<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration No. 333-27351
PROSPECTUS
$93,888,000
[AMERICA WEST LOGO]
America West Airlines
1997-1 Pass Through Trusts
PASS THROUGH CERTIFICATES, SERIES 1997-1
------------------------
Each Pass Through Certificate (collectively, the "Certificates") will
represent a fractional undivided interest in one of the four America West
Airlines 1997-1 Pass Through Trusts (the "Class A Trust", the "Class B Trust",
the "Class C Trust" and the "Class D Trust" and, collectively, the "Trusts") to
be formed pursuant to a pass through trust agreement (the "Basic Agreement") and
four separate supplements thereto (each, a "Trust Supplement" and together with
the Basic Agreement, collectively, the "Pass Through Trust Agreements") between
America West Airlines, Inc. ("AWA") and Fleet National Bank, as trustee under
each Trust (the "Trustee"). The Certificates to be issued by the Class A Trust,
the Class B Trust, the Class C Trust and the Class D Trust are referred to
herein as "Class A Certificates", "Class B Certificates", "Class C Certificates"
and "Class D Certificates", respectively. No Certificate issued by a Trust will
have any rights, benefits or interests in respect of any other Trust. Pursuant
to the Intercreditor Agreement (as defined herein), (i) the Class B Certificates
will be subordinated in right of payment to the Class A Certificates, (ii) the
Class C Certificates will be subordinated in right of payment to the Class B
Certificates and (iii) the Class D Certificates will be subordinated in right of
payment to the Class C Certificates. Payments of interest on the Class A, Class
B, and Class C Certificates (but not the Class D Certificates) will be supported
by a separate liquidity facility for the benefit of the holders of such
Certificates, each such facility to be provided by Kredietbank N.V., acting
through its New York branch (the "Liquidity Provider"), in an amount sufficient
to pay interest thereon at the applicable interest rate for such Certificates on
three successive distribution dates.
(continued on the following page)
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 26 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
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>
PASS THROUGH FINAL EXPECTED PRICE TO
CERTIFICATES PRINCIPAL AMOUNT INTEREST RATE DISTRIBUTION DATE PUBLIC(1)(2)
------------ ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Class A $45,936,000 7.33% July 2, 2008 100%
Class B 17,226,000 7.40 July 2, 2005 100
Class C 17,226,000 7.53 January 2, 2004 100
Class D 13,500,000 8.12 July 2, 2001 100
</TABLE>
- ---------------
(1) Plus accrued interest, if any, from June 17, 1997.
(2) The aggregate commission payable to the Underwriter varies by Trust and
aggregates to $1,023,669, which constitutes 1.09% of the principal amount of
the Certificates offered hereby. The aggregate commission and certain other
expenses, estimated at approximately $1,216,000, will be paid by a
U.S.-domiciled subsidiary of GPA Group plc. All proceeds of the Certificates
will be used by the Trusts to purchase the Equipment Notes from the Owner
Trustees (as defined herein).
------------------------
The Certificates offered hereby are offered by the Underwriter, subject to
prior sale, when, as and if accepted by the Underwriter and subject to approval
of certain legal matters by Milbank, Tweed, Hadley & McCloy, counsel for the
Underwriter. It is expected that delivery of the Certificates in book-entry form
will be made on or about June 17, 1997 through the facilities of The Depository
Trust Company, against payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
June 9, 1997
<PAGE> 2
(continued from cover page)
The property of the Trusts will include, among other things, equipment
notes (the "Equipment Notes") to be issued on a nonrecourse basis by the
trustees (each, an "Owner Trustee") of separate owner trusts (each, an "Owner
Trust") in connection with four separate leveraged lease transactions to
refinance the current indebtedness of such Owner Trustees previously incurred to
finance the purchase of four Airbus Industrie model A320-231 aircraft
(collectively, the "Aircraft") which will be leased to AWA. The Equipment Notes
in respect of each Aircraft will be issued in four series (the "Series A
Equipment Notes", the "Series B Equipment Notes", the "Series C Equipment Notes"
and the "Series D Equipment Notes"). Each Trust will purchase one series of
Equipment Notes issued with respect to the Aircraft such that all of the
Equipment Notes held in each Trust will have an interest rate corresponding to
the interest rate applicable to the Certificates to be issued by such Trust. The
maturity dates of the Equipment Notes acquired by each Trust will occur on or
before the final expected distribution date applicable to the Certificates to be
issued by such Trust. The Equipment Notes issued with respect to each Aircraft
will be secured by a security interest in such Aircraft and an assignment of
certain of the related Owner Trustee's rights under the lease relating thereto
(each, a "Lease"), including the right to receive rentals payable with respect
to such Aircraft by AWA. Although neither the Certificates nor the Equipment
Notes are obligations of, or guaranteed by, AWA, the aggregate amounts
unconditionally payable by AWA for lease of the Aircraft will be at least
sufficient to pay in full when due all scheduled amounts required to be paid on
the Equipment Notes held in the Trusts.
All of the Equipment Notes held by each Trust will accrue interest at the
applicable rate per annum for such Trust, payable on January 2 and July 2 of
each year, commencing January 2, 1998. Interest paid on the Equipment Notes held
in each Trust will be passed through to Certificateholders (as defined herein)
of such Trust on each such date, in each case subject to the Intercreditor
Agreement. See "Description of the Certificates -- General" and "-- Payments and
Distributions".
Scheduled principal payments made on the Equipment Notes held in each Trust
will be passed through to the Certificateholders of each such Trust on January 2
or July 2 or both in certain years, commencing January 2, 1998, in accordance
with the principal repayment schedule set forth herein under "Description of the
Certificates -- Pool Factors", in each case subject to the Intercreditor
Agreement.
Under each Pass Through Trust Agreement, a PTC Event of Default (as defined
herein) will occur if the Trustee fails to pay within ten business days of the
due date thereof: (i) the outstanding Pool Balance (as defined herein) of the
applicable Class of Certificates on the Final Legal Distribution Date (as
defined herein) for such Class or (ii) interest due on such Certificates on any
Distribution Date (as defined herein) (unless, in the case of the Class A, B or
C Certificates, the Subordination Agent (as defined herein) shall have made an
Interest Drawing (as defined herein) in an amount sufficient to pay such
interest and shall have distributed such amount to the Certificateholders
entitled thereto).
---------------------
Delivery of the Certificates is scheduled to be made against payment
therefor on June 17, 1997 (the "Closing Date"), without regard to the date on
which the Underwriter enters into a firm agreement to purchase the Certificates.
Accordingly, the Certificates will be subject to a settlement cycle that exceeds
three business days (such settlement cycle being referred to herein as "Long
Settlement"). Purchasers of Certificates should note that initial trading of
Certificates may be affected by the Long Settlement. See "Underwriting".
Prior to their issuance there will have been no public market for the
Certificates offered hereby nor can there be any assurance that one will
develop. See "Risk Factors -- Factors Relating to the Certificates and the
Offering -- Absence of a Public Market for the Certificates".
2
<PAGE> 3
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY AWA, THE
UNDERWRITER OR THE LIQUIDITY PROVIDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF AWA SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CERTIFICATES.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND
MAY BID FOR, AND PURCHASE, THE CERTIFICATES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
------------------------
AVAILABLE INFORMATION AND REPORTS TO CERTIFICATEHOLDERS
AWA has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (together with all amendments
and exhibits, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Certificates offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, and to which reference is hereby
made. Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved.
AWA is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports and other information with the Commission. Reports and other information
concerning AWA can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549; The Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material can be obtained from the
Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov. Warrants to purchase Class B Common Stock of America West
Holdings Corporation are listed on the New York Stock Exchange and AWA's
registration statements, reports, proxy and information statements and other
information may also be inspected at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005. On behalf of each Trust, the
applicable Trustee will prepare and send certain periodic reports concerning the
Certificates and distributions made by such Trust to the Certificateholders of
such Trust. See "Description of the Certificates -- Reports to
Certificateholders".
AWA is a Delaware corporation. Its executive offices are located at 4000
East Sky Harbor Boulevard, Phoenix, Arizona 85034, and its telephone number is
(602) 693-0800.
3
<PAGE> 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents of AWA, which have been filed with the Commission,
are hereby incorporated by reference in this Prospectus:
1. The Annual Report on Form 10-K for the year ended December 31,
1996;
2. The portions of the definitive Proxy Statement for the Annual
Meeting of Stockholders of America West Holdings Corporation held on May 2,
1997 that have been incorporated by reference into the Form 10-K; and
3. The Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
All documents filed by AWA pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates offered hereby shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the respective dates of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus. AWA's file number is 1-10140.
AWA will provide without charge to any person to whom a copy of this
Prospectus has been delivered, upon written or oral request, a copy of any or
all of the foregoing documents incorporated herein by reference (other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to Patricia Penwell,
Corporate Secretary, America West Airlines, Inc., 51 W. Third Street, Tempe,
Arizona 85281, telephone number (602) 693-0800.
FORWARD LOOKING INFORMATION
This Prospectus contains or incorporates by reference various
forward-looking statements and information that are based on AWA's beliefs as
well as assumptions made by and information currently available to AWA. This
Prospectus contains various forward-looking statements and information that are
based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this Prospectus, the words
"anticipate," "estimates," "expects," "believes," "seeks," "goals," "intends" or
"projects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected or projected. Among the
key factors that may have a direct bearing on AWA's results are competitive
practices in the airline industry generally and particularly in AWA's principal
markets, the ability of AWA to meet existing financial obligations in the event
of adverse industry or economic conditions or to obtain additional capital to
fund future significant commitments and expansion, AWA's relationship with
employees and the terms of future collective bargaining agreements and the
impact of current and future laws and governmental regulations affecting the
airline industry and AWA's operations. For additional discussion of such risks,
see "Risk Factors -- Company and Industry Related Risks".
4
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information and Reports to Certificateholders..... 3
Incorporation of Certain Documents by Reference............. 4
Forward Looking Information................................. 4
Prospectus Summary.......................................... 6
Risk Factors................................................ 26
Use of Proceeds............................................. 34
Ratio of Earnings to Fixed Charges.......................... 34
Capitalization.............................................. 35
Selected Financial and Operating Data....................... 36
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 37
Business.................................................... 46
Management.................................................. 56
Certain Transactions........................................ 60
Description of the Certificates............................. 63
Description of the Liquidity Facilities..................... 75
Description of the Intercreditor Agreement.................. 79
Description of the Aircraft and the Appraisals.............. 82
Description of the Equipment Notes.......................... 83
Certain U.S. Federal Income Tax Consequences................ 101
State Tax Considerations.................................... 103
ERISA Considerations........................................ 104
Underwriting................................................ 106
Legal Matters............................................... 107
Experts..................................................... 107
Index to Financial Statements............................... F-1
Index of Certain Defined Terms.............................. I-1
Aircraft Appraisals......................................... II-1
Equipment Notes Principal Payment Schedule.................. III-1
</TABLE>
5
<PAGE> 6
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus.
America West Holdings Corporation ("Holdings") is a Delaware corporation
that became the holding company for America West Airlines, Inc. effective
midnight December 31, 1996. The only material asset of Holdings is the capital
stock of AWA. Unless otherwise indicated, the term "AWA" refers to America West
Airlines, Inc. and the terms "the Company" and "America West" both refer
collectively to Holdings and AWA, its direct wholly owned subsidiary.
Certain capitalized terms used herein are defined elsewhere in this
Prospectus on the pages indicated in the "Index of Certain Defined Terms"
appearing as Appendix I hereto, and all cross references herein refer to
sections of this Prospectus.
AMERICA WEST AIRLINES, INC.
