were issued
as Series B Preferred Stock. Also, as of December 31, 1996, the Company had
3,000,000 authorized shares of Senior Preferred Stock, without nominal or par
value, of which 30,000 shares were issued as Series F Preferred Stock and
approximately 10,000 shares were issued as Series T Preferred Stock. The terms
of the Series F Preferred Stock and the Series T Preferred Stock provide that
they rank, with respect to dividends and upon distribution of assets in
liquidation, dissolutions or winding-up, pari passu with the Series A Preferred
----------
Stock.
The terms of the Series A, Series F, Series T, and Series B Preferred Stock
are discussed in Note 7(a), 7(b), 7(c) and 8(c), respectively.
As of December 31, 1996, dividends remained in arrears on each of the
Company's out-standing preferred stock issuances. See Note 7(d).
(c) Series B Preferred Stock
As of December 31, 1996, the Company had 4,262,550 Depositary Shares,
representing 42,625.5 shares of its $437.50 Series B Preferred Stock
outstanding. Each Depositary Share represents 1/100 of a share of the Series B
Preferred Stock. The Series B Preferred Stock is convertible at any time, at the
option of the holder, at the rate of 249.25 shares of Common Stock of the
Company per preferred share, or 2.4925 shares of Common Stock per Depositary
Share. The Series B Preferred Stock ranks junior to the Company's Series A,
Series F and Series T Preferred
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Stock and senior to the Common Stock with respect to dividend payments and the
distribution of assets, whether upon liquidation or otherwise. Except under
certain circumstances, the holders of Series B Preferred Stock have no voting
rights.
The Series B Preferred Stock is redeemable, at the option of the Company
and with consent of the holders of Series F Preferred Stock, (i) in whole but
not in part, only in certain circumstances, for so long as any shares of Series
A Preferred Stock are outstanding; and (ii) in whole or in part if no shares of
Series A Preferred Stock are outstanding, in each case at a redemption price
currently equal to approximately $52.19 per Depositary Share and thereafter at
prices declining to $50.00 per Depositary Share (equivalent to $5,000 per share
of Series B Preferred Stock) on or after May 15, 2001, plus accrued dividends.
The Company paid dividends totaling $83.0 million to holders of the
Company's Senior Preferred Stock during 1996. The Company had previously
deferred dividend payments on all outstanding series of preferred stock
beginning with payments due September 30, 1994. Because the Series B Preferred
Stock is junior to the Company's Senior Preferred Stock, the Company cannot pay
dividends on the Series B Preferred Stock until the dividends in arrears on the
Senior Preferred Stock are paid in full. As of December 31, 1996, deferred
dividends of $77.0 million and $42.0 million remained in arrears on the
Company's Senior Preferred Stock and the Series B Preferred Stock, respectively.
As long as preferred dividends are deferred, the Series B Preferred Stock will
continue to accumulate dividends at its stated dividend rate of 8.75% but is not
subject to additional dividends (interest) on the balance of the deferred
dividends. As of December 31, 1996, the liquidation preference of the Series B
Preferred Stock was $255.1 million (the face amount of the issuance of $213.1
million plus unpaid dividends of $42.0 million). The annual dividends on the
Series B Preferred Stock amount to approximately $18.6 million.
Under the terms of the Series B Preferred Stock, the holders have the right
to elect two additional directors to the Company's board of directors if six
quarterly dividend payments are not paid. That right became effective on
February 15, 1996. The right must be exercised by notice of the holders of
record of 20% or more of the Series B Preferred Stock. In April and October
1996, two different groups of shareholders representing more than the 20% of the
Series B Preferred Stock shares outstanding notified the Company that they
wished to exercise their right to elect additional directors. However, the
shareholders in each of these groups subsequently sold their shares prior to
fully exercising their rights. There is currently no ongoing effort to elect
directors under the terms of the Series B Preferred Stock.
See Note 7(d) for additional information with respect to deferred dividends
and potential restrictions of the Company's ability to pay dividends on or
repurchase or redeem its own shares of capital stock.
(d) Treasury Stock
In 1989, the Company's board of directors authorized the repurchase from
time to time of up to 9.4 million shares of Common Stock in open market
transactions. As of December 31, 1996, the Company had repurchased 2.1 million
shares since the inception of the program (all the purchases occurred during
1989). The Company held 0.6 million Common Stock shares in treasury as of
December 31, 1988.
The Company sold approximately 1.9 million and 0.5 million treasury stock
shares during 1994 and 1993, respectively, and had expended its treasury stock
balance prior to December 31, 1994.
F-33
<PAGE>
During 1996, certain employees, upon fulfilling the vesting requirements of
Common Stock grants, surrendered approximately 0.1 million shares of Common
Stock to the Company in lieu of cash payments to satisfy tax withholding
requirements. The Company reissued these shares prior to December 31, 1996 upon
the exercise of stock options.
The Company has not repurchased shares of its Common Stock since 1989 and
may be subject to certain legal restrictions on its ability to repurchase its
Common Stock under Delaware law.
(e) Stock-Based Compensation
As of December 31, 1996, approximately 11.0 million shares of Common Stock
were reserved for future grants of Common Stock or the possible exercise of
stock options and stock appreciation rights ("SARs") issued under the Company's
four stock option and incentive plans. The Company accounts for stock-based
compensation using the intrinsic value method prescribed under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). In accordance with APB 25, the Company recognized compensation
expense (an element of Personnel costs) related to Common Stock grants of $11.9
million, $0.3 million and $0.2 million in 1996, 1995 and 1994, respectively, and
compensation expense related to stock option grants of $7.9 million in 1996
(none for 1995 or 1994). In addition, the Company recognized compensation
expenses related to SARs, the Company's only variable stock-based compensation
instrument, of $41.6 million in 1996 (none for 1995 or 1994). Deferred
compensation related to Common Stock grants was $9.4 million and $11.6 million
as of December 31, 1996 and 1995, respectively, and deferred compensation
related to stock option grants was $2.4 million as of December 31, 1996 (none as
of December 31, 1995).
The 1996 Stock Incentive Plan ("1996 Plan"), which became effective during
May 1996 and encompasses the Company's former 1988 Stock Incentive Plan,
provides for the grant of up to 8.4 million shares of Common Stock and stock
options to key employees. The 1984 Stock Option and Stock Appreciation Rights
Plan ("1984 Plan") originally provided for the grant of up to 0.6 million stock
options and SARs to key employees. Common Stock grants, available under the 1996
Plan, are subject to a vesting period of up to four years. The Company granted
0.6 million and 0.9 million shares of Common Stock during 1996 and 1995,
respectively (none during 1994). The weighted average fair value per share of
Common Stock granted in 1996 and 1995 was $17 and $13, respectively. Both plans
provide that options may be granted as either nonqualified or incentive stock
options. Stock options awarded under both plans have terms of 10 years and one
month. Stock options awarded under either plan prior to 1994, except for those
that have been forfeited, have vested. Stock options awarded during 1996, 1995
and 1994 have vesting periods of three to four years. SARs, available under the
1984 Plan, permit the grantee to receive an amount equal to the excess of the
fair market value of a share of Common Stock over the SAR's exercise price on
the day the SAR is exercised and may be settled in cash or Common Stock, or any
combination of the two. No SARs were granted under the 1996 Plan or the 1988
Plan during 1996 or 1995. The 1984 Plan had 24,400 SARs outstanding as of
December 31, 1996.
Under the 1992 Stock Option Plan ("1992 Plan"), US Airways employees whose
pay was reduced, generally during a 12 month period in 1992 and 1993, received
stock options to purchase 50 shares of Common Stock at a price of $15 per share
for each $1,000 of salary reduction. Participating employees have five years
from the grant date to exercise such stock options. Effective November 1, 1996,
the Company added a SAR feature to the 1992 Plan and granted SARs to stock
option holders on a one-for-one basis. For each SAR, the holder is entitled to
receive a cash distribution equal to the excess of the fair market value of a
share of Common
F-34
<PAGE>
Stock above $15. The exercise of any SAR cancels its tandem stock option and,
conversely, the exercise of any stock option cancels its tandem SAR. The SARs
have the same expiration date as the tandem stock options. As of December 31,
1996, all stock options and SARs outstanding under the 1992 Plan were vested and
4.2 million shares of Common Stock remain reserved for the possible conversion
of stock options issued and outstanding under this plan (however, the Company
expects most plan participants to exercise SARs as opposed to stock options due
to lower transaction fees for SAR exercises).
The Nonemployee Director Stock Incentive Plan ("Director Plan"), which also
became effective during May 1996, allows for the grant of up to 70,000 shares of
Common Stock to the Company's nonemployee directors. As of December 31, 1996,
15,000 Common Stock shares were reserved for the possible conversion of stock
options issued and outstanding under this plan. Common Stock grants under this
plan are subject to a one year vesting period.
The following table summarizes stock option transactions pursuant to the
Company's various stock option and incentive plans for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
(000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
Stock Options
- -------------
Outstanding at
beginning of year 8,426 $17 8,844 $18 9,009 $19
Granted (1) 97 $17 155 $ 9 354 $ 9
Granted (2) 2,415 $13 - - - -
Exercised 435 $15 43 $10 5 $10
Forfeited (3) 673 $16 489 $25 504 $24
Expired 48 $32 41 $36 10 $23
----- ----- -----
Outstanding at
end of year 9,782 $17 8,426 $17 8,844 $18
Exercisable at
end of year 7,802 7,986 8,237
</TABLE>
(1) Exercise price equal to the fair market value of a share of Common Stock
at date of grant; 1996 activity includes 20,000 stock options that were
repriced.
(2) Exercise price lower than the fair market value of a share of Common Stock
at date of grant.
(3) 1996 activity includes cancellation of repriced stock options. See (1)
above.
The weighted average fair value of stock options which had an exercise
price equal to the fair market value of a share of Common Stock at date of grant
was $12 and $6 for 1996 and 1995, respectively. The weighted average value of
stock options which had an exercise price lower than the fair market value of a
share of Common Stock at date of grant was $13 for 1996 (no such grants during
1995).
F-35
<PAGE>
<TABLE>
<CAPTION>
Stock Options Stock Options
Outstanding Exercisable
------------------------------------------ --------------------------
Weighted
Number Average Weighted Weighted
of Shares Remaining Average Average
Range of Outstanding Contractual Exercise Number Exercise
Exercise Prices at 12/31/96 Life Price Exerciseable Price
- --------------- ----------- ------ ------- ------------ -------
(000) (years) (000)
<S> <C> <C> <C> <C> <C>
$ 4.25 to $10.00 278 7.8 $ 7 145 $ 7
$10.01 to $15.00 6,845 3.8 $14 5,086 $15
$15.01 to $20.00 477 5.9 $17 394 $18
$20.01 to $25.00 1,924 4.3 $22 1,919 $22
$25.01 to $40.00 51 1.8 $36 51 $36
$40.01 to $46.38 207 2.1 $46 207 $46
</TABLE>
During 1995, the Financial Accounting Standards Board adopted Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement
requires the use of fair value techniques to determine compensation expense
associated with stock-based compensation. Although the Company has opted to
continue to apply the provisions of APB 25 to determine compensation expense, as
permitted under SFAS 123, the Company is obligated to disclose certain
information including pro forma net income and earnings per share as if SFAS 123
had been adopted by the Company to measure compensation expense. Had
compensation cost been measured in accordance with SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma numbers
indicated in the table below. In order to calculate the pro forma net income
information presented below, the Company used the Black-Scholes stock
option-pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: stock volatility of 50.1% and 48.8%; risk-free interest
rates of 6.2% and 6.6%; expected stock option life of 9 years for both years;
and no dividend yield (0%) for either year.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net income As reported (000s) $263,373 $119,287
Pro forma (000s) $248,204 $119,074
Net income applicable to As reported (000s) $174,598 $ 34,383
common stockholders Pro forma (000s) $159,429 $ 34,170
Primary income per As reported $2.69 $0.55
common share Pro forma $2.48 $0.55
Fully-diluted income As reported $2.33 $0.55
per common share Pro forma $2.18 $0.55
</TABLE>
Pro forma net income and income per common share information reflect stock
options granted in 1996 and 1995 only. Therefore, the full impact of calculating
compensation expense for stock options under SFAS 123 is not reflected in the
pro forma net income and income per common share amounts above because
compensation expense is recognized over the stock option's vesting period and
compensation expense for stock options granted prior to January 1, 1995 is not
considered. See also Note 1(l).
F-36
<PAGE>
(f) Adjustment for Minimum Pension Liability
The provisions of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" ("SFAS 87"), require the recognition of an
additional minimum liability for each defined benefit plan for which the
accumulated benefit obligation exceeds plan assets. This amount has been
recognized by the Company as a liability with an offsetting intangible asset
(see Note 1(e)). Because the intangible asset recognized may not exceed the
amount of unrecognized prior service cost on an individual plan basis, the
balance is reported as a separate reduction of Stockholders' Equity (Deficit) as
of December 31, 1996 and 1995. See also Note 10(a).
9. Employee Stock Ownership Plan
In August 1989, US Airways established an Employee Stock Ownership Plan
("ESOP"). US Airways Group sold 2,200,000 shares of its Common Stock to an
Employee Stock Ownership Trust (the "Trust") to hold on behalf of US Airways'
employees, exclusive of officers, in accordance with the terms of the Trust and
the ESOP. The trustee placed those shares in a suspense account pending their
release and allocation to employees. US Airways provided financing to the Trust
in the form of a 9 3/4% loan for $111.4 million for its purchase of shares and
US Airways contributed an additional $2.2 million to the Trust. US Airways makes
a yearly contribution to the Trust sufficient to cover the Trust's debt service
requirement. The contributions are made in amounts equal to the periodic loan
payments as they come due, less dividends available for loan payment. Since the
Company did not pay dividends on any shares held by the Trust for the years
ended December 31, 1996, 1995 and 1994, the Trust did not utilize dividends to
service its debt during those periods. The initial maturity of the loan is 30
years. As the loan is repaid over time, the trustee systematically releases
shares of the common stock from the suspense account and allocates them to
participating employees. Each participant's allocation is based on the
participant's compensation, the total compensation of all ESOP participants and
the total number of shares being released. For each year after 1989, a minimum
of 71,933 shares are released from the suspense account and allocated to
participant accounts. If US Airways Group's return on sales equals or exceeds
four percent in a given year, more shares are released and repayment of the loan
is accelerated. Annual contributions made by US Airways, and therefore loan
repayments made by the Trust, were $11.4 million in each of 1996, 1995 and 1994.
The interest portion of these contributions was $10.3 million in 1996, $10.4
million in 1995 and $10.5 million in 1994. Approximately 582,000 shares of
Common Stock have been released or committed to be released as of December 31,
1996. US Airways recognized approximately $4 million of compensation expense
related to the ESOP in each of 1996, 1995 and 1994 based on shares allocated to
employees (the "shares allocated" method). Deferred compensation related to the
ESOP amounted to approximately $83.5 million, $87.2 million and $90.9 million as
of December 31, 1996, 1995 and 1994, respectively. All shares of Common Stock
sold to the Trust are considered issued and outstanding for computing the
weighted average common shares outstanding for the income (loss) per common
share calculation.
See also Note 8(e) regarding the Company's accounting treatment for
stock-based compensation.
10. Employee Benefit Plans
(a) Pension Plans
The Company's subsidiaries have several pension plans in effect covering
substantially all employees. One qualified defined benefit plan covers US
Airways' maintenance employees and provides benefits of specified amounts based
on periods of service. Qualified defined benefit plans
F-37
<PAGE>
for substantially all other employees provide benefits based on years of service
and compensation. The qualified defined benefit plans for domestic employees are
funded, on a current basis, to meet the minimum funding requirements of the
Employee Retirement Income Security Act of 1974. Liabilities related to pension
plans covering foreign employees are calculated in accordance with generally
accepted accounting principles and funded in accordance with the laws of the
individual country.
In 1996, US Airways changed the annual measurement date for its pension
plan assets and liabilities to September 30 from December 31. The change in
measurement date is considered a change in a method of accounting and Accounting
Principles Board Opinion No. 20, "Accounting Changes" ("APB 20"), requires that
the cumulative effect of such a change be recognized as an adjustment to
retained earnings. The change in measurement date had no material cumulative
effect on pension expense for prior years and thus no adjustment was recognized.
For purposes of determining whether a minimum pension liability existed as of
September 30, 1996, plan contributions made in the fourth quarter of 1996 were
included in plan assets. The Company's other subsidiaries, which represent less
than 1% of the combined ABO, continue to use a December 31 measurement date.