AWA is the ninth largest commercial airline carrier in the United States,
operating through its principal hubs located in Phoenix, Arizona and Las Vegas,
Nevada, and a mini-hub located in Columbus, Ohio. Management believes AWA is the
lowest cost full service carrier in the United States. At March 31, 1997, AWA
served 57 destinations, including six destinations in Mexico and one in Canada,
with a fleet of 101 aircraft. AWA offers service to an additional 17
destinations through an alliance agreement with Continental Airlines, Inc.
("Continental") and 17 commuter service and regional destinations through an
alliance agreement with Mesa Air Group, Inc. ("Mesa").
AWA is the leading airline serving Phoenix and Las Vegas, with
approximately 36% and 23% of total revenue passenger miles, respectively, based
on the twelve months ended December 31, 1996. The Phoenix and Las Vegas airports
are the seventh and thirteenth largest airports and the fifth and eighth largest
domestic hubs in the United States as measured by passenger enplanements. AWA
believes that these hubs are well positioned for continued growth due to their
geographically favorable locations with access to key southwestern and west
coast markets, relatively low operating costs, year-round fair weather and
modern, uncongested facilities. Substantially all of AWA's passenger traffic is
channeled into or through its hubs, which serve as gateways for AWA's route
network. Through its hub-and-spoke system, AWA serves more markets with greater
frequency than would be possible with the same number of aircraft in a
point-to-point route system.
AWA operates with a low cost structure. AWA's operating cost per available
seat mile ("ASM") for the first three months of 1997 was 7.40 cents, which was
approximately 21.1% less than the average cost per ASM of the nine major
domestic airlines. AWA believes that its low cost structure is a significant
competitive advantage relative to other full service carriers and also enables
AWA to compete effectively against low cost carriers in its short-haul local
markets. As a full service airline, AWA believes that it distinguishes itself
from other low cost carriers by offering passenger services that include
assigned seating, meal service on selected flights, participation in
computerized reservation systems, interline ticketing, first class cabins,
baggage transfer and various other services.
Through its America West Vacations division ("America West Vacations"), AWA
arranges and sells vacation packages that include hotel accommodations, air
fare, ground transportation and a variety of entertainment options. This
business unit generated approximately $190 million in gross package sales in
1996. America West Vacations occupies a substantial position in the Las Vegas
destination market and arranges packages for travel to the other traditional
vacation destinations served by AWA, including Arizona, California, Florida,
Canada and Mexico. To further develop this business, the Company intends to
combine America West Vacations with AWA's charter business and reorganize such
operations as a separate subsidiary of Holdings during 1997.
6
<PAGE> 7
BUSINESS STRATEGY
The Company's strategy seeks to achieve revenue growth and profitability by
capitalizing on its key competitive strengths while maximizing financial
flexibility. The principal elements of the Company's strategy are (i)
strengthening AWA's position in its existing hubs through strategic expansion,
(ii) maintaining AWA's position as a leading low cost full service carrier,
(iii) focusing on airline reliability and customer service, (iv) operating a
modern and efficient fleet, (v) continuing to develop AWA's passenger base
through key alliances and (vi) pursuing opportunities to expand its leisure
travel businesses.
STRENGTHEN POSITION IN EXISTING HUBS THROUGH STRATEGIC EXPANSION.
AWA's strategy is designed to capitalize on its strong position in its
Phoenix and Las Vegas hubs. In February 1996, AWA began implementation of a
two-year plan to expand its principal hub operations and increase connecting
traffic and service to longer-haul nonstop markets. Pursuant to this plan,
during 1996 AWA increased ASMs by 11.3% and added six new cities to AWA's route
network. In addition, AWA has increased flight frequencies to enhance service to
existing West Coast destinations and to expand connecting opportunities through
Phoenix to long-haul flights to the East and Midwest. AWA has also sought to
increase asset utilization through the expansion of its night flight service to
Las Vegas, utilizing aircraft for this service that otherwise would be idle
overnight. Pursuant to the growth plan, AWA added one new city to its route
network in the first-quarter of 1997 and expects to introduce service to at
least one additional city by December 31, 1997.
MAINTAIN ITS POSITION AS A LEADING LOW COST AIRLINE.
AWA is committed to maintaining its low cost structure, which it has
achieved primarily through employee productivity, favorable labor costs per ASM
and industry-leading asset utilization. AWA maintained low unit costs by
focusing on productivity at all levels. In 1996, AWA increased its ASMs by 11.3%
while increasing its full-time equivalent head count by 10.8%.
FOCUS ON RELIABILITY AND CUSTOMER SERVICE.
AWA is committed to maintaining its reliability and to improving its
overall customer service. As a result of customer service and operational issues
encountered in the third quarter of 1996, AWA initiated a program entitled Get
the Product Right . . . Together, aimed at maximizing the airline's reliability
and further improving customer service. Consistent with its strategy of being a
low cost airline, this program is designed to be implemented without adversely
affecting AWA's cost structure. In May 1997, AWA was ranked number one in
customer satisfaction among the nine major domestic airlines, for flights of 500
miles or less, in the Airline Customer Satisfaction -- U.S. Flights Study
conducted by Frequent Flyer Magazine and J.D. Power and Associates.
OPERATE A MODERN AND EFFICIENT FLEET.
AWA enjoys operational efficiencies due to its modern, fuel efficient
fleet. At March 31, 1997, AWA's fleet consisted of 60 Boeing 737s, 27 Airbus
A320s and 14 Boeing 757s, with an average age of approximately 10.2 years. Most
of AWA's existing aircraft are held under leases with considerable fleet plan
flexibility. As a result, in the event economic conditions change adversely, AWA
can reduce its fleet size and reduce its aircraft related financial obligations
by not renewing expiring aircraft leases.
CONTINUE TO DEVELOP PASSENGER BASE THROUGH ALLIANCES.
AWA plans to continue to employ alliance agreements to expand its passenger
base and in some cases to achieve cost savings through the reduction of
redundant labor and facilities. AWA's alliance agreements generally provide for
code-sharing arrangements and linking of frequent flyer programs, and in some
cases involve coordination of flight schedules, sharing of ticket counter space,
coordination of ground handling operations and joint purchasing and marketing
efforts. AWA currently has alliance agreements with Continental, British
Airways, Northwest Airlines and Mesa. Management believes that AWA's
code-sharing
7
<PAGE> 8
activities result in increased travel and profitability for AWA and AWA intends
to pursue additional alliances as opportunities warrant.
EXPAND LEISURE TRAVEL BUSINESSES.
The Company's strategic plan includes the expansion of its leisure tour
packaging and charter businesses which, the Company believes, present
opportunities for growth. The Company further believes that it will be
competitive in these businesses because of its low cost structure and expertise
gained in developing and managing America West Vacations and AWA's professional
and college sports chartering business. During 1997, the Company expects to
combine the America West Vacations and charter business under a separate
subsidiary of Holdings, establish a private label tour packaging business,
pursue the management of other airlines' vacation packaging businesses, expand
the scope of its vacation and charter products and introduce new package tour
destinations.
8
<PAGE> 9
SUMMARY OF TERMS OF CERTIFICATES
Set forth below is certain information about each Class of Certificates:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Aggregate face amount......... $45,936,000 $17,226,000 $17,226,000 $13,500,000
Rating:
Moody's..................... A2 Baa2 Ba1 Ba3
Standard & Poor's........... AA- A- BBB- BB
Initial LTV Ratio
(cumulative)(1)............. 40.0% 55.0% 70.0% 81.8%
Expected principal
distribution window (in
years)...................... 0.5 - 11.0 0.5 - 8.0 0.5 - 6.5 0.5 - 4.0
Initial average life (in
years)...................... 8.7 6.6 4.9 2.0
January 2 and January 2 and January 2 and January 2 and
Regular Distribution Dates.... July 2 July 2 July 2 July 2
Final Expected Distribution
Date........................ July 2, 2008 July 2, 2005 January 2, 2004 July 2, 2001
Final Legal Distribution
Date........................ January 2, 2010 January 2, 2007 July 2, 2005 July 2, 2001
sec. 1110 protection(2)....... Yes Yes Yes Yes
Liquidity Facility coverage... 3 semi-annual 3 semi-annual 3 semi-annual None
interest interest interest
payments payments payments
Initial Liquidity Facility
amount(3)................... $5,190,959 $1,965,200 $1,999,723 None
</TABLE>
- ---------------
(1) Assumes an aggregate appraised Aircraft Value of $114,840,000.
(2) The benefits of Section 1110 of the Bankruptcy Code (as defined herein)
would be available by assignment to the Indenture Trustees (as and to the
extent described in further detail herein).
(3) For each Class of Certificates (other than the Class D Certificates), the
initial amount of the related Liquidity Facility will cover the first three
successive interest payments (without regard to any future payments of
principal on such Certificates).
9
<PAGE> 10
EQUIPMENT NOTES AND THE AIRCRAFT
Set forth below is certain information about the Equipment Notes held in
the Trusts and the Aircraft securing such Equipment Notes:
<TABLE>
<CAPTION>
AIRCRAFT EQUIPMENT NOTES
- ------------------------------------------------------------- --------------------------------------
MANUFACTURER'S AIRCRAFT DELIVERY APPRAISED PRINCIPAL MATURITY
SERIAL NUMBER TYPE DATE(1) VALUE SERIES AMOUNT DATE
- -------------- --------------- -------- ------------ ------- ----------- ------------
<C> <S> <C> <C> <C> <C> <C>
66 Airbus A320-231 12/29/89 $ 28,600,000 A,B,C,D $23,520,000 July 2, 2008
67 Airbus A320-231 12/29/89 28,600,000 A,B,C,D 23,520,000 July 2, 2008
76 Airbus A320-231 12/29/89 28,820,000 A,B,C,D 23,424,000 July 2, 2008
81 Airbus A320-231 12/29/89 28,820,000 A,B,C,D 23,424,000 July 2, 2008
------------ -----------
$114,840,000 $93,888,000
============ ===========
</TABLE>
- ---------------
(1) The delivery date indicated is for the purpose of the Leases. The original
delivery dates of the Aircraft from the manufacturer were in November and
December of 1989. See "Description of the Aircraft and the Appraisals".
The appraised value of each Aircraft set forth above is based upon the
lesser of the average and median value of such Aircraft as appraised by the
following three independent appraisal and consulting firms as of the dates
indicated: BK Associates, Inc. ("BK") as of March 26, 1997, Aircraft Information
Services, Inc. ("AISI") as of March 19, 1997 and Morten Beyer and Associates
("MBA") as of March 31, 1997 (BK, AISI and MBA are collectively referred to
herein as the "Appraisers"). See "Description of the Aircraft and the
Appraisals".
An appraisal is only an estimate of value and should not be relied upon as
a measure of realizable value. The proceeds realized upon a sale of any Aircraft
may be less than the appraised value thereof. In addition, the value of the
Aircraft in the event of the exercise of remedies under the applicable Indenture
will depend on market and economic conditions, the availability of buyers, the
condition of the Aircraft, whether the Aircraft are sold separately or as a
block and other factors. Accordingly, there can be no assurance that the
proceeds realized upon any such exercise with respect to the Equipment Notes and
the Aircraft pursuant to the applicable Indenture would be as appraised or
sufficient to satisfy in full payments due on the Equipment Notes issued
thereunder or the Certificates.
For a discussion of the assumptions and methodologies used in preparing the
appraisals, see "Risk Factors -- Factors Relating to the Certificates and the
Offering -- Appraisals and Realizable Value of the Aircraft" and "Description of
the Aircraft and the Appraisals".
LOAN TO AIRCRAFT VALUE RATIOS
The following table sets forth the loan to Aircraft value ratio ("LTV
Ratio") for each Class of Certificates as of the date of the consummation of the
offering of the Certificates and the Regular Distribution Dates specified
therein. The LTV Ratios for each Class of Certificates were obtained for each
such Regular Distribution Date by dividing (i) the expected Pool Balance of such
Class of Certificates together in each case with the expected Pool Balance of
all other Classes of Certificates senior in right of payment to such Class of
Certificates under the Intercreditor Agreement determined immediately after
giving effect to the distributions expected to be made on such Regular
Distribution Date, by (ii) the assumed value of all of the Aircraft (the
"Assumed Aggregate Aircraft Value") on such Regular Distribution Date based on
the assumptions set forth below.
The table contains forward-looking information that is based on the
assumption that the value of each Aircraft included in the Assumed Aggregate
Aircraft Value as of June 17, 1997 depreciates by 2% per year until the
fifteenth year after the year of delivery of such Aircraft by the manufacturer,
by 4% per year thereafter until the twentieth year after the year of such
delivery and by 6% per year thereafter. Other rates or methods of depreciation
would result in materially different LTV Ratios and no assurance can be given
(i) that the depreciation rates and methods assumed for the purpose of the table
are the ones most likely to occur or are appropriate for evaluating the actual
future value of any Aircraft or (ii) as to such actual future
10
<PAGE> 11
value. Many of the factors affecting the value of the Aircraft are discussed
herein under "Risk Factors -- Factors Relating to the Certificates and the
Offering -- Appraisals and Realizable Value of Aircraft". Although the table is
compiled on an aggregate basis, it should be noted that, because the Equipment
Notes are not cross-collateralized, the excess proceeds realized from the
disposition of any particular Aircraft would not be available to offset
shortfalls on the Equipment Notes relating to any other Aircraft. Therefore,
upon the occurrence of an Indenture Event of Default, even if the Aircraft as a
group could be sold for more than the total amounts payable in respect of all of
the outstanding Equipment Notes, if certain Aircraft were sold for less than the
total amount payable in respect of the related Equipment Notes, there would not
be sufficient proceeds to pay all Classes of Certificates in full. See
"Description of the Equipment Notes -- Loan to Value Ratios of Equipment Notes"
for additional information regarding LTV Ratios for the Equipment Notes issued
in respect of each Aircraft which may be more relevant in a default situation
than the aggregate values shown in the following table. Thus, the table should
not be considered a forecast or prediction of expected or likely LTV Ratios but
simply a mathematical calculation based on one set of assumptions.
<TABLE>
<CAPTION>
ASSUMED CLASS A CLASS B CLASS C
AGGREGATE CERTIFICATES CLASS A CERTIFICATES CLASS B CERTIFICATES CLASS C
AIRCRAFT POOL CERTIFICATES POOL CERTIFICATES POOL CERTIFICATES
DATE VALUE(1) BALANCE LTV BALANCE LTV BALANCE LTV
---- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
June 17, 1997........ $114,840,000 $45,936,000 40.0% $17,226,000 55.0% $17,226,000 70.0%
July 2, 1998......... 112,169,302 44,867,686 40.0 16,825,374 55.0 16,825,376 70.0
July 2, 1999......... 109,498,605 43,799,400 40.0 16,424,768 55.0 16,424,770 70.0
July 2, 2000......... 106,827,907 42,731,160 40.0 16,024,180 55.0 16,024,182 70.0
July 2, 2001......... 104,157,209 41,662,874 40.0 15,623,574 55.0 13,480,762 67.9
July 2, 2002......... 101,486,512 40,594,588 40.0 15,222,968 55.0 6,976,488 61.9
July 2, 2003......... 98,815,814 39,526,302 40.0 14,569,104 54.7 37,954 55.1
July 2, 2004......... 96,145,116 38,458,016 40.0 6,355,270 46.6 0 NA
July 2, 2005......... 93,474,419 34,791,504 37.2 0 NA 0 NA
July 2, 2006......... 88,133,023 24,018,476 27.3 0 NA 0 NA
July 2, 2007......... 82,791,628 12,441,316 15.0 0 NA 0 NA
July 2, 2008......... 0 0 NA 0 NA 0 NA
<CAPTION>
CLASS D
CERTIFICATES CLASS D
POOL CERTIFICATES
DATE BALANCE LTV
---- ------------ ------------
<S> <C> <C>
June 17, 1997........ $13,500,000 81.8%
July 2, 1998......... 9,463,424 78.4
July 2, 1999......... 4,646,482 74.2
July 2, 2000......... 812,976 70.8
July 2, 2001......... 0 NA
July 2, 2002......... 0 NA
July 2, 2003......... 0 NA
July 2, 2004......... 0 NA
July 2, 2005......... 0 NA
July 2, 2006......... 0 NA
July 2, 2007......... 0 NA
July 2, 2008......... 0 NA
</TABLE>
- ---------------
(1) The Assumed Aggregate Aircraft Value as of June 17, 1997 (but not the
Assumed Aggregate Aircraft Values for subsequent dates) was determined based
upon the lesser of the average and median value of all Aircraft as appraised
by the Appraisers as of the respective dates of their appraisals (see
"Description of the Aircraft and the Appraisals"). No assurance can be given
that such value represents the realizable value of the Aircraft. See "Risk
Factors -- Factors Relating to the Certificates and the
Offering -- Appraisals and Realizable Value of the Aircraft" and
"Description of the Aircraft and the Appraisals".
11
<PAGE> 12
CASH FLOW STRUCTURE
Set forth below is a diagram illustrating the structure for the offering of
the Certificates and certain cash flows.
[DIAGRAM]
- ---------------
* Each Aircraft is subject to a separate Lease and a related Indenture.
** Liquidity Facilities are only available with respect to the Class A, B and C
Certificates.
12
<PAGE> 13
THE OFFERING
Trusts: ................... Each of the Class A Trust, the Class B Trust, the
Class C Trust and the Class D Trust is to be
formed pursuant to one of the four separate Pass
Through Trust Agreements to be entered into
between AWA and Fleet National Bank, as trustee
under each Trust. Each Trust will be a separate
entity.
Certificates Offered:...... The Certificates are pass through certificates to
be issued by each Trust, representing fractional
undivided interests in such Trust. The
Certificates to be issued by the Class A Trust,
the Class B Trust, the Class C Trust and the
Class D Trust are the Class A Certificates, Class
B Certificates, Class C Certificates and Class D
Certificates, respectively.
Subordination Agent:....... Fleet National Bank, as subordination agent under
the Intercreditor Agreement (in such capacity,
the "Subordination Agent").
Initial Liquidity
Provider:.................. Kredietbank N.V., acting through its New York
branch, initially will provide three separate
liquidity facilities for the benefit of the
holders of the Class A Certificates, Class B
Certificates and Class C Certificates,
respectively.
Trust Property:............ The property of the Trusts (the "Trust Property")
will include (i) Equipment Notes to be issued on
a nonrecourse basis by the Owner Trustees in
connection with four separate leveraged lease
transactions to refinance the current
indebtedness of such Owner Trustees originally
incurred to finance the Aircraft which will be
leased by such Owner Trustees to AWA, together
with all monies at any time paid thereon and all
monies due and to become due thereunder, (ii) the
rights of such Trust under the Intercreditor
Agreement (including all monies receivable in
respect of such rights), (iii) except for the
Class D Trust, all monies receivable under the
Liquidity Facility for such Trust and (iv) funds
from time to time deposited with the Trustee in
accounts relating to such Trust. The Equipment
Notes with respect to each Aircraft will be
issued in four series under separate Indentures
(each, an "Indenture") between the related Owner
Trustee and the indenture trustee thereunder (the
"Indenture Trustee"). Each Trust will purchase,
pursuant to certain Refunding Agreements (each, a
"Refunding Agreement"), one series of Equipment
Notes issued with respect to the Aircraft such
that all of the Equipment Notes held in each
Trust will have an interest rate corresponding to
the interest rate applicable to the Certificates
to be issued by such Trust. The maturity dates of
the Equipment Notes acquired by each Trust will
occur on or before the final expected
distribution date (the "Final Expected
Distribution Date") applicable to the
Certificates to be issued by such Trust as set
forth on the cover page of this Prospectus. The
aggregate original principal amount of the
Equipment Notes to be held in each Trust will be
the same as the aggregate original face amount of
the Certificates to be issued by such Trust.
Certificates and
Denominations:........... The Certificates of each Trust will be issued in
denominations of $1,000 and integral multiples
thereof, except one Certificate which may be
issued in a different denomination. See
"Description of the Certificates -- General".
13
<PAGE> 14
Regular Distribution
Dates:..................... January 2 and July 2, commencing January 2, 1998.
Special Distribution
Date:...................... Any business day on which a Special Payment is to
be distributed. See "Description of the
Certificates -- Payments and Distributions".
Record Date:............... The fifteenth day preceding a Regular Distribution
Date or a Special Distribution Date.
Distributions:............. All payments of principal and interest received by
the Trustee on the Equipment Notes held in each
Trust will be distributed by the Trustee to the
holders of the Certificates (the
"Certificateholders ") of such Trust, on the
Regular Distribution Dates, subject to the
provisions of the Intercreditor Agreement.
Assuming payments on the Equipment Notes are made
when due, the Final Expected Distribution Date
for each Class of Certificates will be as set
forth on the cover page of this Prospectus.
Payments on the Equipment Notes held in each
Trust are scheduled to be received in specified
amounts by the Trustee of such Trust on January 2
and July 2 of each year, commencing January 2,
1998. Payments of principal, Make-Whole Amount
(if any) and interest resulting from the purchase
(if any) of the Equipment Notes held in any Trust
will be distributed on a Special Distribution
Date after not less than ten days' notice from
the Trustee to the Certificateholders of such
Trust, subject to the provisions of the
Intercreditor Agreement. For a discussion of
distributions upon an Indenture Event of Default,
see "Description of the Certificates -- Indenture
Events of Default and Certain Rights Upon an
Indenture Event of Default".
Events of Default:......... Events of Default under each Pass Through Trust
Agreement (each, a "PTC Event of Default ") are
the failure to pay within ten business days of
the due date thereof: (i) the outstanding Pool
Balance of the applicable Class of Certificates
on the Final Legal Distribution Date (as defined
below) for such Class or (ii) interest due on
such Class of Certificates on any Regular
Distribution Date or Special Distribution Date
(each, a "Distribution Date") (unless, in the
case of the Class A, B or C Certificates, the
Subordination Agent shall have made an Interest
Drawing with respect thereto in an amount
sufficient to pay such interest and shall have
distributed such amount to the Certificateholders
entitled thereto). The "Final Legal Distribution
Date" for each of the Class A, B, C and D
Certificates is January 2, 2010, January 2, 2007,
July 2, 2005 and July 2, 2001, respectively. Any
failure to make expected principal distributions
on any Class of Certificates on any Regular
Distribution Date (other than the Final Legal
Distribution Date) will not constitute a PTC
Event of Default with respect to such
Certificates.
Purchase Rights of
Certificateholders:...... Upon the occurrence and during the continuation of
a Triggering Event (as defined below), (i) the
Class B Certificateholders shall have the right
to purchase all, but not less than all, of the
Class A Certificates, (ii) the Class C
Certificateholders shall have the right to
purchase all, but not less than all, of the Class
A and B Certificates and (iii) the Class D
Certificateholders shall have the right to
purchase all, but not less than all, of the Class
A, B and C Certificates in each case at a
purchase price equal to the Pool Balance of the
relevant Class or Classes of Certificates plus
accrued and unpaid interest thereon to the date
of purchase, without any Make-Whole Amount, but
including
14
<PAGE> 15
any other amounts due to the Certificateholders
of such Class or Classes.