(this space intentionally left blank)
F-38
<PAGE>
The funded status of the Company's qualified defined benefit plans:
<TABLE>
<CAPTION>
1996* 1995
--------------------------- ---------------------------
Plans in Which Plans in Which
--------------------------- ---------------------------
Plan ABO Plan ABO
Assets Exceed Exceeds Assets Exceed Exceeds
ABO Plan Assets ABO Plan Assets
------------- ----------- ------------- -----------
(in millions)
<S> <C> <C> <C> <C>
Fair value of plan assets $ 2,186 $ 305 $ 1,009 $ 1,419
Actuarial present value of:
Vested benefit obligation 2,062 369 940 1,603
Nonvested benefit obligation 24 13 30 22
----- ----- ----- -----
ABO based on salaries to date 2,086 382 970 1,625
Additional benefits based on
estimated future salary levels 665 - 143 598
----- ----- ----- -----
Projected benefit obligation ("PBO") 2,751 382 1,113 2,223
----- ----- ----- -----
PBO in excess of fair value of plan assets (565) (77) (104) (804)
Contributions from October 1, 1996
through December 31, 1996 45 12 - -
Unrecognized net transition asset (21) (9) (2) (34)
Unrecognized prior service (credit) cost (13) 75 2 66
Unrecognized net loss 508 40 317 571
----- ----- ----- -----
Pension (liability) or asset
before adjustment (46) 41 213 (201)
----- ----- ----- -----
Adjustment for minimum
pension liability ** - (106) - (149)
----- ----- ----- -----
Pension (liability) or asset as
adjusted and recognized in
Consolidated Balance Sheets $ (46) $ (65) $ 213 $ (350)
===== ===== ===== =====
</TABLE>
* See discussion above regarding the measurement dates used by the Company's
subsidiaries.
** See Note 8(f).
The weighted average assumptions used to determine the actuarial present
value of the PBO:
<TABLE>
<CAPTION>
1996* 1995
---- ----
<S> <C> <C>
Discount rate 8.00% 7.25%
Rate of increase in compensation levels 3.58% 3.59%
Expected long-term rate of return on plan assets 8.85% 9.32%
Components of plan assets:
Cash equivalents and short-term investments 10% 7%
Equity investments** 28% 26%
Fixed income and other investments 62% 67%
</TABLE>
* See discussion above regarding the measurement dates used by the Company's
subsidiaries.
** Plan assets as of December 31, 1995 include 205 shares of US Airways Group
Common Stock.
F-39
<PAGE>
The components of the net periodic pension cost for the qualified defined
benefit plans:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 146 $ 94 $ 127
Interest cost on PBO 251 218 217
Actual return on plan assets (57) (541) 48
Net amortization and deferral (131) 371 (254)
---- ---- ----
Net periodic pension costs $ 209 $ 142 $ 138
==== ==== ====
</TABLE>
Non-qualified supplemental pension plans are established for certain
employee groups, which provide incremental pension payments from the Company's
funds so that total pension payments equal amounts that would have been payable
from the Company's qualified pension plans if it were not for limitations
imposed by Federal income tax regulations.
The status of the Company's non-qualified supplemental plans:
<TABLE>
<CAPTION>
1996* 1995
---- ----
(in millions)
<S> <C> <C>
Fair value of plan assets $ - $ -
Actuarial present value of:
Vested benefit obligation 32 33
Nonvested benefit obligation 1 2
---- ----
ABO based on salaries to date 33 35
Additional benefits based on estimated future salary levels 2 2
---- ----
PBO 35 37
---- ----
PBO in excess of fair value of plan assets (35) (37)
Contributions for October 1, 1996 to December 31, 1996 1 -
Unrecognized net transition asset - -
Unrecognized prior service cost 2 3
Unrecognized net loss 3 9
---- ----
Pension (liability) or asset before adjustment (29) (25)
Adjustment for minimum pension liability ** (6) (11)
---- ----
Unfunded supplemental liability as adjusted and
recognized in Consolidated Balance Sheets $ (35) $ (36)
==== ====
</TABLE>
* See discussion above regarding the measurement dates used by the Company's
subsidiaries.
** See Note 8(f).
The discount rate used to determine the actuarial present value of the PBO
was 8.00% and 7.25% as of September 30, 1996 and December 31, 1995,
respectively. Weighted average rates of 6.00% and 5.88% were used to estimate
future salary levels in 1996 and 1995, respectively.
(this space intentionally left blank)
F-40
<PAGE>
The components of net periodic supplemental pension expense for the
non-qualified supplemental pension plans:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 2 $ - $ -
Interest cost on PBO 2 2 3
Actual return on plan assets - - -
Net amortization and deferral 6 (1) 21
-- --- ---
Net periodic supplemental pension cost $ 10 $ 1 $ 24
==== === ====
</TABLE>
In addition to the qualified and non-qualified defined benefit plans
described above, the Company contributes to certain defined contribution plans.
The Company's contributions are based on a formula which considers the age and
earnings of each employee and the amount of employee contributions. In addition,
certain qualified defined contribution plans contain a requirement for profit
sharing contributions if the Company achieves a certain pre-tax margin level.
The Company's expense related to its defined contribution plans, excluding
expenses related to its ESOP (see Note 9), was $61 million, $65 million and $43
million for 1996, 1995 and 1994, respectively. The 1996 expense amount includes
$4.8 million related to the profit sharing component of its defined contribution
plans. The Company made no contributions to its defined contribution plans
related to profit sharing in 1995 and 1994 because it did not achieve the
prescribed pre-tax margin level. The 1995 expense amount includes a catch up
adjustment of $11.6 million for new employer match contributions for certain
collective bargaining groups.
(b) Postretirement Benefits Other Than Pensions
The Company offers medical and life insurance benefits to certain employees
who retire, and their eligible dependents. The medical benefits provided by the
Company are coordinated with Medicare benefits. Retirees generally contribute
amounts towards the cost of their medical expenses based on years of service
with the Company. The Company also provides uninsured death benefit payments to
survivors of retired employees for stated dollar amounts, or in the case of
retired pilot employees, death benefit payments determined by age and level of
pension benefit. The plans for postretirement medical and death benefits are
funded on a pay-as-you-go basis.
In 1996, US Airways changed the annual measurement date for postretirement
benefit liabilities to September 30 from December 31. The change in measurement
date is considered a change in a method of accounting and APB 20 requires that
the cumulative effect of such a change be recognized as an adjustment to
retained earnings. The change in measurement date had no material cumulative
effect on postretirement benefit expenses for prior years and thus no adjustment
was recognized. The Company's remaining subsidiaries, which represent less than
1% of the combined accumulated postretirement benefit obligation ("APBO"),
continue to use a December 31 measurement date.
(this space intentionally left blank)
F-41
<PAGE>
The status of the plans:
<TABLE>
<CAPTION>
1996* 1995
------ ------
(in millions)
<S> <C> <C>
Plan assets at fair value $ - $ -
APBO:
Retirees 326 338
Fully eligible active plan participants 170 176
Other plan participants 455 482
---- ----
Total APBO 951 996
APBO in excess of plan assets (951) (996)
Contributions from October 1, 1996 through December 31, 1996 7 -
Unrecognized prior service credits (142) (155)
Unrecognized net (gain) loss (34) 112
----- ----
Accrued postretirement benefit liability $ (1,120) $ (1,039)
======== ========
<CAPTION>
The assumptions used to determine the APBO:
1996* 1995
---- ----
<S> <C> <C>
Discount rate 8.00% 7.25%
Rate of increase in compensation levels 3.00% to 6.00% 3.00% to 6.00%
Health care cost trend 7.5% 8.5%
</TABLE>
* See discussion above regarding the measurement dates used by the Company's
subsidiaries.
The components of net periodic postretirement benefit expense:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 44 $ 29 $ 36
Interest cost on APBO 75 65 60
Net amortization and deferral (11) (15) (12)
---- --- ---
Net periodic postretirement benefit cost $ 108 $ 79 $ 84
==== === ===
</TABLE>
The assumed health care cost trend rate used in measuring the APBO was 7.5%
in 1996, declining by 1% per year after 1996 to an ultimate rate of 4.5%. If the
assumed health care cost trend rates were increased by one percentage point, the
APBO at September 30, 1996 would be increased by 10% and 1996 periodic
postretirement benefit expense would increase 12%.
(c) Postemployment Benefits
The Company provides certain postemployment benefits to all of its
employees. In 1993, US Airways adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS
112"). SFAS 112 requires the use of an accrual method to recognize
postemployment benefits such as severance, disability-related and workers'
compensation benefits. The Company records the expense for these benefits once a
triggering event occurs.
F-42
<PAGE>
11. Profit Sharing
In exchange for temporary wage and salary reductions and other concessions
during a twelve month period in 1992 and 1993, including certain ongoing work
rule and medical benefits concessions and the freeze of the defined benefit plan
for certain non-contract employees, affected US Airways employees participate in
a profit sharing program and were granted stock options to purchase US Airways
Group Common Stock (see related discussion under Note 8(e)). This profit sharing
program was designed to recompense those US Airways employees whose pay had been
reduced in an amount equal to (i) two times salary forgone plus (ii) one time
salary forgone (subject to a minimum of $1,000) for the freeze of the defined
benefit pension plan for certain non-contract employees. US Airways has
recognized charges of $213.5 million, including $121.6 million and $49.7 million
in 1996 and 1995, respectively. Cash distributions to participants of $213.5
million have also been made, including $74.9 million and $3.3 million in 1996
and 1995, respectively, and a final cash distribution in the first quarter of
1997 of $129.1 million. After the first quarter 1997 payment, the Company's
obligations under this profit sharing program were satisfied and this program
ceased.
US Airways' ESOP and Defined Contribution Retirement Program ("DCRP") each
have profit sharing components. Under the ESOP, each eligible US Airways
employee receives Common Stock shares based on his or her compensation relative
to the total compensation of all participants and the number of Common Stock
shares in the allocation pool. When US Airways' return on sales equals or
exceeds certain prescribed levels, US Airways increases its contribution, which
effectively increases the number of Common Stock shares in the allocation pool
(see Note 9). US Airways did not make any provision for profit sharing
contributions in connection with the profit sharing component of the ESOP during
1996 or 1995. Under the DCRP, US Airways makes additional contributions to
participant accounts when US Airways Group achieves certain prescribed pre-tax
margin levels (see Note 10(a)). US Airways' 1996 results of operations reflect a
provision of $4.8 million for the profit sharing component of the DCRP. In 1995,
US Airways' results did not achieve the prescribed pre-tax margin levels.
Accordingly, US Airways made no such provision in 1995 for this program.
12. Related Party Transactions
US Airways wet leased Boeing 767-200ER aircraft, including cockpit and
cabin crews, to British Airways in order to serve three routes between the U.S.
and London beginning June 1993. The final wet lease arrangement expired May 31,
1996. US Airways recognized other operating revenues of approximately $12.6
million, $63.6 million and $60.7 million for the years 1996, 1995 and 1994,
respectively, related to the wet lease arrangements. These revenues were offset
by an equal amount of other operating expenses.
US Airways also has various agreements with British Airways for ground
handling at certain airports, contract training and other services. US Airways
recognized other operating revenues of approximately $5.8 million, $4.9 million
and $6.4 million for the years 1996, 1995 and 1994, respectively, related to the
services US Airways performed for British Airways.
US Airways' current receivables from and payables to British Airways were
approximately $8.0 million and $5.5 million, respectively, as of December 31,
1996 and $11.5 million and $5.3 million, respectively, as of December 31, 1995.
US Airways has a long-term receivable from British Airways related to three
U.S. to London routes that US Airways relinquished at the time of implementation
of a code sharing arrangement
F-43
<PAGE>
with British Airways. US Airways is terminating its code sharing arrangement
with British Airways effective March 29, 1997. The balance of the receivable was
approximately $40.7 million and $45.4 million as of December 31, 1996 and 1995,
respectively. Payments began in December 1995 in conjunction with the
termination of the first wet lease arrangement and continue annually for nine
years.
See also Note 6 - British Airways Plc Investment and Note 7 - Redeemable
Preferred Stock and Deferral of Dividends.
During 1996, certain employees, upon fulfilling the vesting requirements of
Common Stock grants, surrendered approximately 0.1 million shares of Common
Stock to the Company in lieu of cash payments to satisfy tax withholding
requirements (see also Note 8(d)).
13. Select Financial Information - USAM Investments
USAM's equity in the earnings of ATS, GIP and GJP for the years 1996, 1995
and 1994 was as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Apollo Travel Services Partnership (ATS) $19,188 $20,708 $20,089
Galileo International Partnership (GIP) 17,213 13,320 6,081
Galileo Japan Partnership (GJP) 201 518 365
------ ------ ------
$36,602 $34,546 $26,535
====== ====== ======
</TABLE>
The following is summarized financial information for these partnerships
(combined, in millions):
<TABLE>
<CAPTION>
As of December 31,
----------------------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Current assets $ 357 $ 405
Noncurrent assets 480 512
---- ----
Total assets 837 917
---- -----
Current liabilities 227 294
Long-Term liabilities 209 228
---- ----
Total liabilities 436 522
---- ----
Net assets $ 401 $ 395
==== ====
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Service revenues $1,466 $1,327 $1,193
Cost and expenses 1,207 1,103 1,046
----- ----- -----
Net earnings $ 259 $ 224 $ 147
===== ===== =====
</TABLE>
USAM received distributions from GIP, GJP and ATS of approximately $4.1
million, $0.1 million and $44.5 million (including a special distribution from
ATS of $33.7 million during the
F-44
<PAGE>
second quarter of 1996 which represented a distribution of cash to partners),
respectively, during 1996. USAM received distributions from GIP, GJP and ATS of
approximately $2.6 million, $0.2 million and $11.2 million, respectively, during
1995.
14. Selected Quarterly Financial Data (Unaudited)
The following table presents selected quarterly financial data for 1996 and
1995:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions except per share amounts)
<S> <C> <C> <C> <C>
1996
Operating revenues $ 1,868 $ 2,149 $ 2,073 $ 2,052
Operating income (loss) $ 11 $ 246 $ 131 $ 49
Net income (loss) $ (32) $ 201 $ 68 $ 27
Net income (loss) applicable to
common stockholders $ (55) $ 178 $ 45 $ 6
Income (loss) per common share
Primary $ (0.86) $ 2.71 $ 0.69 $ 0.08
Fully-diluted $ (0.86) $ 1.91 $ 0.60 $ 0.08
1995
Operating revenues $ 1,763 $ 1,983 $ 1,873 $ 1,855
Operating income (loss) $ (42) $ 163 $ 93 $ 108
Net income (loss) $ (97) $ 113 $ 43 $ 60
Net income (loss) applicable to
common stockholders $ (117) $ 92 $ 22 $ 38
Income (loss) per common share
Primary $ (1.91) $ 1.47 $ 0.35 $ 0.61
Fully-diluted $ (1.91) $ 1.11 $ 0.35 $ 0.54
</TABLE>
See Note 16 - Non-Recurring and Unusual Items.
Note: The sum of the four quarters may not equal yearly totals due to rounding
of quarterly results.
15. Supplemental Balance Sheet Information
The components of certain accounts in the accompanying Consolidated
Balance Sheets are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
(a) Cash and cash equivalents:
Cash $ 20,986 $ 13,539
Cash equivalents, at cost which approximates market 929,980 868,315
------- -------
$950,966 $881,854
======= =======
</TABLE>
(table continued on following page)
F-45
<PAGE>
(table continued from previous page)
<TABLE>
<S> <C> <C>
(b) Receivables, net:
Accounts receivable $349,214 $334,462
Less allowance for doubtful accounts 12,189 12,340
------ -------
$337,025 $322,122
======= =======
(c) Materials and supplies, net:
Materials and supplies $395,065 $412,230
Less allowance for obsolescence 146,291 164,086
------- -------
$248,774 $248,144
======= =======
(d) Accrued expenses:
Salaries and wages* $ 422,766 $345,710
All other 676,415 630,276
--------- --------
$1,099,181 $975,986
========= =======
</TABLE>
* Includes amounts related to profit sharing. See Note 11 for additional
information.
Note: Certain 1995 amounts have been reclassified to conform with 1996
classifications.