"Triggering Event" means (x) the occurrence of an
Indenture Event of Default under all Indentures
resulting in a PTC Event of Default with respect
to the most senior Class of Certificates then
outstanding, (y) the acceleration of, or a
failure to pay at final maturity, all of the
outstanding Equipment Notes or (z) certain
bankruptcy or insolvency events involving AWA.
Equipment Notes
(a) Interest:............ The Equipment Notes held in each Trust will accrue
interest at the applicable rate per annum for the
Certificates issued by such Trust as set forth on
the cover page of this Prospectus, payable on
January 2 and July 2 of each year, commencing
January 2, 1998, and such interest will be passed
through to Certificateholders of such Trust on
each such date until the Final Expected
Distribution Date for the Certificates issued by
such Trust, in each case subject to the
Intercreditor Agreement. Interest is calculated
on the basis of a 360-day year consisting of
twelve 30-day months. See "Description of the
Certificates -- Payments and Distributions",
"Description of the Equipment Notes -- General"
and "-- Principal and Interest Payments".
(b) Principal:........... Scheduled principal payments made on the Equipment
Notes held in each Trust will be passed through
to the Certificateholders of each such Trust on
January 2 or July 2 or both in certain years
commencing January 2, 1998, in accordance with
the principal repayment schedule set forth herein
under "Description of the Certificates -- Pool
Factors", in each case subject to the
Intercreditor Agreement.
(c) Redemption and
Purchase:........... (i) All of the Equipment Notes issued with
respect to an Aircraft will be redeemed in
whole upon the occurrence of an Event of Loss
with respect to such Aircraft if such
Aircraft is not replaced by AWA under the
related Lease, in each case at a price equal
to the aggregate unpaid principal amount
thereof, together with accrued interest
thereon to, but not including, the date of
redemption, and all other amounts payable
under the related Indenture or under the
related Refunding Agreement to the holders of
such Equipment Notes, but without any
Make-Whole Amount.
(ii) If, with respect to an Aircraft, (x) the
Indenture Trustee with respect to the related
Equipment Notes has taken action or notified
the applicable Owner Trustee that it intends
to take action to foreclose the lien of the
related Indenture or otherwise commence the
exercise of any significant remedy under such
Indenture or the related Lease, (y) the
Equipment Notes with respect to such Aircraft
shall have been accelerated or (z) there
shall have occurred and be continuing a Lease
Event of Default, then in each case all of
the Equipment Notes issued with respect to
such Aircraft may be purchased by the related
Owner Trustee or the beneficial owner of such
Aircraft (the "Owner Participant"), at a
price equal to the aggregate unpaid principal
amount thereof, together with accrued and
unpaid interest thereon to, but not
including, the purchase date, and all other
amounts then payable
15
<PAGE> 16
under the related Indenture or under the
related Refunding Agreement to the holders of
such Equipment Notes, but without any
Make-Whole Amount (provided that if such option
is exercised at a time when a Lease Event of
Default shall have occurred and be continuing
for less than 120 days and the events described
in clauses (x) and (y) of this sentence do not
apply, such price shall include the Make-Whole
Amount).
(d) Security:............ The Equipment Notes issued with respect to each
Aircraft will be secured by a perfected security
interest in the related Owner Trustee's rights in
and to such Aircraft and an assignment to the
related Indenture Trustee of certain of the
related Owner Trustee's rights under the related
Lease, including the right to receive payments of
rent thereunder. The Equipment Notes are not
cross-collateralized and, consequently, the
Equipment Notes issued in respect of any one
Aircraft are not secured by any of the other
Aircraft or the Leases related thereto. There are
no cross-default provisions in the Indentures or
Leases and, consequently, events resulting in an
event of default under any particular Indenture
or Lease may or may not result in an event of
default occurring under any other Indenture or
Lease. If the Equipment Notes issued in respect
of one or more Aircraft are in default and the
Equipment Notes issued in respect of the
remaining Aircraft are not in default, no
remedies will be exercisable under the Indentures
with respect to such remaining Aircraft. See
"Description of the Equipment Notes -- Security",
"-- Indenture Events of Default; Notice and
Waiver" and "-- Remedies".
Although the Equipment Notes are not obligations
of, or guaranteed by, AWA or Holdings, the
aggregate amounts unconditionally payable by AWA
for lease of the Aircraft will be at least
sufficient to pay in full when due all scheduled
amounts required to be paid on the Equipment
Notes issued with respect to the Aircraft. See
"Description of the Equipment Notes -- General".
(e) Section 1110
Protection:......... Milbank, Tweed, Hadley & McCloy, counsel to the
Underwriter, has advised the Indenture Trustees
that if AWA were to become a debtor under Chapter
11 of the Bankruptcy Code, the applicable Owner
Trustee, as a lessor under each Lease, and the
related Indenture Trustee, as assignee of such
Owner Trustee's rights under such Lease pursuant
to such related Indenture, would be entitled to
the benefits of Section 1110 of Title 11 of the
United States Code (the "Bankruptcy Code") with
respect to the airframe and engines comprising
the related Aircraft. See "Description of the
Equipment Notes -- Remedies" for a description of
that opinion and certain assumptions and
qualifications contained therein.
(f) Ranking:............. Series B Equipment Notes issued in respect of each
Aircraft will be subordinated in right of payment
to Series A Equipment Notes issued in respect of
such Aircraft; Series C Equipment Notes issued in
respect of such Aircraft will be subordinated in
right of payment to Series A and B Equipment
Notes issued in respect of such Aircraft; and
Series D Equipment Notes issued in respect of
such Aircraft will be subordinated in right of
payment to Series A, B and C Equipment Notes
issued in respect of such Aircraft. On each
Distribution Date, (i) payments of interest and
principal due on Series A Equipment
16
<PAGE> 17
Notes issued in respect of any Aircraft will be
made prior to payments of interest and principal
due on any Series B, C and D Equipment Notes
issued in respect of such Aircraft, (ii) payments
of interest and principal due on Series B
Equipment Notes will be made prior to payments of
interest and principal due on any Series C and D
Equipment Notes issued in respect of such
Aircraft and (iii) payments of interest and
principal due on Series C Equipment Notes will be
made prior to payments of interest and principal
due on any Series D Equipment Notes issued in
respect of such Aircraft.
Liquidity Facilities:...... The Subordination Agent and the Liquidity Provider
will enter into a revolving credit agreement
(each, a "Liquidity Facility") with respect to
each Trust (other than the Class D Trust). Under
each of the Liquidity Facilities, the Liquidity
Provider will, if necessary, make advances
("Interest Drawings") in an aggregate amount (the
"Required Amount") sufficient to pay interest on
the Class A, B or C Certificates, as the case may
be, on up to three successive Regular
Distribution Dates (without regard to any future
payments of principal on such Certificates) at
the respective interest rates (without any
penalty or default margin) on such Certificates
(the "Stated Interest Rates"). The initial amount
available under the Liquidity Facilities for the
Class A Certificates, the Class B Certificates
and the Class C Certificates will be $5,190,959,
$1,965,200 and $1,999,723, respectively. An
Interest Drawing under the relevant Liquidity
Facility will be made promptly after any Regular
Distribution Date if, after giving effect to the
subordination provisions of the Intercreditor
Agreement, there are insufficient funds available
to the Subordination Agent to pay interest on any
Class A, B or C Certificates; provided, however,
that on any date the maximum amount available
under such Liquidity Facility to fund any
shortfall in interest due on such Certificates
will not exceed the Required Amount. The
Liquidity Facility for any Trust does not provide
for drawings thereunder to pay for principal of,
or Make-Whole Amount on, the Certificates of such
Trust, any interest on the Certificates of such
Trust in excess of the Stated Interest Rates, or
principal of, or interest or Make-Whole Amount
on, the Certificates of any other Trust.
Upon each Interest Drawing under any Liquidity
Facility, the Subordination Agent will be
obligated to reimburse (to the extent that the
Subordination Agent has available funds therefor)
the Liquidity Provider for the amount of such
drawing. Such reimbursement obligation and any
other amounts, including interest thereon, owing
to the Liquidity Provider under each Liquidity
Facility or certain other agreements (the
"Liquidity Obligations") will rank pari passu
with the Liquidity Obligations relating to all
other Liquidity Facilities and will rank senior
to the Certificates in right of payment. Upon
reimbursement in full of the Interest Drawings
(but not other drawings), together with any
accrued interest thereon, under any Liquidity
Facility, the amount available under such
Liquidity Facility will be reinstated to the then
Required Amount of such Liquidity Facility;
provided that the amount will not be reinstated
at any time if (i) a Liquidity Event of Default
(as defined herein) shall have occurred and be
continuing or (ii) both(A) a Triggering Event
shall have occurred and be continuing and (B) a
Performing Note Deficiency (as defined below)
exist.
17
<PAGE> 18
"Non-Performing Equipment Notes" are Equipment
Notes other than Performing Equipment Notes.
"Performing Equipment Notes" are Equipment Notes
with respect to which no payment default has
occurred and is continuing (without giving effect
to any acceleration thereof); provided that in
the event of a bankruptcy proceeding involving
AWA as a debtor under Chapter 11 of the
Bankruptcy Code (i) any payment default existing
during the 60-day period under Section
1110(a)(1)(A) of the Bankruptcy Code (or such
longer period as may apply under Section 1110(b)
of the Bankruptcy Code) (the "Section 1110
Period ") shall not be taken into consideration,
unless during the Section 1110 Period the trustee
in such proceeding or AWA refuses to assume or
agree to perform its obligations under the Lease
related to such Equipment Notes and (ii) any
payment default occurring after the date of the
order of relief in such proceeding shall not be
taken into consideration if such payment default
is cured under Section 1110(a)(1)(B) of the
Bankruptcy Code before the later of (A) 30 days
after the date of such default or (B) the
expiration of the Section 1110 Period.
"Performing Note Deficiency" means any time that
less than 65% of the then aggregate outstanding
principal amount of all Equipment Notes are
Performing Equipment Notes.
If at any time the short-term unsecured debt rating
of the Liquidity Provider issued by Moody's
Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("Standard & Poor's" and,
together with Moody's, the "Rating Agencies") is
lower than the Threshold Rating (as defined
herein) or, in the event the Liquidity Provider's
short-term unsecured debt is not rated by Moody's
or Standard & Poor's, the long-term unsecured
debt rating of any Liquidity Provider issued by
either Moody's or Standard & Poor's is lower than
the Threshold Rating, then the Liquidity Provider
for the related Trust or the Subordination Agent,
in consultation with AWA (whose recommendations
the Subordination Agent will accept), may arrange
for another similar facility to be provided by a
financial institution having unsecured short-term
debt ratings or, in the event a selected
financial institution's short-term unsecured debt
is not rated by Moody's or Standard & Poor's,
long-term unsecured debt ratings, issued by the
applicable Rating Agencies which are equal to or
higher than the Threshold Rating. If such
Liquidity Facility is not replaced within the
period specified in the Intercreditor Agreement
after notice of the downgrading, such Liquidity
Facility will be drawn in full (the "Downgrade
Drawing") and the proceeds will be deposited into
an account (a "Cash Collateral Account") for such
Trust and used for the same purposes and under
the same circumstances and subject to the same
conditions as cash payments of Interest Drawings
under such Liquidity Facility would be used.
The Intercreditor Agreement provides that the
Subordination Agent shall hold the proceeds of a
Final Drawing made in accordance with the
provisions set forth under "Description of
Liquidity Facilities -- Liquidity Events of
Default" in the Cash Collateral Account for the
related Trust as cash collateral to be used for
the same purposes and under the same
circumstances, and subject to the same
conditions, as
18
<PAGE> 19
cash payments of Interest Drawings under such
Liquidity Facility would be used.