16. Non-Recurring and Unusual Items
(a) 1996
The Company's results for 1996 include two non-recurring items recorded by
US Airways during the second quarter of 1996 related to US Airways' subleasing
of 11 non-operating BAe-146 aircraft (see Note 16 (b) and 16 (c) below). US
Airways reversed $22.5 million of previously accrued rent obligations related to
these aircraft against Aircraft rent expense and reversed $7.0 million against
Aircraft maintenance expense related to previously accrued lease return
provisions. US Airways may reverse additional amounts related to the 1994
non-recurring charge in future periods dependent upon its success and the terms
at which the remaining non-operating BAe-146 aircraft are subleased or otherwise
disposed.
(b) 1995
In the fourth quarter of 1995, US Airways reversed $4.1 million of the
$132.8 million non-recurring charge related to its grounded BAe-146 fleet that
was recorded in the fourth quarter of 1994 (see Note 16 (c) below). The
reversal, a credit to Aircraft rent expense, reflects the successful remarketing
by US Airways of three of these aircraft.
(c) 1994
The Company's results for 1994 include (i) a $132.8 million charge related
to US Airways' grounded BAe-146 fleet, recorded in the fourth quarter of 1994
(During 1994, US Airways again evaluated the secondary market for its
non-operating BAe-146 aircraft and determined that it was probable that it would
not be successful in its efforts to sublease or other wise dispose of these
assets (before lease expiry). Considering this analysis, US Airways did not
include a provision for any potential subleasing activity in determining the
amount of the 1994 charge.); (ii) a $54.0 million charge for obsolete inventory
and rotables to reflect market value, recorded in the fourth quarter of 1994;
(iii) a $50.0 million addition to Passenger transportation revenues in the
fourth quarter of 1994 to adjust estimates made during the first three quarters
of 1994; (iv) a $40.1 million
F-46
<PAGE>
charge primarily related to US Airways' decision to cease operations of its
remaining Boeing 727-200 aircraft in 1995, recorded in the third quarter of
1994; (v) a $25.9 million charge related to US Airways' decision to
substantially reduce service between Los Angeles and San Francisco and close its
San Francisco crew base, recorded in the third quarter of 1994; (vi) a $28.3
million gain resulting from the sale of certain aircraft and assets to Mesa Air
Group, Inc. (formerly Mesa Airlines, Inc.) ("Mesa") and the accounting treatment
of the hull insurance recovery on the aircraft lost in the September, 1994
accident, recorded in the third quarter of 1994; and (vii) a $1.7 million charge
related to the sale of assets to Mesa, recorded in the third quarter of 1994.
F-47
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR US
AIR-WAYS, INC.
INDEPENDENT AUDITORS' REPORT
The Stockholder and Board of Directors
US Airways, Inc.:
We have audited the consolidated balance sheets of US Airways, Inc. (formerly
USAir, Inc.) and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, cash flows, and changes in stockholder's
equity (deficit) for each of the three years in the period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of US Airways, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Washington, D. C.
February 26, 1997, except as to note 4(c) and note 4(d)
which are as of March 13, 1997
F-48
<PAGE>
US Airways, Inc. (Formerly USAir, Inc.)
Consolidated Statements of Operations
Years Ended December 31,
- ------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues
Passenger transportation $6,799,420 $6,267,762 $5,922,223
Cargo and freight 158,899 153,651 160,364
US Airways Express transportation revenues 145,118 - -
Other 600,620 563,463 496,006
---------- ---------- ----------
Total Operating Revenues 7,704,057 6,984,876 6,578,593
Operating Expenses
Personnel costs 3,040,682 2,751,437 2,753,269
Aviation fuel 780,597 646,004 672,526
Commissions 547,048 527,058 549,192
Aircraft rent 387,312 398,063 521,395
Other rent and landing fees 394,431 388,866 422,190
Aircraft maintenance 311,901 295,594 335,791
Depreciation and amortization 300,608 337,066 387,211
US Airways Express capacity purchases 93,042 - -
Other, net 1,479,768 1,406,137 1,453,991
---------- ---------- ----------
Total Operating Expenses 7,335,389 6,750,225 7,095,565
---------- ---------- ----------
Operating Income (Loss) 368,668 234,651 (516,972)
Other Income (Expense)
Interest income 75,905 51,122 28,044
Interest expense (283,936) (301,923) (285,846)
Interest capitalized 8,398 8,781 13,760
Equity in earnings of affiliates 36,602 34,546 26,535
Other, net (14,594) 10,221 18,296
---------- ---------- ----------
Other Income (Expense), net (177,625) (197,253) (199,211)
---------- ---------- ----------
Income (Loss) Before Taxes 191,043 37,398 (716,183)
Provision For Income Taxes 7,811 4,408 -
---------- ---------- ----------
Net Income (Loss) $ 183,232 $ 32,990 $ (716,183)
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-49
<PAGE>
US Airways, Inc. (Formerly USAir, Inc.)
Consolidated Balance Sheets
December 31,
- ------------------------------------------------------------------------------
(dollars in thousands, except per share amount)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 950,134 $ 879,613
Short-term investments 635,839 19,831
Receivables, net 342,718 321,755
Materials and supplies, net 211,184 222,245
Prepaid expenses and other 129,380 97,922
----------- -----------
Total Current Assets 2,269,255 1,541,366
Property and Equipment
Flight equipment 4,972,873 5,021,520
Ground property and equipment 1,087,178 1,052,706
Less accumulated depreciation and amortization (2,381,844) (2,222,814)
----------- -----------
3,678,207 3,851,412
Purchase deposits 77,620 17,026
----------- -----------
Total Property and Equipment, Net 3,755,827 3,868,438
Other Assets
Goodwill, net 494,511 510,562
Other intangibles, net 283,274 312,539
Other assets, net 606,906 590,622
----------- -----------
Total Other Assets 1,384,691 1,413,723
----------- -----------
$ 7,409,773 $ 6,823,527
=========== ===========
LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 84,171 $ 77,496
Accounts payable 472,105 325,079
Payable to parent company 159,383 100,344
Traffic balances payable and unused tickets 715,576 638,019
Accrued aircraft rent 495,662 479,749
Accrued expenses 1,073,773 955,445
----------- -----------
Total Current Liabilities 3,000,670 2,576,132
Long-term Debt, Net of Current Maturities
Long-term debt 2,614,818 2,674,376
Note payable - parent company - 67,556
----------- -----------
Total Long-term Debt, Net of Current Maturities 2,614,818 2,741,932
</TABLE>
(continued on next page)
F-50
<PAGE>
US Airways, Inc. (Formerly USAir, Inc.)
Consolidated Balance Sheets (Continued)
December 31,
- ------------------------------------------------------------------------------
(dollars in thousands, except per share amount)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIT) (Continued)
Deferred Credits and Other Liabilities
Deferred gains, net 356,583 382,995
Postretirement benefits other than pensions,
non-current 1,093,269 1,015,373
Non-current employee benefit liabilities and other 429,588 418,268
----------- -----------
Total Deferred Credits and Other Liabilities 1,879,440 1,816,636
Commitments and Contingencies
Stockholder's Equity (Deficit)
Common stock, par value $1 per share, authorized
1,000 shares, issued and outstanding 1,000 shares 1 1
Paid-in capital 2,416,131 2,416,131
Retained earnings (deficit) (2,466,078) (2,649,310)
Adjustment for minimum pension liability (35,209) (77,995)
----------- -----------
Total Stockholder's Equity (Deficit) (85,155) (311,173)
----------- -----------
$ 7,409,773 $ 6,823,527
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-51
<PAGE>
US Airways, Inc. (Formerly USAir, Inc.)
Consolidated Statements of Cash Flows
Years Ended December 31,
- ------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash and cash equivalents beginning of year $ 879,613 $428,925 $ 367,835
--------- -------- ---------
Cash flows from operating activities
Net income (loss) 183,232 32,990 (716,183)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities
Depreciation and amortization 300,608 337,066 387,211
Loss (gain) on disposition of property 1,808 (16,654) (16,671)
Amortization of deferred gains and credits (26,412) (26,411) (26,382)
Other 21,524 (4,354) (8,080)
Changes in certain assets and liabilities
Decrease (increase) in receivables (20,963) 4,257 127,902
Decrease (increase) in materials, supplies,
prepaid expenses and intangible
pension assets (32,219) (68,415) 70,750
Increase (decrease) in traffic balances
payable and unused tickets 77,557 46,865 (68,452)
Increase (decrease) in accounts payable,
accrued aircraft rent and accrued expenses 326,727 214,707 326,855
Increase (decrease) in postretirement
benefits other than pensions, non-current 77,896 56,667 51,613
--------- -------- ---------
Net cash provided by (used for) operating activities 909,758 576,718 128,563
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net (52,854) (61,689) (46,022)
Additions to other property (123,575) (80,644) (128,874)
Proceeds from disposition of property 21,725 219,762 55,540
Decrease (increase) in short-term investments (603,593) 2,430 (21,994)
Decrease (increase) in restricted cash and investments 11,086 71,980 2,578
Payment of debt for affiliated company (42,830) - -
Collection on note receivable from affiliated company 42,830 - -
Other (5,497) 433 1,110
--------- -------- ---------
Net cash provided by (used for) investing activities (752,708) 152,272 (137,662)
</TABLE>
(continued on next page)
F-52
<PAGE>
US Airways, Inc. (Formerly USAir, Inc.)
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31,
- -------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities
Issuance of debt 103,002 - 172,156
Reduction of debt (189,531) (278,302) (101,967)
--------- --------- ---------
Net cash provided by (used for)financing activities (86,529) (278,302) 70,189
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 70,521 450,688 61,090
--------- --------- ---------
Cash and cash equivalents end of year $ 950,134 $ 879,613 $ 428,925
========= ========= =========
Noncash investing and financing activities
Issuance of debt - refinancing of debt secured
by aircraft $ 159,998 $ - $ -
========= ========= =========
Reduction of debt - refinancing of debt secured
by aircraft $ 154,422 $ - $ -
========= ========= =========
Issuance of parent company debt - aircraft
acquisitions $ - $ 68,640 $ -
========= ========= =========
Reduction of parent company debt - aircraft
acquisitions $ 68,640 $ - $ -
========= ========= =========
Issuance of debt - aircraft acquisitions $ 29,155 $ 169,725 $ 224,614
========= ========= =========
Reduction of debt - aircraft purchase deposits $ - $ 70,837 $ -
========= ========= =========
Underwriter's fees - refinancing of debt secured
by aircraft $ 2,488 $ - $ -
========= ========= =========
Aircraft acquisitions - transfer from affiliated
company $ - $ - $ 3,569
========= ========= =========
Other property acquisitions - transfer from
affiliated company $ - $ - $ 7,925
========= ========= =========
Aircraft dispositions - transfer to affiliated
company $ - $ - $ 81,913
========= ========= =========
Supplemental Information
Cash paid during the year for interest, net
of amounts capitalized $ 257,689 $ 290,560 $ 254,199
========= ========= =========
Cash paid (received) during the year for
income taxes, net $ 11,061 $ (6,329) $ -
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-53
<PAGE>
US Airways, Inc. (Formerly USAir, Inc.)
Consolidated Statements of Changes in Stockholder's Equity (Deficit)
Three Years Ended December 31, 1996
- --------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Adjustment
For
Retained Minimum
Common Paid-In Earnings Pension
Stock Capital (Deficit) Liability Total
------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993 $ 1 $2,416,131 $(1,966,117) $(41,964) $ 408,051
Net loss - - (716,183) - (716,183)
Adjustment for minimum
pension liability - - - 34,947 34,947
------ ---------- ----------- -------- ---------
Balance December 31, 1994 1 2,416,131 (2,682,300) (7,017) (273,185)
Net income - - 32,990 - 32,990
Adjustment for minimum
pension liability - - - (70,978) (70,978)
------ ---------- ----------- -------- ---------
Balance December 31, 1995 1 2,416,131 (2,649,310) (77,995) (311,173)
Net income - - 183,232 - 183,232
Adjustment for minimum
pension liability - - - 42,786 42,786
------ ---------- ----------- -------- ---------
Balance December 31, 1996 $ 1 $2,416,131 $(2,466,078) $(35,209) $ (85,155)
====== ========== =========== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-54
<PAGE>
US AIRWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying Consolidated Financial Statements include the accounts of US
Airways, Inc. ("US Airways") (formerly USAir, Inc.) and its wholly-owned
subsidiary USAM Corp. ("USAM"). US Airways is a wholly-owned subsidiary of US
Airways Group, Inc. ("US Airways Group" or the "Company") (formerly USAir Group,
Inc.). All significant intercompany accounts and transactions have been
eliminated. However, as discussed further in Note 10, US Airways' financial
results are significantly influenced by related party transactions.
US Airways is a major United States air carrier whose primary business is
transporting passengers, property and mail. US Airways operates predominantly in
the eastern U.S. with primary hubs at the major airports in Pittsburgh,
Pennsylvania, Charlotte, North Carolina, Philadelphia, Pennsylvania and at
Baltimore/Washington International Airport. US Airways also maintains
significant operations at the major airports in Boston, Massachusetts, New York,
New York and Washington, D.C. US Airways enplaned 56.9 million passengers during
1996 and is currently the fifth largest domestic air carrier, as measured by
revenue passenger miles ("RPMs").
USAM owns 11% of the Galileo International Partnership ("GIP") which owns and
operates the Galileo Computer Reservation System ("Galileo CRS"), approximately
11% of the Galileo Japan Partnership ("GJP") which markets the Galileo CRS in
Japan and approximately 21% of the Apollo Travel Services Partnership ("ATS")
which markets the Galileo CRS in the U.S. and Mexico. USAM accounts for these
investments using the equity method because it is represented on the board of
directors of each of the partnerships and therefore participates in policy
making processes.
US Airways terminated its Airline Technical Services, LLC joint venture with a
subsidiary of British Airways plc ("British Airways"), effective January 1997.
Amounts related to this joint venture (accounted for using the equity method)
included in US Airways' financial results for the years ended 1996 and 1995 are
immaterial and no material charges resulted from its termination.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain 1995 and 1994 amounts have been reclassified to conform with 1996
classifications.
(B) CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For financial statement purposes, US Airways considers all highly liquid
investments purchased within three months of maturity to be cash equivalents.
Cash and cash equivalents are stated at cost, which approximates market value.
Short-term investments consist of certificates of deposit and commercial paper
purchased with maturities greater than three months but less than one year.
In 1994, US Airways adopted Statement of Financial Accounting Standards No.
115,
F-55
<PAGE>
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
Under this statement, US Airways has classified its entire short-term
investment portfolio as "available-for-sale." As of December 31, 1996 and 1995,
there were no material differences between estimated fair values and carrying
amounts for cash equivalents and short-term investments.
(C) MATERIALS AND SUPPLIES
Inventories of materials and supplies are valued at the lower of cost or
market value. Costs are determined using average costing methods and are
charged to operations as consumed. An allowance for obsolescence is provided for
flight equipment expendable and repairable parts.
(D) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost or, if acquired under capital leases,
at the lower of the present value of minimum lease payments or fair market value
at the inception of the lease. Maintenance and repairs, including the overhaul
of aircraft components, are charged to operating expense as incurred and costs
of major improvements are capitalized for both owned and leased assets. Interest
related to deposits on aircraft purchase contracts and facility and equipment
construction projects is capitalized as additional cost of the asset or as
leasehold improvement if the asset is leased. Depreciation and amortization for
principle asset classifications is provided on a straight-line basis to
estimated residual values over estimated depreciable lives. US Airways
periodically reviews estimated depreciable lives and residual values for
reasonableness and revises its estimates, if necessary.
<TABLE>
<CAPTION>
Depreciable
Assets Lives Residual Values
- ------------------------------------------ -------------- ----------------
(years) (in millions)
<S> <C> <C>
Aircraft
Boeing 767-200ER 20 $ 14.0
Boeing 757-200 20 8.0
Boeing 737-300/400 20 7.5
Boeing 737-200 5-17 0.6-5.0
McDonnell Douglas MD-80 20 7.5
Douglas DC-9-30 17 3.0
Fokker 100 20 5.0
Fokker F28-4000 8 2.0
Fokker F28-1000 6 1.0
Turboprop aircraft 15 1.5
Improvements to leased aircraft life of lease -
Ground property, equipment and leasehold 1-10 or
improvements life of lease -
Buildings 30 -
</TABLE>
Property acquired under capital lease is amortized on a straight-line basis
over the term of the lease and charged to Depreciation and amortization expense.
When property and equipment is sold or retired, the cost and accumulated
depreciation is removed from the accounts and any gain or loss recognized as
Other, net, a component of Other Income (Expense).