The Subordination Agent, in consultation with AWA
(whose recommendations the Subordination Agent
will accept), may, subject to certain
limitations, arrange for a replacement facility
at any time to replace the Liquidity Facility for
any Trust. If such replacement facility is
provided at any time after a Downgrade Drawing
under such Liquidity Facility, the funds on
deposit in the Cash Collateral Account for such
Trust will be returned to the Liquidity Provider
being replaced.
Notwithstanding the subordination provisions of the
Intercreditor Agreement, the Liquidity Facility
for any Class of Certificates does not provide
for drawings thereunder to pay principal of or
interest or Make-Whole Amount on the Certificates
of any other Class. Therefore, only the holders
of the Certificates to be issued by a particular
Trust will be entitled to receive and retain the
proceeds of drawings under the Liquidity Facility
for such Trust. There is no Liquidity Facility
for the Class D Trust. See "Description of the
Liquidity Facilities".
Intercreditor Agreement:
(a) Subordination:....... The Trusts, the Liquidity Provider and the
Subordination Agent will enter into an agreement
(the "Intercreditor Agreement") which will
provide as follows:
(i) All payments made in respect of the Equipment
Notes and certain other payments will be made
to the Subordination Agent which will
distribute such payments as described in
paragraphs (ii) and (iii) below.
(ii) On each Distribution Date, so long as no
Triggering Event shall have occurred (whether
or not continuing), all payments received by
the Subordination Agent in respect of the
Equipment Notes and certain other payments
will be distributed in the following order:
(a) payment of the Liquidity Obligations to
the Liquidity Provider and, if applicable, to
replenish Cash Collateral Accounts up to
their respective Required Amounts; (b)
payment of Expected Distributions (as defined
below) to the holders of Class A
Certificates; (c) payment of Expected
Distributions to the holders of Class B
Certificates; (d) payment of Expected
Distributions to the holders of Class C
Certificates; (e) payment of Expected
Distributions to the holders of Class D
Certificates; and (f) payment of certain fees
and expenses of the Subordination Agent and
each Trustee.
"Expected Distributions" means, with respect to the
Certificates of any Trust on any Distribution
Date (the "Current Distribution Date"), the sum
of (x) accrued and unpaid interest on such
Certificates and (y) the difference between (A)
the Pool Balance of such Certificates as of the
immediately preceding Distribution Date and (B)
the Pool Balance of such Certificates as of the
Current Distribution Date, calculated on the
basis that the principal of the Equipment Notes
held in such Trust has been paid when due
(whether at stated maturity, upon redemption,
prepayment, purchase or acceleration or
otherwise)
19
<PAGE> 20
and such payments have been distributed to the
holders of such Certificates.
(iii) Upon the occurrence of a Triggering Event and
at all times thereafter, all payments
received by the Subordination Agent in
respect of the Equipment Notes and certain
other payments will be distributed in the
following order: (a) to reimburse the
Subordination Agent, each Trustee, the
Liquidity Provider and any Certificateholder,
as the case may be, for the payment of
Administration Expenses (as defined herein);
(b) to the Liquidity Provider in payment of
Liquidity Obligations and, so long as no
Performing Note Deficiency exists and no
Liquidity Event of Default has occurred and
is continuing, to replenish Cash Collateral
Accounts up to their respective Required
Amounts; (c) to reimburse the Subordination
Agent, each Trustee and each
Certificateholder, as the case may be, for
the payment of Certain Taxes and Fees (as
defined herein); (d) to pay Adjusted Expected
Distributions to the holders of Class A
Certificates; (e) to pay Adjusted Expected
Distributions to the holders of Class B
Certificates; (f) to pay Adjusted Expected
Distributions to the holders of Class C
Certificates; and (g) to pay Adjusted
Expected Distributions to the holders of
Class D Certificates.
"Adjusted Expected Distributions" means with
respect to the Certificates of any Class on any
Current Distribution Date the sum of (x) the
amount of accrued and unpaid interest on such
Certificates plus (y) the greater of:
(A) the difference between (x) the Pool Balance of
such Certificates as of the immediately preceding
Distribution Date and (y) the Pool Balance of
such Certificates as of the Current Distribution
Date, calculated on the basis that (i) the
principal of the Non-Performing Equipment Notes
held in such Trust has been paid in full and such
payments have been distributed to the holders of
such Certificates and (ii) the principal of the
Performing Equipment Notes has been paid when due
(but without giving effect to any acceleration of
Performing Equipment Notes) and has been
distributed to the holders of such Certificates;
and
(B) the amount, if any, by which (i) the Pool
Balance of such Class of Certificates as of the
immediately preceding Distribution Date exceeds
(ii) the Aggregate LTV Collateral Amount for such
Class of Certificates for the Current
Distribution Date;
provided that, until the date of the initial LTV
Appraisals (as defined below), clause (B) above
shall not be applicable.
"Aggregate LTV Collateral Amount" means, for any
Class of Certificates for any Distribution Date,
the sum of the applicable LTV Collateral Amounts
(as defined below) for each Aircraft minus the
Pool Balance for each Class of Certificates, if
any, senior to such Class after giving effect to
any distribution of principal on such
Distribution Date on such senior Class or
Classes, but in no event an amount less than
zero.
"Appraised Current Market Value" of any Aircraft
means the lower of the average or the median of
the most recent three LTV Appraisals (as defined
below) of such Aircraft. After a Triggering Event
occurs and any Equipment Note becomes a
Non-Performing Equipment
20
<PAGE> 21
Note, the Subordination Agent will be required to
obtain LTV Appraisals to determine the Appraised
Current Market Value and additional LTV
Appraisals on or prior to each anniversary of the
date of such initial LTV Appraisals; provided
that, if the Controlling Party reasonably objects
to the appraised value of the Aircraft shown in
any such LTV Appraisals, the Controlling Party
shall have the right to obtain or cause to be
obtained substitute LTV Appraisals (including any
LTV Appraisals based upon physical inspection of
the Aircraft).
"LTV Appraisal" means a current fair market value
appraisal (which may be a "desktop" appraisal)
performed by any Appraiser or any other
nationally recognized appraiser on the basis of
an arm's-length transaction between an informed
and willing purchaser under no compulsion to buy
and an informed and willing seller under no
compulsion to sell, both parties having knowledge
of all relevant facts.
"LTV Collateral Amount" of any Aircraft for any
Class of Certificates for any Distribution Date
means the lesser of (i) the initial LTV Ratio for
such Class of Certificates multiplied by the
Appraised Current Market Value of such Aircraft
and (ii) the outstanding principal amount of the
Equipment Notes secured by such Aircraft after
giving effect to any principal payments of such
Equipment Notes on or before such Distribution
Date.
"LTV Ratio" initially means for the Class A
Certificates 40.0%, for the Class B Certificates
55.0%, for the Class C Certificates 70.0% and for
the Class D Certificates 81.8%.
(b) Intercreditor
Rights:.................... Pursuant to the Intercreditor Agreement, the
Trustees and the Liquidity Provider will agree
that, with respect to any Indenture at any given
time, the relevant Indenture Trustee will be
directed (a) in taking, or refraining from
taking, any action thereunder, so long as no
Indenture Event of Default shall have occurred
and be continuing thereunder, by the holders of
at least a majority of the outstanding principal
amount of the Equipment Notes issued thereunder
(provided that, for so long as the Subordination
Agent is the registered holder of the Equipment
Notes, the Subordination Agent shall act with
respect to this clause (a) in accordance with the
directions of the Trustees representing holders
of Certificates representing an undivided
interest in such principal amount of Equipment
Notes) and (b) after the occurrence and during
the continuance of an Indenture Event of Default
thereunder, subject to certain conditions in
exercising remedies thereunder (including
acceleration of such Equipment Notes or
foreclosing the lien on the Aircraft securing
such Equipment Notes), by the Controlling Party.
"Controlling Party" with respect to any Indenture
means: (w) the Class A Trustee; (x) upon payment
of Final Distributions to the holders of Class A
Certificates, the Class B Trustee; (y) upon
payment of Final Distributions to the holders of
Class B Certificates, the Class C Trustee; and
(z) upon payment of Final Distributions to the
holders of Class C Certificates, the Class D
Trustee. See "Description of the
Certificates -- Indenture Events of Default and
Certain Rights Upon an Indenture Event of
Default" for a description of the rights of the
Certificateholders of each Trust to direct the
respective Trustee. Notwithstanding the
foregoing, subject to certain limitations, the
Liquidity Provider shall have the right to elect
to
21
<PAGE> 22
become the Controlling Party with respect to an
Indenture at any time from and including the date
which is 18 months after the earlier of (i) the
acceleration of the Equipment Notes issued
thereunder and (ii) a Final Drawing (as defined
herein) under the Liquidity Facilities, if at the
time of such election the Liquidity Obligations
have not been paid in full; provided that if
there is more than one Liquidity Provider, the
Liquidity Provider with the greatest amount of
unreimbursed Liquidity Obligations shall have
such right.
"Final Distributions" means, with respect to the
Certificates of any Trust on any Distribution
Date, the sum of (x) the aggregate amount of all
accrued and unpaid interest on such Certificates
and (y) the Pool Balance of such Certificates as
of the immediately preceding Distribution Date.
(i) Upon the occurrence and during the
continuation of any Indenture Event of
Default under any Indenture, the Controlling
Party may accelerate and sell all (but not
less than all) of the Equipment Notes issued
under such Indenture to any person, subject
to the provisions of paragraph (ii) below.
The proceeds of such sale will be distributed
pursuant to the provisions of the
Intercreditor Agreement.
(ii) So long as any Certificates are outstanding,
during nine months after the earlier of (x)
the acceleration of the Equipment Notes under
any Indenture or (y) the bankruptcy or
insolvency of AWA, without the consent of
each Trustee, (a) no Aircraft subject to the
lien of such Indenture or such Equipment
Notes may be sold, if the net proceeds from
such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment
Notes, and (b) the amount and payment dates
of rentals payable by AWA under the Lease for
such Aircraft may not be adjusted, if, as a
result of such adjustment, the discounted
present value of all such rentals would be
less than 75% of the discounted present value
of the rentals payable by AWA under such
Lease before giving effect to such
adjustment, in each case, using the weighted
average interest rate of the Equipment Notes
then outstanding under such Indenture as the
discount rate.
"Minimum Sale Price" means, with respect to the
Aircraft or the Equipment Notes issued in respect
of such Aircraft, at any time, the lesser of (a)
75% of the Appraised Current Market Value of such
Aircraft based on the most recent LTV Appraisal
and (b) the aggregate outstanding principal
amount of such Equipment Notes, plus accrued and
unpaid interest thereon.
Use of Proceeds:........... The proceeds from the sale of the Certificates
offered hereby will be used to purchase the
Equipment Notes issued by the related Owner
Trustees in connection with the refinancing of
the indebtedness previously incurred by the Owner
Trustees to finance the purchase of the Aircraft.
The proceeds from the sale of Equipment Notes
will be used to repay all of the current
indebtedness of the Owner Trustees with respect
to the Aircraft, and any proceeds remaining after
such repayment may be used to pay certain costs
and expenses, such as break-funding costs and
redemption premiums, incurred in the refinancing.
Such Equipment Notes will represent in the
aggregate the entire debt portion of the
leveraged lease transactions relating to all of
22
<PAGE> 23
the Aircraft. Neither AWA nor Holdings will
receive any of the proceeds from the sale of the
Certificates. See "Use of Proceeds".
Trustee: .................. Fleet National Bank will act as Trustee and as
paying agent and registrar for the Certificates
of each Trust. Fleet National Bank will also act
as Subordination Agent under the Intercreditor
Agreement.
Indenture Trustee: ........ The Chase Manhattan Bank will act as Indenture
Trustee with respect to the issue of Equipment
Notes relating to each of the Aircraft.
Federal Income Tax
Consequences:............ Each Trust will be classified as a grantor trust
for federal income tax purposes, and therefore
each Certificate Owner will be treated as the
owner of a pro rata undivided interest in each of
the Equipment Notes and any other property held
by such Trust. Each Certificate Owner should
report on its federal income tax return its pro
rata share of income from such Equipment Notes
and other property held by such Trust in
accordance with such Certificate Owner's method
of accounting. The Equipment Notes will not be
issued with original issue discount for U.S.
federal income tax purposes. See "Certain U.S.
Federal Income Tax Consequences".
ERISA Considerations:...... In general, employee benefit plans subject to Title
I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended
(the "Code"), or entities which may be deemed to
hold the assets of any such plan (collectively,
"Plans"), will be eligible to purchase the Class
A Certificates. Plans will not be eligible to
purchase the Class B, C or D Certificates;
provided, however, that such Certificates may be
acquired with the assets of an insurance company
general account that may be deemed to contain
Plan assets if the conditions of Prohibited
Transaction Class Exemption ("PTCE") 95-60, 60
Fed. Reg. 35,925, are satisfied. By the
acceptance of a Class B, C or D Certificate, each
Certificateholder will be deemed to have
represented that either (i) no Plan assets have
been used to purchase such Certificate or (ii)
the purchase and holding of such Certificate is
exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to
PTCE 95-60. Each Plan fiduciary (and each
fiduciary for a governmental or church plan
subject to rules similar to those imposed on
Plans under ERISA) should consult with its legal
advisor concerning an investment in any of the
Certificates. See "ERISA Considerations".
Rating of the
Certificates:.............. It is a condition to the issuance of the
Certificates that the Certificates be rated by
Moody's and Standard & Poor's as set forth below:
<TABLE>
<CAPTION>
STANDARD &
CERTIFICATES MOODY'S POOR'S
------------ ------- ----------
<S> <C> <C>
Class A A2 AA-
Class B Baa2 A-
Class C Ba1 BBB-
Class D Ba3 BB
</TABLE>
A rating is not a recommendation to purchase, hold
or sell Certificates, inasmuch as such rating
does not address market price or suitability for
a particular investor. There can be no assurance
that such ratings will not be lowered or
withdrawn by a Rating Agency if, in the opinion
23
<PAGE> 24
of such Rating Agency, circumstances (including
the downgrading of AWA or the Liquidity Provider)
so warrant. See "Risk Factors -- Factors Relating
to the Certificates and the Offering -- Ratings
of the Certificates".
Rating of the Initial
Liquidity Provider:........ Kredietbank N.V., acting through its New York
branch, as the Initial Liquidity Provider, has a
short-term unsecured debt rating of P-1 and A1+
from Moody's and Standard & Poor's, respectively,
and a long-term unsecured debt rating of Aa2 and
AA- from Moody's and Standard & Poor's,
respectively.
Threshold Rating:.......... "Threshold Rating" means the short-term unsecured
debt rating of P-1 by Moody's and A-1 by Standard
& Poor's or, in the event a person's short-term
unsecured debt is not rated by either Moody's or
Standard & Poor's, the long-term unsecured debt
rating of A2 by Moody's and AA- by Standard &
Poor's.
24
<PAGE> 25
SUMMARY FINANCIAL AND OPERATING DATA
The following table summarizes certain financial and operating data with
respect to AWA contained elsewhere in this Prospectus and should be read in
conjunction therewith. Statements of operations data subsequent to August 25,
1994 and balance sheet data as of December 31, 1994, 1995 and 1996 and March 31,
1996 and 1997 reflect the adoption by AWA of fresh start reporting upon
consummation of AWA's reorganization and are not prepared on a basis of
accounting consistent with prior data. References to "Predecessor Company" refer
to AWA's operations prior to its emergence from bankruptcy and references to
"Reorganized Company" refer to AWA's operations after its emergence from
bankruptcy. See the financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<TABLE>
<CAPTION>
REORGANIZED COMPANY
---------------------------------------------------------------- PREDECESSOR COMPANY(1)
THREE MONTHS ENDED YEAR ENDED ---------------------------
MARCH 31, DECEMBER 31, AUGUST 26 TO JANUARY 1 TO YEAR ENDED
----------------------- ----------------------- DECEMBER 31, AUGUST 25, DECEMBER 31,
1997 1996 1996 1995 1994 1994 1993
---------- ---------- ---------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Operating revenues........ $ 462,187 $ 413,150 $1,739,526 $1,550,642 $ 469,766 $ 939,028 $1,325,364
Operating income.......... 33,463 34,318 68,666(2) 154,732(3) 38,871 107,506 121,054
Income (loss) before
income taxes and
extraordinary items..... 25,918 25,420 34,493 108,378 19,736 (201,209) 37,924
Income (loss) before
extraordinary items..... 13,944 13,727 9,610 54,770 7,846 (203,268) 37,165
Extraordinary gain
(loss)(4)............... -- -- (1,105) (984) -- 257,660 --
Net income................ 13,944 13,727 8,505 53,786 7,846 54,392 37,165
BALANCE SHEET DATA (AT END
OF PERIOD):
Working capital
deficiency.............. $ (188,483) $ (75,785) $ (170,907) $ (70,416) $ (47,927) $ (163,572) $ (124,375)
Total assets.............. 1,602,082 1,651,928 1,597,677 1,588,709 1,545,092 -- 1,016,743
Long-term debt, less
current maturities(5)... 333,685 371,588 330,148 373,964 465,598 -- 620,992
Total stockholder's equity
(deficiency)............ 623,382 667,155 622,780 649,472 595,446 -- (254,262)
OPERATING DATA:
Available seat miles (in
millions)............... 5,791 4,955 21,625 19,421 6,424 11,636 17,190
Revenue passenger miles
(in millions)........... 3,982 3,504 15,321 13,313 3,972 8,261 11,221
Passenger load factor
(%)..................... 68.8 70.7 70.9 68.5 61.8 71.0 65.3
Yield per revenue
passenger mile
(cents)................. 10.94 11.07 10.69 10.91 11.02 10.68 11.11
Passenger revenue per
available seat mile
(cents)................. 7.52 7.83 7.57 7.48 6.81 7.58 7.25
Operating cost per
available seat mile
(cents)................. 7.40 7.65 7.73(2) 7.19(3) 6.71 7.15 7.01
Full time equivalent
employees (at end of
period)................. 10,015 8,933 9,652 8,712 10,715 10,849 10,544
</TABLE>
- ---------------
(1) Includes net expenses incurred by the Predecessor Company in connection
with its reorganization of $273.7 million for the period January 1 to
August 25, 1994 and $25.0 million for the year ended December 31, 1993.
(2) Reflects a $65.1 million nonrecurring special charge related to AWA's
renegotiation of its AVSA aircraft purchase agreement and writedown of
certain aircraft related inventory and equipment and underutilized
facilities as well as certain other adjustments. The special charge
increased cost per available seat mile by .30 cents for the year ended
December 31, 1996.
(3) Costs associated with AWA's outsourcing of its heavy aircraft maintenance
resulted in a pretax restructuring charge of approximately $10.5 million
and an increase in cost per available seat mile of .05 cents for the year
ended December 31, 1995.
(4) Includes (i) an extraordinary loss of $1.1 million in 1996 relating to
prepayment of the 10 3/4% Notes, (ii) an extraordinary loss of $984,000 in
1995 resulting from the exchange of debt by AWA and (iii) an extraordinary
gain of $257.7 million in the period from January 1 to August 25, 1994
resulting from the discharge of indebtedness pursuant to the consummation
of AWA's plan of reorganization.
(5) Includes certain balances reported as "Estimated Liabilities Subject to
Chapter 11 Proceedings" for the Predecessor Company.
25
<PAGE> 26
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE CERTIFICATES SHOULD CAREFULLY REVIEW THE
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND SHOULD PARTICULARLY
CONSIDER THE FOLLOWING MATTERS:
AWA AND INDUSTRY RELATED RISKS
COMPETITIVE INDUSTRY CONDITIONS
The airline industry is highly competitive and industry earnings are
volatile. From 1990 to 1992, the airline industry experienced unprecedented
losses due to high fuel costs, general economic conditions, intense price
competition and other factors. Airlines compete on the basis of pricing,
scheduling (frequency and flight times), on-time performance, frequent flyer
programs and other services. The airline industry is susceptible to price
discounting, which involves the offering of discount or promotional fares to
passengers. Any such fares offered by one airline are normally matched by
competing airlines, which may result in lower industry yields without a
corresponding increase in traffic levels.
Most of AWA's markets are highly competitive and are served by larger
carriers with substantially greater financial resources than AWA. A number of
AWA's larger competitors have proprietary reservation systems providing them
with certain competitive advantages. Also, in recent years several new carriers
have entered the industry, typically with low cost structures. In some cases,
new entrants have initiated or triggered further price discounting. The entry of
additional new carriers on many of AWA's routes, as well as increased
competition from or the introduction of new services by established carriers,
could negatively impact AWA's results of operations. See
"Business -- Competition and Marketing".
In addition, the introduction of broadly available, deeply discounted fares
by a U.S. airline would result in lower yields for the entire industry and could
have a material adverse effect on AWA's operating results.
LEVERAGE; FUTURE CAPITAL REQUIREMENTS
At March 31, 1997, AWA had $377.9 million of long-term indebtedness
(including current maturities). AWA does not have available lines of credit or
significant unencumbered assets and thus may be less able than certain of its
competitors to withstand adverse industry conditions or a prolonged economic
recession. In addition, at March 31, 1997, AWA had firm commitments for a total
of 17 Airbus A320-200 aircraft for delivery beginning in 1999. The aggregate net
cost of such aircraft is based on formulae that include certain price indices
(including indices for various aircraft components such as metal products) for
periods preceding the various delivery dates. Based on an assumed 5% annual
price escalation, AWA estimates such aggregate net cost to be approximately $850
million. AWA has arranged for financing for up to one-half of the commitment
relating to such aircraft and will require substantial capital from external
sources to meet its remaining financial commitment. There can be no assurance
that AWA will be able to obtain such capital in sufficient amounts or on
acceptable terms. AWA is presently negotiating to expand such arrangement from
17 to 22 firm orders for new aircraft, obtain financing support for 16 of the 22
firm orders and improve financing terms and conditions under which aircraft
would be purchased.
LABOR RELATIONS
There have been numerous attempts by unions to organize the employees of
AWA, and AWA expects such organization efforts to continue in the future.
Several groups of AWA's employees have selected their respective collective
bargaining representatives and negotiations are in progress. AWA cannot predict
which, if any, other employee groups may seek union representation or the
outcome or the terms of any future collective bargaining agreement and therefore
the effect, if any, on AWA's operations or financial condition. See
"Business -- Labor Relations".