(E) GOODWILL AND OTHER INTANGIBLES
Goodwill, the cost in excess of fair value of identified net assets acquired,
is being amortized on a straight-line basis over 40 years. The $629.5 million
goodwill resulting from the acquisition of
F-56
<PAGE>
Pacific Southwest Airlines ("Pacific Southwest") and Piedmont Aviation, Inc.
("Piedmont Aviation"), both in 1987, is being amortized as Depreciation and
amortization expense. As of December 31, 1996 and 1995, accumulated amortization
related to the Pacific Southwest and Piedmont Aviation acquisitions was $144.1
million and $128.3 million, respectively. The $11.4 million goodwill resulting
from USAM's computer reservation system investments is being amortized as a
component of Other Income (Expense), consistent with the classification of the
related income or loss on the investments. As of December 31, 1996 and 1995,
USAM's related accumulated amortization was $2.3 million and $2.0 million,
respectively. US Airways periodically evaluates whether goodwill is impaired by
comparing the goodwill balances with estimated future undiscounted cash flows
which, in US Airways' judgment, are attributable to the goodwill. This analysis
is performed separately for the goodwill which resulted from each acquisition.
Other intangible assets consist mainly of purchased operating rights at
various airports, purchased route authorities, capitalized software costs and
the intangible asset associated with the underfunded amounts of certain pension
plans ("Intangible Pension Asset"). The operating rights, route authorities and
capitalized software costs are being amortized on a straight-line basis over the
expected periods of benefit as Depreciation and amortization expense. The
operating rights, valued at purchase cost or appraised value if acquired with
Pacific Southwest or Piedmont Aviation, are being amortized over periods ranging
from ten to 25 years, the route authorities are being amortized over 25 years
and capitalized software costs are being amortized over five years. The
Intangible Pension Asset is recognized in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions" ("SFAS 87")
(see Note 8(a)). As of December 31, 1996 and 1995, accumulated amortization
related to intangible assets was $128.2 million and $104.0 million,
respectively.
Based on the most recent analyses, US Airways believes that goodwill and other
intangible assets were not impaired as of December 31, 1996.
(F) OTHER ASSETS
Other Assets consists primarily of non-current pension assets, the unamortized
balance of deferred compensation, restricted cash and investments and a long-
term receivable from British Airways. Deferred compensation resulted mainly from
US Airways' establishment of an Employee Stock Ownership Plan ("ESOP") in 1989
(see Note 7). Restricted cash and investments are deposits in trust accounts to
collateralize letters of credit and workers' compensation policies. The long-
term receivable from British Airways resulted from the relinquishment by US
Airways of three U.S. to London routes.
Besides the deferred compensation that arose from the establishment of the
ESOP, US Airways accounts for deferred compensation and the related amortization
by applying the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB
25, US Airways recognizes deferred compensation equal to the fair market value
of US Airways Group common stock for such stock granted to US Airways employees
("Stock Grants") (which is amortized as Personnel costs over the vesting period)
but typically records no deferred compensation when options to purchase US
Airways Group Common Stock are granted to US Airways employees ("Option Grants")
(because, except on limited occasions, there is no difference between the
exercise price of the stock options and the fair market value of US Airways
Group Common Stock on the date of grant).
F-57
<PAGE>
US Airways recognized compensation expense related to Stock Grants of $11.9
million, $0.3 million and $0.2 million in 1996, 1995 and 1994, respectively, and
compensation expense related to Option Grants of $7.9 million in 1996 (none for
1995 or 1994). In addition, US Airways recognized compensation expense related
to stock appreciation rights tied to the fair market value of US Airways Group
common stock ("SARs") of $41.6 million in 1996 (none for 1995 or 1994) as the
result of a SAR feature granted to stock option holders under US Airways Group's
1992 Stock Option Plan. Deferred compensation related to Stock Grants was $9.4
million and $11.6 million as of December 31, 1996 and 1995, respectively, and
deferred compensation related to Options Grants was $2.4 million as of December
31, 1996 (none as of December 31, 1995).
The following table summarizes stock option transactions related to US Airways
employees pursuant to US Airways Group's various stock option and incentive
plans for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(000) (000) (000)
Stock Options
- -------------------
Outstanding at
beginning of year 8,426 $17 8,844 $18 9,009 $ 19
Granted (1) 82 $17 155 $ 9 354 $ 9
Granted (2) 2,415 $13 - - - -
Exercised 435 $15 43 $10 5 $ 10
Forfeited (3) 673 $16 489 $25 504 $ 24
Expired 48 $32 41 $36 10 $ 23
----- ----- -----
Outstanding at
end of year 9,767 $17 8,426 $17 8,844 $ 18
Exercisable at
end of year 7,802 7,986 8,237
</TABLE>
(1) Exercise price equal to the fair market value of a share of US Airways
Group common stock at date of grant; 1996 activity includes 20,000 stock
options that were repriced.
(2) Exercise price lower than the fair market value of a share of US Airways
Group common stock at date of grant.
(3) 1996 activity includes the cancellation of repriced stock options. See (1)
above.
The weighted average fair value of stock options which had an exercise price
equal to the fair market value of a share of US Airways Group common stock at
date of grant was $11 and $6 for 1996 and 1995, respectively. The weighted
average value of stock options which had an exercise price lower than the fair
market value of a share of US Airways Group common stock at date of grant was
$13 for 1996 (no such grants during 1995).
During 1995, the Financial Accounting Standards Board adopted Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement
requires the use of fair value techniques to determine compensation expense
associated with stock-based compensation. As mentioned above, US Airways applies
the provisions of APB 25 to determine compensation expense, as permitted under
SFAS 123. However, US Airways is obligated to
F-58
<PAGE>
disclose certain information including pro forma net income as if SFAS 123 had
been adopted to measure compensation expense. Had compensation cost been
measured in accordance with SFAS 123, US Airways estimates that its net income
for 1996 would have been reduced from $183.2 million to $168.1 million and its
net income for 1995 would have been reduced from $33.0 million to $32.8 million.
In order to calculate this pro forma net income information, US Airways used the
Black-Scholes stock option-pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: stock volatility of US Airways
Group common stock of 50.1% and 48.8%; risk-free interest rates of 6.2% and
6.6%; expected stock option life of 9 years for both years; and no dividend
yield (0%) for either year.
The pro forma net income information reflects Option Grants in 1996 and 1995
only. Therefore, the full impact of calculating compensation expense for stock
options under SFAS 123 is not reflected in the pro forma net income amounts
above because compensation expense is recognized over the stock option's vesting
period and compensation expense for stock options granted prior to January 1,
1995 is not considered.
In November 1995, US Airways entered into a five-year transaction with a third
party pursuant to which US Airways agreed to pledge to such third party from
time to time certain flight equipment and simulators as collateral for up to $70
million aggregate principal amount of letters of credit to be issued by the
third party with respect to certain workers' compensation obligations of US
Airways. On December 15, 1995, US Airways pledged ten aircraft to the third
party, resulting in the release of $67.2 million in cash and securities that had
been previously pledged by US Airways to letter of credit providers.
(G) DEFERRED GAINS ON SALE AND LEASEBACK TRANSACTIONS
Gains on aircraft sale and leaseback transactions are deferred and amortized
over the term of the leases as a reduction of the related aircraft rent expense.
(H) RECOGNITION OF PASSENGER TRANSPORTATION REVENUES
Passenger ticket sales are recognized as Passenger transportation revenues
when the transportation service is rendered or the ticket otherwise expires. At
the time of sale, a liability is established (Traffic balances payable and
unused tickets) and subsequently eliminated through carriage of the passenger,
through billing from another air carrier which renders the service or by refund
to the passenger.
Effective October 1, 1996, US Airways began purchasing all of the capacity
(available seat miles) generated by US Airways Group's three wholly-owned
regional air carriers and, concurrently, recognizing revenues, "US Airways
Express transportation revenues," when transportation service is rendered by
these affiliated air carriers or the related tickets otherwise expire.
Liabilities related to tickets sold for travel on these air carriers are also
included in US Airways' Traffic balances payable and unused tickets and are
subsequently eliminated in the same manner as described above. See Note 10 for
more information related to these capacity purchase arrangements.
As of December 31, 1995, $30.8 million owed to US Airways Group's three
wholly-owned regional airline subsidiaries was included in Traffic balances
payable and unused tickets. No such amounts are included as of December 31, 1996
due to the capacity purchase arrangements mentioned above.
F-59
<PAGE>
(I) FREQUENT TRAVELER AWARDS
US Airways accrues the estimated incremental cost of travel awards earned by
participants in its frequent traveler program when requisite mileage award
levels are achieved.
(J) INVESTMENT TAX CREDIT
Investment tax credit benefits were recorded using the "flow-through" method
as a reduction of the Federal income tax provision.
(K) ADVERTISING COSTS
Advertising costs are expensed when incurred as other operating expense.
Advertising expense for 1996, 1995 and 1994 was $51.2 million, $66.6 million and
$63.4 million, respectively.
2. FINANCIAL INSTRUMENTS
(A) TERMS OF CERTAIN FINANCIAL INSTRUMENTS
US Airways has entered into hedging arrangements designed to reduce its
exposure to fluctuations in the price of aviation fuel. Under these
arrangements, US Airways receives or makes payments based on the difference
between a fixed price and the market price for specified petroleum products. Net
settlements are recorded as adjustments to Aviation fuel expense. The total
notional gallons under hedging arrangements were 84 million and 38 million as of
December 31, 1996 and 1995, respectively (US Airways entered into arrangements
prior to December 31, 1996 which, effectively closed certain hedging
arrangements covering approximately 22 million gallons). For hedging
arrangements open as of December 31, 1996, US Airways will pay fixed prices
ranging from $0.553 to $0.700 per notional gallon and receive a floating rate
per gallon based on current market prices. The open hedging arrangements, all of
which expire during 1997, represent approximately 6% of US Airways' expected
1997 fuel consumption. For arrangements open as of December 31, 1995, US Airways
paid fixed prices ranging from $0.499 to $0.548 per notional gallon and received
a floating rate based on market prices. Although these hedging arrangements
expose US Airways to credit loss in the event of non-performance by the other
parties to the agreements, US Airways does not anticipate such non-performance
because of the favorable creditworthiness of the other parties. US Airways may
continue to enter into such arrangements, depending on market conditions.
An aggregate of $32 million of future principal payments of US Airways' long-
term debt due 1998 through 2000 is payable in Japanese Yen. This foreign
currency exposure has been hedged to maturity by US Airways' participation in
foreign currency contracts. Net settlements will be recorded as adjustments to
Interest expense. Although US Airways is exposed to credit loss in the event of
non-performance by the counterparty to the contracts, US Airways does not
anticipate such non-performance because of the favorable creditworthiness of the
other party.
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless a quoted market price indicates otherwise, the fair values of short-
term investments and other investments generally approximates carrying values
because of the short maturity of these instruments. US Airways has estimated the
fair value of long-term debt and the long-term note receivable by discounting
future cash flows using current rates offered to US Airways for debt and note
receivables of similar maturities. The fair values of energy swap agreements and
F-60
<PAGE>
foreign currency contracts are obtained from dealer quotes. These values
represent the estimated amount US Airways would receive or pay to terminate such
agreements.
The estimated fair values of US Airways' financial instruments, none of which
are held for trading purposes, are summarized as follows (brackets denote a
liability):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 1995
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Short-term investments $ 635,839 $ 635,605 $ 19,831 $ 19,822
Restricted cash and investments (1) 87,783 87,843 98,742 98,539
Long-term note receivable (1) 40,733 30,080 45,433 33,277
Other long-term investments (1) (2) 20,606 22,126 4,607 4,008
Long-term debt (excludes
capital lease obligations) (2,649,609) (2,697,422) (2,753,932) (2,564,514)
Energy swap agreements:
In a net receivable position - 3,550 - 1,845
Foreign currency contracts:
In a net receivable position - 963 - 4,050
</TABLE>
(1) Amounts included in Other Assets on US Airways' Consolidated Balance
Sheets.
(2) Classified as "held-to-maturity" under SFAS 115.
<TABLE>
<CAPTION>
3. LONG-TERM DEBT
Details of long-term debt are as follows:
December 31,
-----------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Senior Debt:
10% Senior Notes due 2003 $ 300,000 $ 300,000
9 5/8% Senior Notes due 2001 175,000 175,000
5.7% to 12% Equipment Financing Agreements,
Installments due 1997 to 2016 2,117,834 2,180,430
8.4% Intercompany Aircraft Loan with US Airways Group - 68,640
8.6% Airport Facility Revenue Bond due 2022 27,620 27,620
7 1/4% Aircraft Purchase Deposit Financing due 1998* 29,155 -
Other - 2,242
---------- ----------
2,649,609 2,753,932
Capital Lease Obligations 49,380 65,496
---------- ----------
Total 2,698,989 2,819,428
Less Current Maturities 84,171 77,496
---------- ----------
$2,614,818 $2,741,932
========== ==========
</TABLE>
* See Note 4(d) for additional information with respect to aircraft US Airways
has scheduled for delivery in 1998.
F-61
<PAGE>
Maturities of long-term debt and debt under capital leases for the next five
years:
<TABLE>
<CAPTION>
<S> <C>
(in thousands)
1997 $ 84,171
1998 184,693
1999 77,351
2000 122,569
2001 246,372
Thereafter 1,983,833
</TABLE>
Interest rates on $242 million principal amount of long-term debt as of
December 31, 1996 are subject to adjustment to reflect prime rate and other rate
changes.
Equipment financings totaling $2.2 billion were collateralized by aircraft and
engines with a net book value of approximately $2.3 billion as of December 31,
1996.
4. COMMITMENTS AND CONTINGENCIES
(A) OPERATING ENVIRONMENT
US Airways improved financial results for 1996 are primarily attributable to
favorable capacity and pricing trends in markets it operates in, continued
stable domestic economic conditions and the positive influence of its revenue
enhancement and cost reduction initiatives. However, US Airways' financial
condition, results of operations and future prospects are more susceptible to an
economic downturn and competitive influences than most of its major competitors
due to its high cost structure amid the growing low cost, low fare environment
in the domestic airline industry. As discussed in Note 10, US Airways' financial
results for the fourth quarter and full-year 1996 were significantly affected by
related party transactions.
Most of US Airways' operations are in competitive markets, predominantly
within the Eastern U.S. In recent years, air carriers with low costs of
operations and fare structures have initiated and or expanded into markets
served by US Airways. In addition, several of the larger, mature air carriers
have developed or indicated their intention to develop similar low cost, low
fare operations. In an effort to preserve market share, US Airways has typically
responded to the entry of a low cost, low fare competitor into its markets by
matching fares and increasing the frequency of service in related markets,
generally with the result of diluting US Airways' yield in those markets. US
Airways' currently has the highest unit operating costs among the major domestic
air carriers and the growth and expansion of low cost, low fare air carriers or
operations in US Airways' markets has put considerable pressure on US Airways to
reduce operating costs in order to maintain competitiveness.
US Airways was able to reduce certain non-labor related operating costs during
1996 and 1995 through various organizational changes, process reengineering and
reducing or eliminating capacity in unprofitable markets; however, US Airways
has not been successful to date in achieving meaningful reductions in its
largest expense category, Personnel costs. US Airways believes that its long-
term financial viability depends on its success in further reducing its cost of
operations, including its Personnel costs.
As of December 31, 1996, US Airways employed approximately 40,160 full-time
equivalent employees. Approximately 26,200, or 65%, of these employees are
covered by collective bargaining agreements with various unions, or will be
covered by collective bargaining
F-62
<PAGE>
agreements for which initial negotiations are in progress. US Airways' contracts
with the International Association of Machinists and Aerospace Workers ("IAM"),
which represents US Airways' machinists group, the Air Line Pilots Association
("ALPA"), which represents US Airways' pilots, and the Association of Flight
Attendants ("AFA"), which represents US Airways' flight attendants, are open for
negotiation and collective bargaining talks are underway. US Airways has not yet
reached an initial contract with its fleet service employees, a class of
approximately 5,700 employees who are also represented by the IAM. US Airways
cannot predict the ultimate outcome of these negotiations or if it will be
successful in achieving meaningful wage and benefit concessions from its
employees.
Although a competitive strength in some regards, the concentration of
significant operations in the Eastern U.S. results in US Airways being
susceptible to changes in certain regional conditions that may have an adverse
affect on its financial condition and results of operations. For example,
geographically isolated inclement weather and the partial Federal government
shutdowns which both occurred during the first quarter of 1996, adversely
effected operating revenues and expenses to a greater degree than some of its
competitors.
US Airways' operations are dependent on the availability of aviation fuel. The
availability and price of aviation fuel is largely determined by the actions of
the nations which compose the Organization of Petroleum Exporting Countries
("OPEC") cartel. OPEC, which currently controls a significant amount of the
world's known crude oil reserves, can affect the availability and price of
aviation fuel through its production and price-targeting actions. In addition,
aviation fuel prices are affected by political events, seasonal factors and
other factors generally outside of US Airways' control. US Airways has a
diversified aviation fuel supplier network and participates in fuel hedging
transactions (see Note 2) in order to ensure aviation fuel availability and
partially protect US Airways from temporary aviation fuel price fluctuations.
(B) LEASES
US Airways leases certain aircraft, engines, computer and ground equipment, in
addition to the majority of its ground facilities. Ground facilities include
executive offices, overhaul and maintenance bases and ticket and administrative
offices. Public airports are utilized for flight operations under lease
arrangements with the municipalities or agencies owning or controlling such
airports. Substantially all leases provide that the lessee shall pay taxes,
maintenance, insurance and certain other operating expenses applicable to the
leased property. Some leases also include renewal and purchase options.
In addition, US Airways subleases certain leased aircraft and ground
facilities under noncancelable operating leases expiring in various years
through 2021.
The following amounts applicable to capital leases are included in property
and equipment:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
(in thousands)
Flight equipment $167,308 $192,775
Ground property and equipment 406 4,767
-------- --------
167,714 197,542
Less accumulated amortization 125,568 140,212
-------- --------
$ 42,146 $ 57,330
======== ========
</TABLE>
F-63
<PAGE>
As of December 31, 1996, obligations under capital and noncancelable operating
leases for future minimum lease payments were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
(in thousands)
<S> <C> <C>
1997 $21,304 $ 704,579
1998 10,294 666,706
1999 10,295 628,959
2000 7,193 623,135
2001 4,703 619,755
Thereafter 14,109 5,788,942
------- ----------
Total minimum lease payments 67,898 9,032,076
Less sublease rental receipts 174,655
----------
Total minimum operating lease payments $8,857,421
==========
Less amount representing interest 18,518
-------
Present value of future minimum capital lease payments 49,380
Less current obligations under capital leases 15,912
-------
Long-term obligations under capital leases $33,468
=======
</TABLE>
Rental expense under operating leases for 1996, 1995 and 1994 was $731
million, $738 million and $703 million, respectively. The $731 million rental
expense for 1996 excludes a credit of $22.5 million related to the US Airways'
subleasing of eleven non-operating British Aerospace BAe-146-200 ("BAe-146")
aircraft. The $738 million rental expense for 1995 excludes a credit of $4.1
million related to US Airways' subleasing of three non-operating BAe-146
aircraft. See Note 14 for additional information related to US Airways' non-
operating BAe-146 aircraft. The $703 million rental expense for 1994 excludes
charges of $103 million related to US Airways' grounded BAe-146 fleet and $13
million primarily related to US Airways' decision to cease operations of its
remaining Boeing 727-200 aircraft in 1995.
US Airways also leases certain owned aircraft under noncancelable operating
leases which expire in various years through 2002 to both third and related
parties, primarily subsidiaries of US Airways Group. See Note 10 - Related Party
Transactions. The minimum future rentals to be received by US Airways on these
leases are: $12.7 million - 1997; $7.2 million - 1998; $5.4 million - 1999; $4.6
million - 2000; $4.2 million - 2001; and $1.8 million thereafter. The following
amounts are applicable to aircraft leased under such agreements as reflected in
flight equipment:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Flight equipment $82,868 $192,198
Less accumulated amortization 36,947 75,089
------- --------
$45,921 $117,109
======= ========
</TABLE>
(C) LEGAL PROCEEDINGS
US Airways is involved in legal proceedings arising out of its two aircraft
accidents that occurred in July and September 1994 near Charlotte, North
Carolina and Pittsburgh, Pennsylvania, respectively. The National Transportation
Safety Board ("NTSB") held hearings beginning in September 1994 relating to the
July accident and January and November of 1995 relating to the September
accident. In April 1995, the NTSB issued its finding of probable causes with
respect to
F-64
<PAGE>
the accident near Charlotte. It assigned as probable causes flight crew errors
and the failure of air traffic control to convey weather and windshear hazard
information. The NTSB has not yet issued its final accident investigation report
for the accident near Pittsburgh. The NTSB has indicated that a determination of
the cause of the accident is not likely until sometime in 1997. US Airways
expects that it will be at least two to three years before the accident
litigation and related settlements will be concluded. Litigation resulting from
the July 1994 accident in Charlotte was recently tried in U.S. District Court in
Columbia, South Carolina. The jury found US Airways was liable for compensatory
damages but was not liable for punitive damages. The compensatory damages trials
have not been concluded and US Airways cannot estimate possible compensatory
damages. However, US Airways believes that it is fully insured with respect to
this litigation. Therefore, US Airways believes that the litigation will not
have a material adverse effect on its financial condition or results of
operations.
On July 30, 1996, US Airways Group and US Airways initiated a lawsuit in U.S.
District Court for the Southern District of New York against British Airways plc
("British Airways"), BritAir Acquisition Corp., Inc., American Airlines Inc.
("American") and American's parent company, AMR Corp. US Airways Group and US
Airways claim that British Airways, in pursuit of an alliance with American, is
responsible for breaches of fiduciary duty to US Airways Group and US Airways
and violated certain provisions of the January 21, 1993 Investment Agreement
between US Airways Group and British Airways. The lawsuit also claims that the
defendants are in violation of U.S. Antitrust laws that prohibit conduct that
harms competition. Although the defendants filed motions to dismiss the lawsuit
following the filing of the complaint, these motions became superseded on March
5, 1997 when US Airways Group filed an Amended Complaint with the Court based on
information gathered in the pre-trial discovery process. The defendants have
informed US Airways Group that, in response to the Amended Complaint, they
intend to file new motions to dismiss shortly. US Airways is unable to predict
at this time the ultimate outcome of this lawsuit.
In December 1995, US Airways received a Civil Investigative Demand ("CID")
from the U.S. Department of Justice relating to US Airways' compliance with the
terms of a consent decree entered into in December 1992, as amended in September
1994. The consent decree was entered into to resolve litigation concerning US
Airways' methods of disseminating fare data to the Airline Tariff Publishing
Company. 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. The CID issued in December 1995 seeks information concerning US Airways'
use of travel dates in its fare filings, among other things. Although US Airways
believes there will be no further action stemming from this CID, the
investigation has not been fully closed.
In February and March 1995, 39 class action lawsuits were filed in various
federal district courts by travel agencies and a travel agency trade association
alleging that seven of the major U.S. airlines, including US Airways, violated
the antitrust laws when they individually capped travel agent base commissions
at $50 for round-trip domestic tickets with base fares above $500 and at $25 for
one-way domestic tickets with base fares above $250. The lawsuits were
consolidated in the federal district of Minnesota. The plaintiffs sought
unspecified treble damages for restraint of trade. In September of 1996 the case
against US Airways, and subsequently the cases against the other airlines, were
settled. While US Airways believes that its actions in establishing a commission
cap were in full compliance with the antitrust laws, the uncertainty and expense
of litigation prompted a settlement of the claims. US Airways paid $9.5 million,
as part of a total settlement of $85.8 million for all of the defendants. US
Airways did not admit liability or wrongdoing and the settlement allowed the
commission cap to remain in place. The settlement was approved by the court in
January of 1997.
F-65
<PAGE>
In October 1995, US Airways terminated for cause an agreement with In-Flight
Phone Corporation ("IFPC"). IFPC was US Airways' provider of on-board telephone
and interactive data systems (the "IFPC System"). The agreement contemplated the
eventual installation of the IFPC System on substantially all of US Airways'
aircraft. The IFPC System had been installed on approximately 80 aircraft prior
to the date of termination of the agreement. On December 6, 1995, IFPC filed
suit against US Airways in Illinois state court seeking equitable relief and
damages in excess of $186 million. US Airways believes that its termination of
its agreement with IFPC was appropriate and that it is owed significant damages
from IFPC. On December 7, 1995, US Airways successfully defended IFPC's
emergency motion for a temporary restraining order. On December 13, 1995, IFPC's
motion for a preliminary injunction was denied and IFPC has relinquished its
right to appeal that decision. IFPC's claim for damages remains pending. In June
1996, US Airways filed a counterclaim against IFPC seeking compensatory damages
in excess of $25 million and punitive damages in excess of $25 million. In
January 1997, IFPC filed for protection from its creditors under Chapter 11 of
the Bankruptcy Code. The parties stipulated to lift the automatic stay provided
for in the Bankruptcy Code which could allow IFPC's and US Airways' claims to be
fully litigated. US Airways is unable to predict at this time the ultimate
resolution or potential financial impact on its financial condition and results
of operations of these proceedings.
In May 1995, US Airways Group, US Airways and the Retirement Income Plan for
Pilots of USAir, Inc. (the "Pilots' Pension Plan") were sued in federal district
court for the District of Columbia by 481 active and retired US Airways pilots
alleging violations of the Employee Retirement Income Security Act ("ERISA") by
erroneously calculating benefits under the Pilots' Pension Plan. The plaintiffs
sought, among other things, damages in excess of $70 million. In May 1996, the
court issued a decision in the lawsuit granting US Airways' Motion to Dismiss
the majority of the complaint for lack of subject matter jurisdiction, deciding
that the dispute must be resolved through the arbitration process. The court
retained jurisdiction over one count of the complaint alleging a violation of a
disclosure requirement of ERISA. There are no significant penalties or damages
which can result from this remaining claim. The plaintiffs appealed the court's
decision, however, in the opinion of US Airways' counsel, the appeal is unlikely
to be successful.
The Equal Employment Opportunity Commission and various state and local fair
employment practices agencies are investigating charges by certain job
applicants, employees and former employees of US Airways involving allegations
of employment discrimination in violation of Federal and state laws. The
plaintiffs in these cases generally seek declaratory and injunctive relief and
monetary damages, including back pay. In some instances they also seek
classification adjustment, compensatory damages and punitive damages. Such
proceedings are in various stages of litigation and investigation, and the
outcome of these proceedings is difficult to predict. In US Airways' opinion,
however, the disposition of these matters is not likely to have a material
adverse effect on its financial condition or results of operations.
(D) AIRCRAFT COMMITMENTS
In June 1995, US Airways entered into agreements with The Boeing Company
("Boeing") and Rolls Royce plc ("Rolls Royce") deferring the delivery of eight
757-200 aircraft from 1996 to 1998. As part of the agreements, the due dates for
progress payments associated with the 1996 deliveries were likewise rescheduled.
Accordingly, approximately $71 million of progress payments that had been paid
by US Airways were refunded to US Airways in the third quarter of 1995. The
related long-term debt which financed the deposits was dissolved.
F-66
<PAGE>
The following schedule of US Airways' new aircraft deliveries and scheduled
payments as of December 31, 1996 (including progress payments, payments at
delivery, buyer furnished equipment, spares, and capitalized interest) reflects
US Airways' current agreements with Boeing and Rolls Royce as discussed above
(dollars in millions):
<TABLE>
<CAPTION>
Delivery Period - Firm Orders
-------------------------------------------------
There-
1997 1998 1999 2000 2001 after Total
----- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Boeing
757-200 - 8 - - - - 8
737-Series* - - - - - 40 40
----- ----- ----- ----- ----- ------ ------
Total - 8 - - - 40 48
===== ===== ===== ===== ===== ====== ======
Payments $ 74 $ 254 $ - $ - $ 52 $1,803 $2,183
===== ===== ===== ===== ===== ====== ======
</TABLE>
* Purchase agreement includes a provision allowing US Airways to purchase any
other Boeing commercial aircraft type in satisfaction of its obligation to
purchase forty 737-Series aircraft. Such satisfaction would be accomplished on
an "equivalent-seat" basis.
The above aircraft commitments do not include any amounts related to a
contingent contract to acquire up to 400 aircraft from Airbus Industrie. The
contract is contingent upon US Airways achieving a competitive cost structure
and approval of definitive documentation by US Airways' board of directors.
During the fourth quarter of 1996, US Airways advised Boeing and Rolls Royce
that it does not plan to accept delivery of the eight Boeing 757-200 aircraft
that it presently has on firm order and suspended progress payments related to
these aircraft. As of December 31, 1996, US Airways had made $58.3 million in
progress payments for these aircraft. Subsequently, Boeing alleged, among other
things, that US Airways is in default of the 757-200 purchase agreement and that
US Airways has also repudiated the purchase agreement related to the 737-Series
aircraft scheduled for delivery commencing in 2003. Boeing has purported to
terminate both such 757-200 and 737-Series purchase agreements, an action which
US Airways believes is not supported by law or the facts, and has claimed almost
$450 million as damages for US Airways' alleged breach of such agreements. US
Airways subsequently advised Boeing, among other things, that US Airways rejects
Boeing's asserted legal basis for termination of such agreements. In addition,
US Airways stated that it would hold Boeing responsible for any damages incurred
as a result of Boeing's unlawful termination and demanded immediate return of
all payments made by US Airways in furtherance of the 737-Series purchase
agreement, together with interest from the date of payment. US Airways also
expressed its belief that Boeing is legally committed to pursue contract
resolutions in good faith. Notwithstanding the formal legal positions of the
parties, both sides have expressed a desire to resolve this dispute on a
mutually satisfactory basis. US Airways cannot predict whether Boeing will seek
to exercise remedies against US Airways and if so, whether the effect on US
Airways' financial condition or results of operations would be material.
US Airways has a commitment to purchase hush kits for certain of its Douglas
DC-9-30 and Boeing 737-200 aircraft. The installation of these hush kits will
bring the aircraft into compliance with Federal Aviation Administration Stage 3
noise level requirements. The projected payments associated with the purchase of
the hush kits are $19.7 million during 1997 and $32.1 million during 1998 and
1999.
F-67
<PAGE>
(E) CONCENTRATION OF CREDIT RISK
US Airways invests available cash in money market securities of various banks,
commercial paper of financial institutions and other companies with high credit
ratings and securities backed by the United States government.
As of December 31, 1996, most of US Airways' receivables related to tickets
sold to individual passengers through the use of major credit cards (42%) or to
tickets sold by other airlines (17%) and used by passengers on US Airways or its
regional airline affiliates. These receivables are short-term, generally being
settled within 14 days after sale. Bad debt losses, which have been minimal in
the past, have been considered in establishing allowances for doubtful accounts.
US Airways does not believe it is subject to any significant concentration of
credit risk.
(F) GUARANTEES
As of December 31, 1996, US Airways guaranteed payments of debt and lease
obligations of Piedmont Airlines, Inc. ("Piedmont") and PSA Airlines, Inc.
("PSA"), both wholly-owned subsidiaries of US Airways Group, totaling $83.6
million.
US Airways also guarantees the payment of principal and interest on special
facility revenue bonds issued by certain municipalities to build or improve
airport and maintenance facilities. Under related lease arrangements, US Airways
is required to make rental payments sufficient to pay maturing principal and
interest payments on the bonds. As of December 31, 1996 the principal amount of
these bonds outstanding was $77.5 million.
5. INCOME TAXES
Effective January 1, 1993, US Airways adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 required a change from the deferred method under Accounting Principles Board
Opinion No. 11 to the asset and liability method of accounting for income taxes.
US Airways files a consolidated Federal income tax return with its parent
company, US Airways Group. US Airways Group and its wholly-owned subsidiaries
have executed a tax sharing agreement which allocates tax and tax items, such as
net operating losses and tax credits between members of the group based on their
proportion of taxable income and other items. This tax sharing and allocation
impacts the deferred tax assets and liabilities reported by each corporation on
a separate company basis. Accordingly, US Airways' tax expense is based on its
taxable income (loss), taking into consideration its allocated tax loss
carryforwards and tax credit carryforwards.
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F-68
<PAGE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
(in thousands)
<S> <C> <C> <C>
Current provision:
Federal $4,432 $4,107 $
-
State 3,026 301 -
------ ------ -----
Total current provision 7,458 4,408 0
------ ------ -----
Deferred provision:
Federal - - -
State 353 - -
------ ------ -----
Total deferred provision 353 0 0
------ ------ -----
Provision for income taxes $7,811 $4,408 $ 0
====== ====== =====
</TABLE>
In 1996, US Airways was not subject to regular Federal income tax as a result
of using $320 million in Federal net operating loss carryforwards. However, US
Airways was subject to Federal alternative minimum tax ("AMT"). Approximately
$318 million in AMT net operating loss carry-forwards and approximately $148
million in state net operating loss carryforwards were utilized to reduce the
Federal and state tax liabilities.