26
<PAGE> 27
CONCENTRATION OF VOTING POWER, INFLUENCE OF CERTAIN PRINCIPAL STOCKHOLDERS
TPG Partners, L.P. ("TPG Partners ") TPG Parallel I, L.P. ("TPG
Parallel "), Air Partners II, L.P. ("Air Partners " and together with TPG
Partners and TPG Parallel, "TPG "), Continental and Mesa collectively control
approximately 60.5% of the total voting power of Holdings and are subject to the
terms of a stockholders' agreement, which provides for certain voting
restrictions until the first annual meeting of stockholders of Holdings held
after August 25, 1997. As a result, these stockholders are able to elect a
majority of their designees to the Board of Directors and otherwise control the
Company. Mesa and Continental are engaged in the airline industry and are
parties to alliance agreements with AWA. Each of TPG Partners, TPG Parallel and
Air Partners is controlled by TPG Advisors, Inc., a Delaware corporation whose
executive officers and directors, through their positions in Air Partners, L.P.,
a significant shareholder of Continental, may be deemed to own beneficially a
significant percentage of Continental's common stock. Larry L. Risley, a
director of each of Holdings and AWA, is the chairman and chief executive
officer of Mesa. There can be no assurance that the controlling stockholders
identified above will not seek to influence the Company in a manner that would
favor their own personal interests over the interests of the Company.
AIRCRAFT FUEL
Aircraft fuel costs constituted approximately 14% of AWA's total operating
expenses during 1996. At current consumption levels, a one cent per gallon
change in the price of jet fuel would affect AWA's annual operating results by
approximately $3.5 million. Accordingly, a substantial increase in the price of
jet fuel or the lack of adequate fuel supplies in the future would have a
material adverse effect on AWA's operating results. AWA's performance during
1996 was adversely affected by the price of jet fuel. The average price of jet
fuel purchased by AWA during 1996 was 66.49 cents per gallon or 19.1% higher
than the average price paid by AWA in 1995. Those price increases were largely
responsible for AWA's 1996 jet fuel expense exceeding that incurred in 1995 by
$59.3 million or 34.1%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
AWA purchases its fuel from petroleum refiners and suppliers on standard
trade terms under master agreements. Although AWA is currently able to obtain
adequate supplies of jet fuel, future supplies and price trends may change as a
result of geopolitical developments, regional production patterns, environmental
concerns and other unpredictable events.
In 1996, AWA implemented a fuel hedging program to manage the risk from
fluctuating jet fuel prices. The program's objectives are to provide some
protection against extreme, upward movements in the price of jet fuel and to
protect AWA's ability to meet its annual fuel expense budget. Under the program,
AWA may enter into certain cap and swap transactions with approved
counterparties for a period not to exceed twelve months. This program will
primarily address AWA's exposure associated with its United States East Coast
fuel requirements, which correlate well with risk management vehicles having
reasonable market liquidity.
Due to the scope and nature of AWA's route system, AWA purchases a
substantially greater share of jet fuel on the United States West Coast than its
larger competitors. West Coast jet fuel prices tend to be more volatile than jet
fuel prices in other domestic markets. Further, the propensity of West Coast jet
fuel prices to move independently from the other United States jet fuel markets
renders many conventional hedging techniques ineffective in managing this
portion of AWA's jet fuel price risk.
FAA FUNDING
The federal air transportation excise taxes, which expired December 31,
1996, have been reenacted effective March 7, 1997 through September 30, 1997.
Such taxes (a 10% ticket tax, a 6.25% air cargo tax and a $6.00 international
departure tax) generate a substantial portion of funding for the Federal
Aviation Administration ("FAA"). A coalition of the seven largest U.S. airlines
is proposing a user fee as a replacement for the excise taxes. A fuel tax is
also being considered. The National Aviation Civilian Review Commission (the
"Review Commission") has announced its intention to conduct an independent
review of possible funding mechanisms to replace the excise taxes and is
scheduled to release a report in September 1997. Implementation by Congress of a
user fee as proposed by the seven airlines, which would favor AWA's larger
27
<PAGE> 28
competitors, or other proposals recommended by the Review Commission, could
significantly increase the cost of AWA's airline operations and could have a
material adverse impact on AWA's operating results. See "Business -- Government
Regulations -- FAA Funding".
SECURITY AND SAFETY MEASURES
Congress recently adopted increased safety and security measures designed
to increase airline passenger security and protect against terrorist acts. Such
measures have resulted in additional operating costs to the airline industry. A
report of the President's Commission on Aviation Safety and Security (the
"Aviation Safety Commission") recommends the adoption of further measures aimed
at improving the safety and security of air travel. AWA cannot forecast what
additional security and safety requirements may be imposed in the future or the
costs or revenue impact that would be associated with complying with such
requirements. See "Business -- Government Regulations -- Additional Security and
Safety Measures".
OTHER REGULATORY MATTERS
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. At March 31, 1997, 20 of AWA's 101 aircraft did not meet the FAA's
Stage III noise reduction requirements and must be retired or significantly
modified prior to the year 2000. These modifications may require substantial
capital expenditures. There can be no assurance that AWA will be able to obtain
financing for such capital expenditures or, if such financing is obtained that
it will be on terms that are favorable or acceptable to AWA. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
The FAA is currently revising procedures for airline surveillance of
outsourced maintenance and training. Additional laws and regulations have been
proposed from time to time that could significantly increase the cost of airline
operations by imposing additional requirements or restrictions on operations.
AWA cannot predict what laws and regulations will be adopted or what changes to
international air transportation agreements will be effected, if any, or how
they will affect AWA. See "Business -- Government Regulations".
SUBSTANTIAL RESTRICTIONS AND COVENANTS
Certain loan agreements and debt instruments of AWA contain significant
operating and financial restrictions on AWA. The terms of such agreements and
instruments affect, and in many cases significantly limit or prohibit, among
other things, the ability of AWA to repay indebtedness prior to its stated
maturity, sell assets or engage in mergers or acquisitions. In addition, under
certain of such agreements and instruments, AWA is required to maintain
specified levels of stockholder's equity and adjusted cash and maintain certain
specified financial ratios. While AWA is currently in compliance with these
restrictions and requirements, such restrictions and requirements could also
limit the ability of AWA to effect future financings, make needed capital
expenditures, withstand a future downturn in AWA's business or the economy in
general or otherwise conduct necessary corporate activities. A failure by AWA to
comply with these restrictions and requirements could lead to a default under
the terms of such indebtedness. In the event of default, the holders of such
indebtedness could elect to declare all of the funds borrowed pursuant thereto
due and payable together with accrued and unpaid interest. In such event, there
can be no assurance that AWA would be able to make such payments or borrow
sufficient funds from alternative sources to make such payments. Even if
additional financing could be obtained, there can be no assurance that it would
be on terms that are favorable or acceptable to AWA.
In the event of certain changes of control, with respect to Holdings or
AWA, AWA will be required to offer to purchase certain amounts of the
indebtedness referred to above, in each case subject to certain conditions.
There can be no assurance that AWA will be able to raise sufficient funds to
meet its obligations in connection with such a change of control. In addition,
in the event of certain asset dispositions, AWA will be
28
<PAGE> 29
required under certain circumstances to use the excess proceeds to offer to
purchase certain amounts of such indebtedness.
FACTORS RELATING TO THE CERTIFICATES AND THE OFFERING
APPRAISALS AND REALIZABLE VALUE OF THE AIRCRAFT
The appraised value of each Aircraft is based upon the lesser of the
average and median value of such Aircraft as appraised by the Appraisers (the
"Appraisals"). The Appraisals are based on differing assumptions and
methodologies, which vary among the Appraisers. For a discussion of the
assumptions and methodologies used in preparing each of the Appraisals,
reference is hereby made to the Appraiser's reports with respect to the
Appraisals, copies of which are annexed to this Prospectus as Appendix II.
Appraisals that are prepared based on different assumptions or methodologies may
result in valuations that are significantly different from those contained in
the Appraisals.
An appraisal is only an estimate of value and should not be relied upon as
a measure of realizable value. The proceeds realized upon the sale of any
Aircraft may be less than the appraised value thereof. In addition, the value of
the Aircraft in the event of the exercise of remedies under the applicable
Indenture will depend on market and economic conditions at the time, the
availability of buyers, the condition of the Aircraft, whether the Aircraft is
sold separately or as a block and other factors. Accordingly, there can be no
assurance that the proceeds realized upon any such exercise with respect to the
Equipment Notes and the Aircraft pursuant to the applicable Indenture would be
as appraised or sufficient to satisfy in full remaining payments due on the
Equipment Notes issued thereunder or the Certificates. See "Description of the
Aircraft and the Appraisals -- Appraised Value".
The Equipment Notes are not cross-collateralized and, consequently,
liquidation proceeds from the sale of the Aircraft in excess of the amounts due
on Equipment Notes related to such Aircraft will not be available to offset
shortfalls, if any, on any other Equipment Notes.
PRIORITY OF DISTRIBUTIONS; SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trusts, the
Subordination Agent and the Liquidity Provider will be parties, on each
Distribution Date, so long as no Triggering Event shall have occurred (whether
or not continuing), all payments received by the Subordination Agent will be
distributed in the following order: (a) payment of the Liquidity Obligations to
the Liquidity Provider and, if applicable, to replenish the Cash Collateral
Accounts up to their respective Required Amounts; (b) payment of Expected
Distributions to the holders of Class A Certificates; (c) payment of Expected
Distributions to the holders of Class B Certificates; (d) payment of Expected
Distributions to the holders of Class C Certificates; (e) payment of Expected
Distributions to the holders of Class D Certificates; and (f) payment of certain
fees and expenses of the Subordination Agent and each Trustee.
In addition, upon the occurrence of a Triggering Event and at all times
thereafter, all payments received by the Subordination Agent in respect of the
Equipment Notes and certain other payments will be distributed under the
Intercreditor Agreement in the following order: (a) to reimburse the
Subordination Agent, each Trustee, the Liquidity Provider and any
Certificateholder, as the case may be, for the payment of Administration
Expenses; (b) to the Liquidity Provider in payment of Liquidity Obligations and,
so long as no Performing Note Deficiency Exists and no Liquidity Event of
Default has occurred and is continuing to replenish Cash Collateral Accounts up
to their respective Required Amounts; (c) to reimburse the Subordination Agent,
each Trustee and each Certificateholder, as the case may be, for payment of
Certain Taxes and Fees; (d) to pay Adjusted Expected Distributions to the
holders of Class A Certificates; (e) to pay Adjusted Expected Distributions to
the holders of Class B Certificates; (f) to pay Adjusted Expected Distributions
to the holders of Class C Certificates; and (g) to pay Adjusted Expected
Distributions to the holders of Class D Certificates.
The priority of distributions after a Triggering Event will have the effect
in certain circumstances of distributing payments received in respect of one or
more junior series of Equipment Notes to more senior
29
<PAGE> 30
Classes of Certificates. If this should occur, the interest accruing on the
remaining Equipment Notes would be less than the interest accruing on the
remaining Certificates because the Certificates would have a greater proportion
of high interest rate junior classes. As a result of this possible interest
shortfall, the holders of one or more junior Classes of Certificates may not
receive the full amount due them after a Triggering Event even if all the
Equipment Notes are eventually paid in full. See "Description of the
Intercreditor Agreement".
CONTROL OVER COLLATERAL; SALE OF COLLATERAL
Pursuant to the Intercreditor Agreement, the Trustee and the Liquidity
Provider will agree that, with respect to any Indenture at any given time, the
Indenture Trustee will be directed (a) in taking, or refraining from taking, any
action with respect to such Indenture or the Equipment Notes issued thereunder,
so long as no Indenture Event of Default has occurred and is continuing
thereunder, by the holders of at least a majority of the outstanding principal
amount of the Equipment Notes issued thereunder (provided that, for so long as
the Subordination Agent is the registered holder of the Equipment Notes, the
Subordination Agent shall act with respect to this clause (a) in accordance with
the directions of the Trustees representing holders of Certificates representing
an undivided interest in such principal amount of Equipment Notes) and (b)
subject to certain conditions in exercising remedies thereunder (including
acceleration of such Equipment Notes or foreclosing the lien on the Aircraft
securing such Equipment Notes) after the occurrence and during the continuance
of an Indenture Event of Default thereunder, by the Controlling Party. See
"Description of the Certificates -- Indenture Events of Default and Certain
Rights Upon an Indenture Event of Default" for a description of the rights of
the Certificateholders of each Trust to direct the respective Trustee.