The significant components of deferred income tax expense (benefit) for the
years ended December 31, 1996, 1995, and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
(in thousands)
<S> <C> <C> <C>
Deferred tax expense (benefit) (exclusive of
the other components listed below) $ 90,583 $ 17,779 $(234,269)
Increase (decrease) for the year in the
valuation allowance for deferred tax
assets (90,230) (17,779) 234,269
-------- -------- ---------
Total $ 353 $ 0 $ 0
======== ======== =========
</TABLE>
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F-69
<PAGE>
A reconciliation of taxes computed at the statutory Federal tax rate on
earnings before income taxes to the provision (credit) for income taxes is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ----------
(in thousands)
<S> <C> <C> <C>
Tax provision (credit) computed at Federal
statutory rate $ 66,865 $ 13,089 $(250,664)
Book expenses not deductible for tax purposes 16,535 15,088 15,691
Limitation in recognizing tax benefit of net
operating loss/credits - - 234,973
Utilization of Federal net operating loss which
reduced valuation allowance (111,920) (7,778) -
State income tax provision, net of Federal
tax benefit 2,320 196 -
Current year temporary differences which
reduced valuation allowance 29,579 (20,293) -
Alternative minimum tax which increased
valuation allowance 7,208 3,384 -
Other (2,776) 722 -
--------- -------- ---------
Provision for income taxes $ 7,811 $ 4,408 $ 0
========= ======== =========
Effective tax rate 4% 12% 0%
========= ======== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1996,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Deferred tax assets:
Leasing transactions $ 153,952 $ 168,813 $ 164,513
Tax benefits purchased/sold 54,173 67,348 76,784
Gain on sale and leaseback transactions 134,090 146,387 154,246
Employee benefits 606,213 510,213 498,710
Net operating loss carryforwards 473,918 627,357 657,870
Alternative minimum tax credit carryforwards 32,681 25,819 20,881
Investment tax credit carryforwards 48,720 48,720 47,880
Other deferred tax assets 156,811 95,358 85,005
---------- ---------- ----------
Total gross deferred tax assets 1,660,558 1,690,015 1,705,889
Less valuation allowance (695,076) (785,306) (803,085)
---------- ---------- ----------
Net deferred tax assets 965,482 904,709 902,804
Deferred tax liabilities:
Equipment depreciation and amortization 927,442 871,056 866,356
Other deferred tax liabilities 38,393 33,653 36,448
---------- ---------- ----------
Total deferred tax liabilities 965,835 904,709 902,804
---------- ---------- ----------
Net deferred tax liabilities $ 353 $ 0 $ 0
========== ========== ==========
</TABLE>
Included in "Other Deferred Tax Assets" above for 1996, 1995 and 1994 are
approximately $79 million, $38 million and $16 million, respectively, of tax
assets which originate from subsidiaries of US Airways Group in accordance with
US Airways' Tax Sharing Agreement.
F-70
<PAGE>
The valuation allowance for deferred tax assets decreased approximately $90
million in 1996, decreased approximately $18 million in 1995, and increased
approximately $234 million in 1994.
As of December 31, 1996, US Airways had unused net operating losses of $1.4
billion for Federal tax purposes, which expire in the years 2006 to 2009. US
Airways also has available, to reduce future taxes payable, $251 million
alternative minimum tax net operating losses expiring in the year 2009, $49
million of investment tax credits expiring in the years 2002 to 2003, and $33
million of alternative minimum tax credits which do not expire. The Federal
income tax returns of US Airways through 1986 have been examined and settled
with the Internal Revenue Service.
6. STOCKHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
US Airways Group owns all of the outstanding common stock of US Airways. US
Airways' board of directors has not authorized the payment of dividends to US
Airways Group since 1988. In addition, US Airways, organized under the laws of
the State of Delaware, may be subject to certain legal restrictions on its
ability to pay dividends on or repurchase or redeem its own shares of capital
stock. Covenants related to US Airways' 10% and 9 5/8% Senior Unsecured Notes
currently do not permit the payment of dividends by US Airways to US Airways
Group. However, these covenants do not restrict US Airways from loaning or
advancing funds to US Airways Group.
The provisions of Statement of Accounting Standards No. 87, "Employers'
Accounting for Pensions," require the recognition of a minimum liability for
each defined benefit plan for which the accumulated benefit obligation exceeds
plan assets. This amount has been recognized by US Airways as a liability with
an offsetting intangible asset (see Note 1(e)). Because the intangible asset
recognized may not exceed the amount of unrecognized prior service cost on an
individual plan basis, the balance is reported as a separate reduction of
Stockholder's Equity (Deficit) as of December 31, 1996 and 1995. See also
Note 9.
7. EMPLOYEE STOCK OWNERSHIP PLAN
In August 1989, US Airways established an ESOP. US Airways Group sold
2,200,000 shares of its Common Stock to an Employee Stock Ownership Trust (the
"Trust") to hold on behalf of US Airways' employees, exclusive of officers, in
accordance with the terms of the Trust and the ESOP. The trustee placed those
shares in a suspense account pending their release and allocation to employees.
US Airways provided financing to the Trust in the form of a 9 3/4% loan for
$111.4 million for its purchase of shares and US Airways contributed an
additional $2.2 million to the Trust. US Airways makes a yearly contribution to
the Trust sufficient to cover the Trust's debt service requirement. The
contributions are made in amounts equal to the periodic loan payments as they
come due, less dividends available for loan payment. Since the Company did not
pay dividends on any shares held by the Trust for the years ended December 31,
1996, 1995 and 1994, the Trust did not utilize dividends to service its debt
during those periods. The initial maturity of the loan is 30 years. As the loan
is repaid over time, the trustee systematically releases shares of the common
stock from the suspense account and allocates them to participating employees.
Each participant's allocation is based on the participant's compensation, the
total compensation of all ESOP participants and the total number of shares being
released. For each year after 1989, a minimum of 71,933 shares are released from
the suspense account and allocated to participant accounts. If US Airways
Group's return on sales equals or exceeds four percent in a given year, more
shares are released and repayment of the loan is accelerated. Annual
contributions made by US Airways, and therefore loan repayments made by the
Trust, were $11.4 million in each of 1996, 1995 and 1994. The interest portion
of these contributions was $10.3 million in 1996, $10.4 million in 1995 and
$10.5 million in 1994. Approximately 582,000 shares of Common Stock have been
F-71
<PAGE>
released or committed to be released as of December 31, 1996. US Airways
recognized approximately $4 million of compensation expense related to the ESOP
in each of 1996, 1995 and 1994 based on shares allocated to employees (the
"shares allocated" method). Deferred compensation related to the ESOP amounted
to approximately $83.5 million, $87.2 million and $90.9 million as of December
31, 1996, 1995 and 1994, respectively.
8. EMPLOYEE BENEFIT PLANS
(A) PENSION PLANS
US Airways has several pension plans in effect covering substantially all of
its employees. One qualified defined benefit plan covers US Airways' maintenance
employees and provides benefits of specified amounts based on periods of
service. Qualified defined benefit plans for substantially all other employees
provide benefits based on years of service and compensation. The qualified
defined benefit plans for domestic employees are funded, on a current basis, to
meet the minimum funding requirements of the Employee Retirement Income Security
Act of 1974. Liabilities related to pension plans covering foreign employees are
calculated in accordance with generally accepted accounting principles and
funded in accordance with the laws of the individual country.
In 1996, US Airways changed the annual measurement date for its pension plan
assets and liabilities to September 30 from December 31. The change in
measurement date is considered a change in a method of accounting and Accounting
Principles Board Opinion No. 20, "Accounting Changes" ("APB 20"), requires that
the cumulative effect of such a change be recognized as an adjustment to
retained earnings. The change in measurement date had no material cumulative
effect on pension expense for prior years and thus no adjustment was recognized.
For purposes of determining whether a minimum pension liability existed as of
September 30, 1996, plan contributions made in the fourth quarter of 1996 were
included in plan assets.
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F-72
<PAGE>
The funded status of US Airways' qualified defined benefit plans:
<TABLE>
<CAPTION>
1996 1995
---------------------------- -------------------------------
Plans in Which Plans in Which
---------------------------- -------------------------------
Plan ABO Plan ABO
Assets Exceed Exceeds Assets Exceed Exceeds
ABO Plan Assets ABO Plan Assets
-------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
(in millions)
Fair value of plan assets $2,168 $ 305 $ 993 $1,419
Actuarial present value of:
Vested benefit obligation 2,050 369 929 1,603
Nonvested benefit obligation 23 13 29 22
------ ----- ------ ------
ABO based on salaries to date 2,073 382 958 1,625
Additional benefits based on
estimated future salary levels 653 - 130 598
------ ----- ------ ------
Projected benefit obligation ("PBO") 2,726 382 1,088 2,223
PBO in excess of fair value of plan assets (558) (77) (95) (804)
Contributions from October 1, 1996
through December 31, 1996 45 12 - -
Unrecognized net transition asset (22) (9) (2) (34)
Unrecognized prior service (credit) cost (13) 75 - 66
Unrecognized net loss 506 40 312 571
------ ----- ------ ------
Pension (liability) or asset
before adjustment (42) 41 215 (201)
------ ----- ------ ------
Adjustment for minimum
pension liability * - (106) - (149)
------ ----- ------ ------
Pension (liability) or asset as
adjusted and recognized in
Consolidated Balance Sheets $ (42) $ (65) $ 215 $ (350)
====== ===== ====== ======
</TABLE>
* See Note 8(f).
The weighted average assumptions used to determine the actuarial
present value of the PBO:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Discount rate 8.00% 7.25%
Rate of increase in compensation levels 3.52% 3.54%
Expected long-term rate of return on plan assets 8.84% 9.33%
Components of plan assets:
Cash equivalents and short-term investments 11% 7%
Equity investments* 27% 26%
Fixed income and other investments 62% 67%
</TABLE>
* Plan assets as of December 31, 1995 include 205 shares of US Airways Group
Common Stock.
F-73
<PAGE>
The components of the net periodic pension cost for the qualified defined
benefit plans:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(in millions)
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 143 $ 92 $ 124
Interest cost on PBO 250 216 216
Actual return on plan assets (55) (539) 48
Net amortization and deferral (132) 371 (254)
----- ----- -----
Net periodic pension cost $ 206 $ 140 $ 134
===== ===== =====
</TABLE>
Non-qualified supplemental pension plans are established for certain employee
groups, which provide incremental pension payments from US Airways' funds so
that total pension payments equal amounts that would have been payable from US
Airways' qualified pension plans if it were not for limitations imposed by
Federal income tax regulations.
The status of US Airways' non-qualified supplemental plans:
<TABLE>
<CAPTION>
1996 1995
------ ------
(in millions)
<S> <C> <C>
Fair value of plan assets $ - $ -
Actuarial present value of:
Vested benefit obligation 31 30
Nonvested benefit obligation 1 2
----- -----
ABO based on salaries to date 32 32
Additional benefits based on estimated future salary levels 1 2
----- -----
PBO 33 34
----- -----
PBO in excess of fair value of plan assets (33) (34)
Contributions from October 1, 1996 through December 31, 1996 1 -
Unrecognized net transition asset - -
Unrecognized prior service cost 2 3
Unrecognized net loss 3 8
----- -----
Pension (liability) or asset before adjustment (27) (23)
Adjustment for minimum pension liability * (7) (11)
----- -----
Unfunded supplemental liability as adjusted and
recognized in Consolidated Balance Sheets $ (34) $ (34)
===== =====
</TABLE>
* See Note 8(f).
The discount rate used to determine the actuarial present value of the PBO was
8.00% and 7.25% as of September 30, 1996 and December 31, 1995, respectively. A
rate of 6% was used to estimate future salary levels in 1996 and 1995.
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F-74
<PAGE>
The components of net periodic supplemental pension expense for the non-
qualified supplemental pension plans:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ -----
(in millions)
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 2 $ - $ -
Interest cost on PBO 2 2 2
Actual return on plan assets - - -
Net amortization and deferral 6 (1) 21
----- ----- -----
Net periodic supplemental pension cost $ 10 $ 1 $ 23
===== ===== =====
</TABLE>
In addition to the qualified and non-qualified defined benefit plans described
above, US Airways also contributes to certain defined contribution plans. US
Airways' contributions are based on a formula which considers the age and
earnings of each employee and the amount of employee contributions. In addition,
certain qualified defined contribution plans contain a requirement for profit
sharing contributions if US Airways Group achieves a certain pre-tax margin
level. US Airways' expense related to its defined contribution plans, excluding
expenses related to its ESOP (see Note 7), was $59 million, $64 million and $43
million for 1996, 1995 and 1994, respectively. The 1996 expense amount includes
$4.8 million related to the profit sharing component of its defined contribution
plan. US Airways made no contributions related to the profit sharing component
of its defined contribution plans in 1995 or 1994 because US Airways Group did
not achieve the prescribed pre-tax margin level. The 1995 expense amount
includes a catch up adjustment of $11.6 million for new employer match
contributions for certain collective bargaining groups.
(B) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
US Airways offers medical and life insurance benefits to certain employees who
retire from US Airways and their eligible dependents. The medical benefits
provided by US Airways are coordinated with Medicare benefits. Retirees
generally contribute amounts towards the cost of their medical expenses based on
years of service with US Airways. US Airways provides uninsured death benefit
payments to survivors of retired employees for stated dollar amounts, or in the
case of retired pilot employees, death benefit payments determined by age and
level of pension benefit. The plans for postretirement medical and death
benefits are funded on a pay-as-you-go basis.
In 1996, US Airways changed the annual measurement date for postretirement
benefit liabilities to September 30 from December 31. The change in measurement
date is considered a change in a method of accounting and APB 20 requires that
the cumulative effect of such a change be recognized as an adjustment to
retained earnings. The change in measurement date had no material effect on
postretirement benefit expenses for prior years and thus no adjustment was
recognized.
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F-75
<PAGE>
<TABLE>
<CAPTION>
The status of the plans:
1996 1995
-------------- --------
(in millions)
<S> <C> <C>
Plan assets at fair value $ - $ -
Accumulated Postretirement Benefit Obligation ("APBO"):
Retirees 326 338
Fully eligible active plan participants 170 176
Other plan participants 454 482
------- -------
Total APBO 950 996
APBO in excess of plan assets (950) (996)
Contributions from October 1, 1996 through December 31, 1996 7 -
Unrecognized prior service credits (143) (155)
Unrecognized net (gain) loss (34) 112
------- -------
Accrued postretirement benefit liability $(1,120) $(1,039)
======= =======
</TABLE>
<TABLE>
<CAPTION>
The assumptions used to determine the APBO:
1996 1995
---- ----
<S> <C> <C>
Discount rate 8.00% 7.25%
Rate of increase in compensation levels 3.00% to 6.00% 3.00% to 6.00%
Health care cost trend 7.50% 8.50%
</TABLE>
<TABLE>
<CAPTION>
The components of net periodic postretirement benefit expense:
1996 1995 1994
-------- --------- --------
(in millions)
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 44 $ 29 $ 36
Interest cost on APBO 74 65 60
Net amortization and deferral (11) (15) (12)
----- ------- -------
Net periodic postretirement benefit expense $ 107 $ 79 $ 84
===== ======= =======
</TABLE>
The assumed health care cost trend rate used in measuring the APBO was 7.5% in
1996, declining by 1% per year after 1996 to an ultimate rate of 4.5%. If the
assumed health care cost trend rates were increased by one percentage point, the
APBO at September 30, 1996 would be increased by 10% and 1996 periodic
postretirement benefit expense would increase 12%.
(C) POSTEMPLOYMENT BENEFITS
US Airways provides certain postemployment benefits to all of its employees.
In 1993, US Airways adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("SFAS 112"). SFAS 112
requires the use of an accrual method to recognize postemployment benefits such
as severance, disability-related and workers' compensation benefits. US Airways
records the expense for these benefits once a triggering event occurs.
F-76
<PAGE>
9. PROFIT SHARING
In exchange for temporary wage and salary reductions and other concessions
during a twelve month period in 1992 and 1993, including certain ongoing work
rule and medical benefits concessions and the freeze of the defined benefit plan
for certain non-contract employees, affected US Airways employees participate in
a profit sharing program and were granted stock options to purchase US Airways
Group Common Stock (see related discussion under Note 1(f)). This profit
sharing program was designed to recompense those US Airways employees whose pay
had been reduced in an amount equal to (i) two times salary forgone plus (ii)
one time salary forgone (subject to a minimum of $1,000) for the freeze of the
defined benefit pension plan for certain non-contract employees. US Airways has
recognized charges of $213.5 million, including $121.6 million and $49.7 million
in 1996 and 1995, respectively. Cash distributions to participants of $213.5
million have also been made, including $74.9 million and $3.3 million in 1996
and 1995, respectively, and a final cash distribution in the first quarter of
1997 of $129.1 million. After the first quarter 1997 payment, US Airways'
obligations under this profit sharing program were satisfied and this program
ceased.
US Airways' ESOP and Defined Contribution Retirement Program ("DCRP") each
have profit sharing components. Under the ESOP, each eligible US Airways
employee receives Common Stock shares based on his or her compensation relative
to the total compensation of all participants and the number of Common Stock
shares in the allocation pool. When US Airways' return on sales equals or
exceeds certain prescribed levels, US Airways increases its contribution, which
effectively increases the number of Common Stock shares in the allocation pool
(see Note 7). US Airways did not make any provision for profit sharing
contributions in connection with the profit sharing component of the ESOP during
1996 or 1995. Under the DCRP, US Airways makes additional contributions to
participant accounts when US Airways Group achieves certain prescribed pre-tax
margin levels (see Note 8(a)). US Airways' 1996 results of operations reflect a
provision of $4.8 million for the profit sharing component of the DCRP. In 1995,
US Airways' results did not achieve the prescribed pre-tax margin levels.
Accordingly, US Airways made no such provision in 1995 for this program.
10. RELATED PARTY TRANSACTIONS
(A) PARENT COMPANY
US Airways' balance sheet line item, Payable to parent company, includes
intercompany loans from US Airways Group which arise in the normal course of
business. These loans bear interest at market rates which are reset quarterly.
As of December 31, 1995, US Airways had a $68.6 million 8.4% note payable to
US Airways Group related to US Airways Group's purchase of aircraft-secured debt
obligations of US Airways. US Airways repaid the note in February 1996.
Net interest expense related to the notes payable and intercompany loans was
$19.7 million, $7.8 million and $11.3 million for the years 1996, 1995 and 1994,
respectively.
(B) REGIONAL AIRLINE SUBSIDIARIES OF US AIRWAYS GROUP
Effective October 1, 1996, US Airways began purchasing all of the capacity
(available seat miles or "ASMs") generated by US Airways Group's three wholly-
owned regional airline subsidiaries, Allegheny Airlines, Inc. ("Allegheny"),
Piedmont and PSA, at a rate per ASM that is
F-77
<PAGE>
determined by US Airways on a monthly basis and, concurrently, recognizing
revenues that result from passengers being carried by these affiliated
companies. The rate per ASM that US Airways pays is based on estimates of the
costs incurred to produce the capacity. During the fourth quarter of 1996, US
Airways recorded US Airways Express transportation revenues of $145.1 million
and US Airways Express capacity purchases (expenses) of $93.0 million related to
this program. The revenues and expenses recognized by US Airways during the
fourth quarter of 1996 related to this program may not be indicative of future
revenues and expenses associated with this program. The revenues and expenses
associated with this program are eliminated during the consolidation of US
Airways Group's results of operations.
US Airways provides various services including passenger handling, contract
training and catering. US Airways recognized other operating revenues of
approximately $63.5 million, $46.5 million and $43.5 million related to these
services for the years 1996, 1995 and 1994, respectively. These regional
airlines also perform passenger and ground handling for US Airways at certain
airports for which US Airways recognized other operating expenses of
approximately $18.7 million, $21.0 million and $15.3 million for the years
1996, 1995 and 1994 respectively.
US Airways also leases or subleases certain turboprop aircraft to these
regional airline subsidiaries. US Airways recognized other operating revenues
related to these arrangements of approximately $14.4 million, $18.7 million and
$22.0 million for the years 1996, 1995 and 1994, respectively. US Airways
entered into a sale-leaseback arrangement with Allegheny during 1994 involving
certain turboprop aircraft (in return, US Airways subleases these same aircraft
back to Allegheny). This arrangement was terminated in September 1996. US
Airways recognized other operating expenses related to the lease of these
aircraft from Allegheny of approximately $6.0 million, $9.8 million and $3.1
million for 1996, 1995 and 1994, respectively.
US Airways' receivables from and payables to these regional airlines were
approximately $17.3 million and $34.1 million, respectively, as of December 31,
1996 and $9.6 million and $1.6 million, respectively, as of December 31, 1995.
As a result of the capacity purchase program discussed above, liabilities
related to tickets sold for travel on the regional airline subsidiaries are
included in the US Airways' Traffic balances payable and unused tickets. As of
December 31, 1995 US Airways' Traffic balances payable and unused tickets
included $30.8 million owed to the regional airline subsidiaries for passengers
flown by the regional airline subsidiaries on behalf of US Airways during the
month of December 1995.
(C) OTHER US AIRWAYS GROUP SUBSIDIARIES
US Airways leases certain aircraft to US Airways Group's wholly-owned
subsidiary USAir Leasing and Services, Inc. ("USAir Leasing and Services").
USAir Leasing and Services subleases these aircraft to third parties. US Airways
recognized other operating revenues related to these arrangements of
approximately $4.3 million, $4.6 million and $2.2 million for the years 1996,
1995 and 1994, respectively.
US Airways purchases a portion of its aviation fuel from US Airways Group's
wholly-owned subsidiary USAir Fuel Corporation ("Fuel Corp."), which acts as a
fuel wholesaler to US Airways in certain circumstances. US Airways' aviation
fuel purchases were approximately $205.9 million, $104.9 million and $57.8
million for the years 1996, 1995 and 1994, respectively. US Airways' accounts
payable to Fuel Corp. was $17.4 million and $20.7 million as of December 31,
1996 and 1995, respectively.
F-78
<PAGE>
The OR Group, Inc. (the "OR Group") was a wholly-owned subsidiary of US
Airways Group incorporated in February 1996 and dissolved in the fourth quarter
of 1996. OR Group provided resource allocation consulting services and
decision-making support systems to US Airways, which assumed these activities
upon OR Group's dissolution. US Airways recorded other operating expenses of
$6.1 million for the year 1996 related to these services.
(D) BRITISH AIRWAYS
On January 21, 1993, US Airways Group and British Airways entered into an
Investment Agreement under which a wholly-owned subsidiary of British Airways
purchased certain series of convertible preferred stock and British Airways
entered into code sharing and wet lease arrangements with US Airways. US Airways
is terminating its code sharing arrangement with British Airways effective March
29, 1997 and the final wet lease arrangement expired May 31, 1996. As of
December 31, 1996, British Airways' total voting interest in US Airways Group
was approximately 23%.
US Airways wet leased Boeing 767-200ER aircraft, including cockpit and cabin
crews, to British Airways in order to serve three routes between the U.S. and
London beginning June 1993. US Airways recognized other operating revenues of
approximately $12.6 million, $63.6 million and $60.7 million for the years 1996,
1995 and 1994, respectively, related to the wet lease arrangements. These
revenues were offset by an equal amount of other operating expenses.
US Airways also has various agreements with British Airways for ground
handling at certain airports, contract training and other services. US Airways
recognized other operating revenues of approximately $5.8 million, $4.9 million
and $6.4 million for the years 1996, 1995 and 1994, respectively, related to the
services US Airways performed for British Airways.
US Airways' current receivables from and payables to British Airways were
approximately $8.0 million and $5.5 million, respectively, as of December 31,
1996 and $11.5 million and $5.3 million, respectively, as of December 31, 1995.
US Airways has a long-term receivable from British Airways related to three
U.S. to London routes that US Airways relinquished at the time of implementation
of a code sharing arrangement with British Airways. The balance of the
receivable was approximately $40.7 million and $45.4 million as of December 31,
1996 and 1995, respectively. Payments began in December 1995 in conjunction with
the termination of the first wet lease arrangement and continue annually for
nine years.
11. SELECT FINANCIAL INFORMATION - USAM INVESTMENTS
USAM's equity in the earnings of ATS, GIP and GJP for the years 1996, 1995 and
1994 was as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Apollo Travel Services Partnership (ATS) $19,188 $20,708 $20,089
Galileo International Partnership (GIP) 17,213 13,320 6,081
Galileo Japan Partnership (GJP) 201 518 365
------- ------- -------
$36,602 $34,546 $26,535
======= ======= =======
</TABLE>
F-79
<PAGE>
The following is summarized financial information for these partnerships
(combined, in millions):
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1995
------ ------
(Unaudited)
<S> <C> <C>
Current assets $ 357 $ 405
Noncurrent assets 480 512
------ ------
Total assets 837 917
------ ------
Current liabilities 227 294
Long-Term liabilities 209 228
------ ------
Total liabilities 436 522
------ ------
Net assets $ 401 $ 395
====== ======
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1995 1994
------ ------ ------
(Unaudited)
<S> <C> <C> <C>
Service revenues $1,466 $1,327 $1,193
Cost and expenses 1,207 1,103 1,046
------ ------ ------
Net earnings $ 259 $ 224 $ 147
====== ====== ======
</TABLE>
USAM received distributions from GIP, GJP and ATS of approximately $4.1
million, $0.1 million and $44.5 million (including a special distribution from
ATS of $33.7 million during the second quarter of 1996 which represented a
distribution of cash to partners), respectively, during 1996. USAM received
distributions from GIP, GJP and ATS of approximately $2.6 million, $0.2 million
and $11.2 million, respectively, during 1995.
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for 1996 and
1995:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
1996
Operating revenues $1,740 $1,994 $1,924 $2,047
Operating income (loss) $ (9) $ 207 $ 97 $ 74
Net income (loss) $ (55) $ 161 $ 28 $ 50
1995
Operating revenues $1,664 $1,852 $1,743 $1,725
Operating income (loss) $ (50) $ 135 $ 66 $ 84
Net income (loss) $ (102) $ 85 $ 17 $ 34
</TABLE>
See Note 14 - Non-Recurring and Unusual Items.
See Note 10(b) with respect to US Airways' capacity purchase arrangements with
US Airways Group's regional airline subsidiaries implemented during the fourth
quarter of 1996.
Note: The sum of the four quarters may not equal yearly totals due to
rounding of quarterly results.
F-80
<PAGE>
13. SUPPLEMENTAL BALANCE SHEET INFORMATION
The components of certain accounts in the accompanying Consolidated Balance
Sheets are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
---------------------------------
(in thousands)
<S> <C> <C>
(a) Cash and cash equivalents:
Cash $ 20,154 $ 11,298
Cash equivalents, at cost which approximates market 929,980 868,315
---------- --------
$ 950,134 $879,613
========== ========
(b) Receivables, net:
Accounts receivable $ 354,671 $333,859
Less allowance for doubtful accounts 11,953 12,104
---------- --------
$ 342,718 $321,755
========== ========
(c) Materials and supplies, net:
Materials and supplies $ 353,994 $383,910
Less allowance for obsolescence 142,810 161,665
---------- --------
$ 211,184 $222,245
========== ========
(d) Accrued expenses:
Salaries and wages* $ 419,688 $342,391
All other 654,085 613,054
---------- --------
$1,073,773 $955,445
========== ========
</TABLE>
* Includes amounts related to profit sharing. See Note 9 for additional
information.
Note: Certain 1995 amounts have been reclassified to conform with 1996
classifications.
14. NON-RECURRING AND UNUSUAL ITEMS
(A) 1996
US Airways' results for 1996 include two non-recurring items recorded during
the second quarter of 1996 related to its subleasing of 11 non-operating BAe-146
aircraft (see Note 14 (b) and 14 (c) below). US Airways reversed $22.5 million
of previously accrued rent obligations related to these aircraft against
Aircraft rent expense and reversed $7.0 million against Aircraft maintenance
expense related to previously accrued lease return provisions. US Airways may
reverse additional amounts related to the 1994 non-recurring charge in future
periods dependent upon its success and the terms at which the remaining five
grounded BAe-146 aircraft are subleased or otherwise disposed.
(B) 1995
In the fourth quarter of 1995, US Airways reversed $4.1 million of the $132.8
million non-recurring charge related to its grounded BAe-146 fleet that was
recorded in the fourth quarter of 1994 (see Note 14 (c) below). The reversal, a
credit to Aircraft rent expense, reflects the successful remarketing by US
Airways of three of these aircraft.
F-81
<PAGE>
(C) 1994
US Airways' results for 1994 include (i) a $132.8 million charge related to
its grounded BAe-146 fleet, recorded in the fourth quarter of 1994 (During 1994,
US Airways again evaluated the secondary market for its non-operating BAe-146
aircraft and determined that it was probable that it would not be successful in
its efforts to sublease or otherwise dispose of these assets (before lease
expiry). Considering this analysis, US Airways did not include a provision for
any potential subleasing activity in determining the amount of the 1994
charge.); (ii) a $54.0 million charge for obsolete inventory and rotables to
reflect market value, recorded in the fourth quarter of 1994; (iii) a $50.0
million addition to Passenger Transportation revenues in the fourth quarter of
1994 to adjust estimates made during the first three quarters of 1994; (iv) a
$40.1 million charge primarily related to US Airways' decision to cease
operations of its remaining Boeing 727-200 aircraft in 1995, recorded in the
third quarter of 1994; (v) a $25.9 million charge related to US Airways'
decision to substantially reduce service between Los Angeles and San Francisco
and close its San Francisco crew base, recorded in the third quarter of 1994;
and (vi) an $18.6 million gain resulting from the accounting treatment of the
hull insurance recovery on the aircraft lost in the September, 1994 accident,
recorded in the third quarter of 1994.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(this space intentionally left blank)
F-82
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and commissions,
are estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $160,755
National Association of Securities Dealers *
New York Stock Exchange *
Blue Sky Fees *
Printing and Engraving Expenses *
Legal Fees and Expenses *
Accounting Fees and Expenses *
Transfer Agent and Registrar Fees *
Miscellaneous *
Total *
-------------------------
* To be provided by amendment
</TABLE>
Item 14. Indemnification of Directors and Officers.
The Registrant is empowered by Delaware Law, subject to the procedures and
limitations therein, to indemnify any person against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with any threatened, pending or
completed action, suit or proceeding in which such person is made a party by
reason of such person being or having been a director, officer, employee or
agent of the Registrant. The statute provides that indemnification pursuant to
its provisions is not exclusive of other rights of indemnification to which a
person may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors, or otherwise. The By-laws of the Registrant provide for
indemnification by the Registrant of its directors and officers to the fullest
extent permitted by Delaware Law. In addition, the Company has entered into
Indemnity Agreements with each of the officers and directors of the Company
providing, in each case, for the indemnification by the Company of such
individuals for all losses and related expenses (subject to certain limitations)
incurred by them arising out of the discharge of their respective duties as
directors and/or officers of the Company.
The foregoing statements are subject to the detailed provisions of Delaware
Law, the Registrant's Amended and Restated Certificate of Incorporation and the
Registrant's Amended and Restated By-laws.
Pursuant to Delaware Law, Article Eighth of the Amended and Restated
Certificate of Incorporation of the Registrant provides that no director of the
Registrant shall be personally liable to the Registrant or its stockholders for
monetary damages for any breach of his fiduciary duty as a director; provided,
however, that such clause shall not apply to any liability of a director (1) for
any breach of his duty of loyalty to the Registrant or its stockholders, (2) for
acts or omissions that are not in good faith or involve intentional misconduct
or a knowing violation of the law, (3) in connection with the unlawful payment
of dividends or an unlawful stock purchase or redemption under Delaware Law, or
(4) for any transaction from which the director derived an improper personal
benefit.
Item 15. Recent Sales of Unregistered Securities.
There have been no sales of unregistered securities by the Registrant within
the past three years.
II-1
<PAGE>
Item 16. Exhibits and Schedules.
(a) Exhibits
Designation Description
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of US Airways Group, Inc. ("US
Airways Group") (incorporated by reference to Exhibit 3.1 to US
Airways Group's Registration Statement on Form 8-B dated January 27,
1983), including the Certificate of Amendment dated May 13, 1987
(incorporated by reference to Exhibit 3.1 to US Airways Group's and US
Airways, Inc.'s ("US Airways") Quarterly Report on Form 10-Q for the
quarter ended March 31, 1987), the Certificate of Increase dated June
30, 1987 (incorporated by reference to Exhibit 3 to US Airways Group's
and US Airways' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987), the Certificate of Increase dated October 16, 1987
(incorporated by reference to Exhibit 3.1 to US Airways Group's and US
Airways' Quarterly Report on Form 10-Q for the quarter ended September
30, 1987), the Certificate of Increase dated August 7, 1989
(incorporated by reference to Exhibit 3.1 to US Airways Group's Annual
Report on Form 10-K for the year ended December 31, 1989), the
Certificate of Increase dated April 9, 1992 (incorporated by reference
to Exhibit 3.1 to US Airways Group's and US Airways' Annual Report on
Form 10-K for the year ended December 31, 1992), the Certificate of
Increase dated January 21, 1993 (incorporated by reference to US
Airways Group's and US Airways' Annual Report on Form 10-K for the
year ended December 31, 1992), and the Certificate of Amendment dated
May 26, 1993 (incorporated by reference to Appendix II to US Airways
Group's Proxy Statement dated April 26, 1993); and the Certificate of
Ownership and Merger merging Nameco, Inc. into USAir Group, Inc. dated
February 17, 1997 (incorporated by reference to Exhibit 3.1 to US
Airways Group's Annual Report on Form 10-K for the year ended December
31, 1996).
3.2 By-Laws of US Airways Group (incorporated by reference to Exhibit 3.2
to US Airways Group's Annual Report on Form 10-K for the year ended
December 31, 1996).
4.1 Certificate of Designation of Series A Cumulative Convertible
Preferred Stock of US Airways Group (incorporated by reference to
Exhibit 4(b) to US Airways Group's Current Report on Form 8-K dated
August 11, 1989).
4.2 Certificate of Designation of Series B Cumulative Convertible
Preferred Stock of US Airways Group (incorporated by reference to
Exhibit 3.3 to Amendment No. 4 to US Airways Group's Registration
Statement on Form S-3 (Registration No. 33-39540) dated May 17, 1991).
4.3 Agreement between US Airways Group and Berkshire Hathaway Inc. dated
August 7, 1989 (incorporated by reference to Exhibit 4(a) to US
Airways Group's Current Report on Form 8-K dated August 11, 1989).
4.4 Certificate of Designation of Series F Cumulative Convertible Senior
Preferred Stock of US Airways Group (incorporated by reference to
Exhibit 28.2 to US Airways Group's Current Report on Form 8-K dated
January 21, 1993).
4.5 Form of Certificate of Designation of Series T Cumulative Exchangeable
Convertible Senior Preferred Stock of US Airways Group (incorporated
by reference to Appendix VII to US Airways Group's Proxy Statement
dated April 26, 1993). Neither US Airways Group nor US Airways is
filing any instrument (with the exception of holders of exhibits
10.1(a-c)) defining the rights of holders of long-term debt because
the total amount of securities authorized under each such instrument
does not exceed ten percent of the total assets of US Airways. Copies
of such instruments will be furnished to the Securities and Exchange
Commission upon request.
II-2
<PAGE>
4.6 Deposit Agreement relating to the Series B Depositary Shares dated as
of May 24, 1991 by and among the Company, The Chase Manhattan Bank,
N.A. as depositary, and the holders from time to time of depositary
receipts issued thereunder (incorporated by reference to Exhibit 4.1
to Amendment No. 4 to US Airways Group's Registration Statement on
Form S-3 (Registration No. 33-39540) dated May 17, 1991).
4.7 Form of Depositary Agreement relating to the Series F, T-1 and T-2
Depositary Shares between the Company and ____________________ as
Depositary and the holders from time to time of depositary shares
receipts issued thereunder.*
4.8 Form of Depositary Receipt and Depositary Share relating to the Series
F, T-1 and T-2 Depositary Shares (included in Exhibit 4.7).*
5.1 Opinion of Lawrence M. Nagin.*
8.1 Tax opinion of Skadden, Arps, Slate, Meagher & Flom LLP.*
10.1(a) Supplemental Agreement No. 16, dated July 19, 1990, to Purchase
Agreement No. 1102 between US Airways and The Boeing Company
(incorporated by reference to Exhibit 10.2(a) to US Airways Group's
Annual Report on Form 10-K for the year ended December 31, 1990).
10.1(b) Supplemental Agreement No. 17, dated November 28, 1990, to Purchase
Agreement No. 1102 between US Airways and The Boeing Company
(incorporated by reference to Exhibit 10.2(b) to US Airways Group's
Annual Report on Form 10-K for the year ended December 31, 1990).
10.1(c) Supplemental Agreement No. 18, dated December 23, 1991, to Purchase
Agreement No. 1102 between US Airways and The Boeing Company
(incorporated by reference to Exhibit 10.2(c) to US Airways Group's
Annual Report on Form 10-K for the year ended December 31, 1991).
10.2 Purchase Agreement No. 1725 dated December 23, 1991 between US Airways
and The Boeing Company (incorporated by reference to Exhibit 10.3 to
US Airways Group's and US Airways' Annual Report on Form 10-K for the
year ended December 31, 1991).
10.3 Incentive Compensation Plan of US Airways Group, Inc. as amended and
restated January 1, 1996 (incorporated by reference to Exhibit 10.3 to
US Airways Group's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.4 US Airways, Inc. Supplementary Retirement Benefit Plan (incorporated
by reference to Exhibit 10.5 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1989).
10.5 US Airways, Inc. Supplemental Executive Defined Contribution Plan
(incorporated by reference to Exhibit 10.6 to US Airways Group's
Annual Report on Form 10-K for the year ended December 31, 1994).
10.6 US Airways Group's 1984 Stock Option and Stock Appreciation Rights
Plan (incorporated by reference to Exhibit A to US Airways Group's
Proxy Statement dated March 30, 1984).
10.7 US Airways Group's 1992 Stock Option Plan (incorporated by reference
to Exhibit A to US Airways Group's Proxy Statement dated March 31,
1992).
10.8 US Airways Group's 1996 Stock Incentive Plan (incorporated by
reference to Exhibit A to US Airways Group's Proxy Statement dated
April 15, 1996).
10.9 Employment Agreement between US Airways and its Chief Executive
Officer. (incorporated by reference to Exhibit 10.11 to US Airways
Group's Annual Report on Form 10-K for the year ended December 31,
1995).
II-3
<PAGE>
10.10 Employment Agreement between US Airways and its President and Chief
Operating Officer (incorporated by reference to Exhibit 10.12 to US
Airways Group's Annual Report on Form 10-K for the year ended December
31, 1995).
10.11 Employment Agreement between US Airways and its Executive Vice
President -Corporate Affairs and General Counsel (incorporated by
reference to Exhibit 10.13 to US Airways Group's Annual Report on Form
10-K for the year ended December 31, 1995).
10.12 Agreement between US Airways and its Chief Executive Officer with
respect to certain employment arrangements (incorporated by reference
to Exhibit 10.14 to US Airways Group's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.13 Agreement between US Airways and its President and Chief Operating
Officer with respect to certain employment arrangements (incorporated
by reference to Exhibit 10.15 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.14 Agreement between US Airways and its Executive Vice President -
Corporate Affairs and General Counsel with respect to certain
employment arrangements (incorporated by reference to Exhibit 10.16 to
US Airways Group's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.15 Employment Agreement between US Airways and its former Chief Executive
Officer as amended by a severance agreement (incorporated by reference
to Exhibit 10.17 to US Airways Group's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.16 Employment Agreement between US Airways and its former Executive Vice
President - Marketing (incorporated by reference to Exhibit 10.20 to
US Airways Group's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.17 Trust Agreement dated as of April 1, 1992 between US Airways and
Wachovia Bank of North Carolina, N.A. providing for certain
compensation arrangements for US Airways' former Executive Vice
President-Marketing (incorporated by reference to Exhibit 10.21 to US
Airways Group's Annual Report on Form 10-K for the year ended December
31, 1995).
10.18 Employment Agreement between US Airways and its Executive Vice
President -Human Resources (incorporated by reference to Exhibit 10.22
to US Airways Group's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.19 Agreement between US Airways and its Chief Executive Officer providing
supplemental retirement benefits (incorporated by reference to Exhibit
10.23 to US Airways Group's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.20 Agreement between US Airways and its President and Chief Operating
Officer providing supplemental retirement benefits (incorporated by
reference to Exhibit 10.24 to US Airways Group's Annual Report on Form
10-K for the year ended December 31, 1995).
10.21 Agreement between US Airways and its Executive Vice President -
Corporate Affairs and General Counsel providing supplemental
retirement benefits (incorporated by reference to Exhibit 10.25 to US
Airways Group's Annual Report on Form 10-K for the year ended December
31, 1995).
10.22 Agreement between US Airways and its former Chief Executive Officer
providing supplemental retirement benefits (incorporated by reference
to Exhibit 10.26 to US Airways Group's Annual Report on Form 10-K for
the year ended December 31, 1995).
II-4
<PAGE>
10.23 Agreement between US Airways and its former Executive Vice President-
Marketing providing supplemental retirement benefits (incorporated by
reference to Exhibit 10.29 to US Airways Group's Annual Report on Form
10-K for the year ended December 31, 1995).
10.24 Employment Agreement between US Airways and its Executive Vice
President -Human Resources providing retirement benefits (incorporated
by reference to Exhibit 10.30 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.25 Agreement between US Airways and its former Executive Vice President-
Marketing providing for supplemental severance benefits (incorporated
by reference to Exhibit 10.25 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.26 Investment Agreement dated as of January 21, 1993 by and between US
Airways Group and British Airways (incorporated by reference to
Exhibit 28.1 to US Airways Group's Current Report on Form 8-K filed on
January 28, 1993, as amended by Amendment No. 1 on Form 8 filed on
April 13, 1993), as amended by Amendment dated February 21, 1994
(incorporated by reference to Exhibit 10.13(a) to US Airways Group's
Annual Report on Form 10-K for the year ended December 31, 1993).
11 Computation of primary and fully diluted earnings per share of US
Airways Group for the three years ended December 31, 1996
(incorporated by reference to Exhibit 11 to US Airways Group's Annual
Report on Form 10-K for the year ended December 31, 1996).
12 Computation of ratio of earnings to combined fixed charges and
preferred stock dividends for the years ended December 31, 1996, 1995,
1994, 1993 and 1992.**
21 Subsidiaries of US Airways Group and US Airways (incorporated by
reference to Exhibit 21 to US Airways Group's Annual Report on Form
10-K for the year ended December 31, 1996).
23.1 Consent of the Auditors of US Airways Group.**
23.2 Consent of the Auditors of US Airways.**
23.3 Consent of Lawrence M. Nagin (included in the opinion filed as Exhibit
5.1 hereto).*
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in the
opinion filed as Exhibit 8.1 hereto).*
24.1 Powers of Attorney signed by the directors of US Airways Group.**
99.1 Financial Statement Schedule -- US Airways Group (incorporated by
reference to Exhibit 27.1 to US Airways Group's Annual Report on Form
10-K for the year ended December 31, 1996).
99.2 Financial Statement Schedule -- US Airways (incorporated by reference
to Exhibit 27.2 to US Airways Group's Annual Report on Form 10-K for
the year ended December 31, 1996).
________________
* To be filed by amendment.
** Filed herewith.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
II-5
<PAGE>
(2) for purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby further undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Arlington, Virginia, on
April 28, 1997.
US AIRWAYS GROUP, INC.
By: /s/Stephen M. Wolf
_________________________________
Stephen M. Wolf
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated,
on the 28th day of April, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> * <C>
________________________ Director
Robert W. Bogle
*
________________________ Director
Edwin I. Colodny
*
________________________ Director
Mathias J. DeVito
*
________________________ Director; President and
Rakesh Gangwal Chief Operating Officer
*
________________________ Director
George J.W. Goodman
/s/John W. Harper
________________________ Senior Vice President-Finance
John W. Harper and Chief Financial Officer
*
________________________ Director
John W. Harris
/s/James A. Hultquist
________________________ Chief Accounting Officer
James A. Hultquist
*
________________________ Director
Edward A. Horrigan, Jr.
*
________________________ Director
Robert LeBuhn
*
________________________ Director
John G. Medlin, Jr.
*
________________________ Director
Hanne M. Merriman
*
________________________ Director
Raymond W. Smith
/s/Stephen M. Wolf
________________________ Director; Chairman of the Board
Stephen M. Wolf and Chief Executive Officer
/s/Lawrence M. Nagin
* By__________________________
Lawrence M. Nagin
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
Exhibit 12
US Airways Group, Inc.
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (Loss) Before Taxes $275,482 $128,272 $(684,923) $(349,367) $(600,818)
Add (deduct):
Fixed charges:
Interest expense 267,122 302,593 284,034 249,916 248,691
Amortization of debt
issuance costs 3,355 4,154 7,523 7,308 3,360
Interest factor in
noncapitalized rentals 334,952 339,721 384,580 363,526 349,984
Interest capitalized (8,398) (8,781) (13,760) (17,763) (27,802)
Amortization of previously
capitalized interest 10,286 10,238 8,802 7,527 6,810
-------- -------- -------- -------- --------
Earnings, as adjusted $882,799 $776,197 $(13,744) $261,147 $(19,775)
Fixed charges:
Interest expense 267,122 302,593 284,034 249,916 248,691
Amortization of debt
issuance costs 3,355 4,154 7,523 7,308 3,360
Interest factor in
noncapitalized rentals 334,952 339,721 384,580 363,526 349,984
Preferred stock dividends 88,775 84,904 78,036 73,651 51,766
-------- -------- -------- -------- --------
$694,204 $731,372 $754,173 $694,401 $653,801
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.3 1.1 * * *
</TABLE>
* For the years ended December 31, 1994, 1993 and 1992, earnings were not
sufficient to cover fixed charges. Additional earnings of approximately $768
million for 1994, $433 million for 1993 and $674 million for 1992 would have
been necessary to achieve a ratio of 1.0.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
US Airways Group, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Washington, D.C.
April 25, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
US Airways, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Washington, D.C.
April 25, 1997
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert W. Bogle, Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23rd day of April,
1997.
/s/ Robert W. Bogle
-------------------
Robert W. Bogle
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, Edwin I. Colodny, Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of April,
1997.
/s/ Edwin I. Colodny
---------------------
Edwin I. Colodny
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito, Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of April,
1997.
/s/ Mathias J. DeVito
---------------------
Mathias J. DeVito
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, Rakesh Gangwal, Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 24th day of April,
1997.
/s/ Rakesh Gangwal
---------------------
Rakesh Gangwal
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman, Director
of US Airways Group, Inc. (the "Company") do hereby constitute and appoint
Lawrence M. Nagin and John W. Harper, and each of them (with full power to each
of them to act alone), attorney and agent for me and in my name and on my behalf
to sign all Registration Statements on Form S-1 or other appropriate forms and
any amendments or supplements thereto of the Company which shall be filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the proposed registration of shares of the Company's
Series F, T-1 and T-2 Preferred Stock and of Depository Shares relating to such
Preferred Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of April,
1997.
/s/ George J. W. Goodman
------------------------
George J. W. Goodman
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris, Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of April,
1997.
/s/ John W. Harris
---------------------
John W. Harris
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan, Jr.,
Director of US Airways Group, Inc. (the "Company") do hereby constitute and
appoint Lawrence M. Nagin and John W. Harper, and each of them (with full power
to each of them to act alone), attorney and agent for me and in my name and on
my behalf to sign all Registration Statements on Form S-1 or other appropriate
forms and any amendments or supplements thereto of the Company which shall be
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended, with respect to the proposed registration of shares of the
Company's Series F, T-1 and T-2 Preferred Stock and of Depository Shares
relating to such Preferred Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of April,
1997.
/s/ Edward A. Horrigan, Jr.
---------------------------
Edward A. Horrigan, Jr.
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn, Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of April,
1997.
/s/ Robert LeBuhn
---------------------
Robert LeBuhn
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr., Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of April,
1997.
/s/ John G. Medlin, Jr.
-----------------------
John G. Medlin, Jr.
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman, Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 23rd day of April,
1997.
/s/ Hanne M. Merriman
---------------------
Hanne M. Merriman
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith, Director of
US Airways Group, Inc. (the "Company") do hereby constitute and appoint Lawrence
M. Nagin and John W. Harper, and each of them (with full power to each of them
to act alone), attorney and agent for me and in my name and on my behalf to sign
all Registration Statements on Form S-1 or other appropriate forms and any
amendments or supplements thereto of the Company which shall be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed registration of shares of the Company's Series F,
T-1 and T-2 Preferred Stock and of Depository Shares relating to such Preferred
Stock.
I hereby give and grant to said attorneys and agents, and each of them
acting alone, full power and authority to generally do and perform all acts and
things necessary to be done in the premises as fully and effectually in all
respects as I could do if personally present; and I hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 25th day of April,
1997.
/s/ Raymond W. Smith
---------------------
Raymond W. Smith