Notwithstanding the foregoing, subject to certain limitations, the Liquidity
Provider shall have the right to elect to become the Controlling Party at any
time after 18 months from the earlier of (i) the acceleration of the Equipment
Notes and (ii) a Final Drawing under the Liquidity Facilities, if at the time of
such election the Liquidity Obligations have not been paid in full. For purposes
of giving effect to the foregoing, the Trustee (other than the Controlling
Party) shall irrevocably agree (and the Certificateholders (other than the
Certificateholders represented by the Controlling Party) shall be deemed to
agree by virtue of their purchase of Certificates) to exercise their voting
rights as directed by the Controlling Party.
Upon the occurrence and during the continuation of any Indenture Event of
Default under any Indenture, the Controlling Party may accelerate and, subject
to the provisions of the following paragraph, sell all (but not less than all)
of the Equipment Notes issued under such Indenture to any person. The market for
Equipment Notes at the time of the existence of any Indenture Event of Default
may be very limited, and there can be no assurance as to the price at which they
could be sold. If the Controlling Party sells any such Equipment Notes for less
than their outstanding principal amount, certain Certificateholders will receive
a smaller amount of principal distributions than anticipated and will not have
any claim for the shortfall against AWA, any Owner Trustee, any Owner
Participant or any Trustee.
Subject to the right of the Owner Trustee or Owner Participant to purchase
the Equipment Notes as described under "Description of Equipment Notes --
Redemption", so long as any Certificates are outstanding, during nine months
after the earlier of (x) the acceleration of the Equipment Notes under any
Indenture or (y) the bankruptcy or insolvency of AWA, without the consent of
each Trustee, (a) no Aircraft subject to the lien of such Indenture or such
Equipment Notes may be sold, if the net proceeds from such sale would be less
than the Minimum Sale Price for such Aircraft or such Equipment Notes, and (b)
the amount and payment dates of rentals payable by AWA under the Lease for such
Aircraft may not be adjusted, if, as a result of such adjustment, the discounted
present value of all such rentals would be less than 75% of the discounted
present value of the rentals payable by AWA under such Lease before giving
effect to such adjustment, in each case, using the weighted average interest
rate of the Equipment Notes outstanding under such Indenture as the discount
rate.
RATINGS OF THE CERTIFICATES
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated A2 by Moody's and AA- by Standard & Poor's, the Class B
Certificates be rated Baa2 by Moody's and A- by Standard & Poor's, the Class C
Certificates be rated Ba1 by Moody's and BBB- by Standard & Poor's and the Class
D
30
<PAGE> 31
Certificates be rated Ba3 by Moody's and BB by Standard & Poor's. A rating is
not a recommendation to purchase, hold or sell Certificates, inasmuch as such
rating does not address market price or suitability for a particular investor.
There is no assurance that a rating will remain for any given period of time or
that a rating will not be lowered or withdrawn entirely by a Rating Agency if,
in its judgment, circumstances in the future (including the downgrading of AWA
or the Liquidity Provider) so warrant. The rating of the Certificates is based
primarily on the default risk of the Equipment Notes, the availability of the
Liquidity Facility for the holders of the Certificates (other than the Class D
Certificates), the collateral value provided by the Aircraft and the
subordination in right of payment under the Intercreditor Agreement of the Class
B Certificates to the Class A Certificates, of the Class C Certificates to the
Class B Certificates and of the Class D Certificates to the Class C
Certificates. The foregoing ratings address the likelihood of timely payment of
interest (at the non-default rate) when due on the Certificates and the ultimate
payment of principal of the Certificates by the Final Legal Distribution Date.
Such ratings do not address the possibility of a PTC Event of Default, an
Indenture Event of Default, including a Lease Event of Default, or other
circumstances (such as an Event of Loss (as defined herein)) which could result
in the payment of the outstanding principal amount of the Certificates prior to
the Final Expected Distribution Date.
The reduction, suspension or withdrawal of the ratings of the Certificates
will not, in and of itself, constitute a PTC Event of Default or an Indenture
Event of Default, including a Lease Event of Default.
REPOSSESSION
Except for the Aircraft subject to the Hong Kong Cross-Border Lease
financings, in which case AWA may not permit such Aircraft to be used, operated
or maintained in Hong Kong or the People's Republic of China, the Leases do not
contain general geographic restrictions on AWA's (or any Permitted Sublessee's)
ability to operate the Aircraft. Although AWA has no current intention to do so,
AWA is permitted, upon compliance with the Leases and the Refunding Agreements,
to sublease the Aircraft and to register the Aircraft in foreign jurisdictions.
While the Indenture Trustee's rights and remedies in the event of a default
under the related Lease include the right to terminate such Lease (and any
sublease) and repossess the related Aircraft, it may be difficult, expensive and
time-consuming to obtain possession of such Aircraft, particularly when such
Aircraft has been registered in a foreign jurisdiction or is located outside the
United States or is subleased to a foreign operator. Any such exercise of the
right to repossess Aircraft will be subject to the limitations and requirements
of applicable law, including the need to obtain consents or approvals for
deregistration or re-export of the Aircraft, which may be subject to delays and
to political risk. When a defaulting Permitted Sublessee or other permitted
transferee is the subject of a bankruptcy, insolvency or similar event, such as
protective administration, additional limitations on the exercise of remedies
may apply. Furthermore, certain jurisdictions may accord higher priority to
certain other liens or other third-party rights over the Aircraft than the lien
of the related Indenture. These factors could limit the benefits of the security
interest in the Aircraft.
As permitted under the Leases, an Airframe subject to a Lease may be
equipped with engines which are not subject to the same Lease, and Engines
subject to a Lease may not be on an Airframe subject to that or another Lease.
As a result, notwithstanding AWA's agreement in the Leases to return the related
Engines owned by the applicable Owner Trustee on the return of the related
repossessed Airframe, at the time of obtaining repossession of an Airframe it
could be difficult, expensive and time-consuming to assemble an Aircraft
consisting of an Airframe and related Engines subject to such Lease.
CROSS-BORDER LEASES
Three Aircraft securing the obligations under the related Indentures are
subject to Hong Kong Cross-Border Lease financings with terms expiring in 2006.
Under the terms of each of the Cross-Border Lease financings, title to the
relevant Aircraft is held by the relevant Owner Trustee as assignee of the title
holder of the Aircraft, which, under a hire purchase agreement, has been hired
by the original title holder to a Hong Kong entity acting as the Cross-Border
Lessor of such Aircraft. In summary, the Hong Kong lease financing documentation
provides that, subject to various terms
31
<PAGE> 32
and conditions, the Cross-Border Lessor has the right to acquire title to the
Aircraft from the relevant Owner Trustee upon the termination of the hire
purchase agreement. The relevant documents further provide that the relevant
Owner Trustee, as assignee of the Cross-Border Lessee, in each of the Hong Kong
transactions can concurrently re-acquire title to the relevant Aircraft from the
Cross-Border Lessor, if such lessor exercises its option to acquire title to the
Aircraft upon the termination of the hire purchase agreement, or the Owner
Trustee, as assignee of the title holder of the Aircraft, can retain title if
the Cross-Border Lessor does not or cannot exercise its option to acquire the
Aircraft upon termination of the hire purchase agreement. The rights of the
Cross-Border Lessee (as defined herein) under each of these financings have been
assigned to the relevant Owner Trustees. Under the terms of the financing, the
Owner Trustee, as assignee of the Cross-Border Lessee, has the right to cause
the termination of such cross-border financing upon the occurrence and
continuance of a Lease Event of Default under the related U.S. Lease and the
exercise of remedies under the U.S. Lease (to the extent not stayed). By virtue
of an agreed defeasance arrangement, the monetary obligations of the
Cross-Border Lessees under the Hong Kong Cross-Border Leases have been assumed
by certain financial institutions or other parties. The relevant Owner Trustee's
right to take title to the Aircraft free of the Cross-Border Lease financing is
not conditioned upon the payment of any sum by any such parties. In addition,
the relevant Cross-Border Lessor and the partners therein have expressly agreed
that, after giving effect to the provisions of the Cross-Border Lease financing
documentation, they shall not have any right to retain or assert any interest in
the relevant Aircraft upon the termination of the relevant Cross-Border Lease
financing.
The ability of an Indenture Trustee to realize upon its security interest
in an Aircraft that is subject to a Cross-Border Lease financing could be
adversely affected if the relevant Cross-Border Lessor or any partner therein
were to become a debtor in a bankruptcy or similar proceeding in its home
jurisdiction and a creditor, trustee in bankruptcy, liquidator, receiver or
similar official were to take the position that the related Aircraft should be
treated as part of the estate of such lessor or partner therein, as the case may
be (particularly, if at the same time the Indenture Trustee is seeking to
exercise remedies under the related Indenture). If such a position were to be
taken in such a proceeding, a delay in the clearing of title to such Aircraft
free of the Cross-Border Lease financing could occur. Such a delay might impede
the ability of an Indenture Trustee to realize upon the Aircraft collateral
securing the related Equipment Notes.
Legal opinions from Hong Kong and English counsel (based on certain
assumptions and qualifications) will be given to the effect that upon the
occurrence of an insolvency, bankruptcy, liquidation or any other similar event
with respect to the Cross-Border Lessor or any partner therein, neither the
Cross-Border Lessor nor any partner therein nor any trustee in bankruptcy,
liquidator, receiver or any other similar official in relation to the
Cross-Border Lessor or any partner therein would be entitled to acquire and
retain title to the relevant Aircraft. There can be no assurance, however, that
the circumstances or the law upon which such counsel based their opinions will
not change, that a court of competent jurisdiction in Hong Kong or England would
not find differently, that such opinions would prove to be correct or that the
law of another jurisdiction would not apply. In this regard, Hong Kong counsel
advises that the Sino-British Joint Declaration on the future of Hong Kong
provides that the laws of Hong Kong in force on June 30, 1997 will be maintained
except for laws that contravene the Basic Law of the Special Administrative
Region of the People's Republic of China which comes into effect in Hong Kong on
July 1, 1997 (the "Basic Law"). Hong Kong counsel will be giving an opinion
that, in their view, the Basic Law does not contain any provisions which would
be contravened by any provision of Hong Kong law relevant to their opinion
referred to above, but that this is a matter for interpretation by the Standing
Committee of the National People's Congress of the People's Republic of China,
in which the power of interpretation of the Basic Law is vested.
In connection with the realization by the Indenture Trustee of its security
interest in an Aircraft subject to a Cross-Border Lease Financing, it may be
desirable to have the related Cross-Border Leases terminated.
The information set forth above regarding Cross-Border Lease financings was
provided by GPA Group plc ("GPA") and AWA takes no responsibility for the
accuracy thereof.
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<PAGE> 33
MAINTENANCE
AWA is responsible for the maintenance, service, repair and overhaul of the
Aircraft to the extent described in the Leases. The failure of AWA (or any
Permitted Sublessee (as defined herein)) to maintain, service, repair or
overhaul adequately an Aircraft may adversely affect the value of such Aircraft
and thus, upon a disposition of the Aircraft, may affect the proceeds available
to repay the holders of the related Equipment Notes. Under the Leases, the
applicable maintenance standards may vary depending upon the jurisdiction in
which an Aircraft is registered and whether an Aircraft is subleased, but AWA is
obligated to cause such Aircraft to be maintained in accordance with maintenance
standards required by, or substantially equivalent to those required by, the
central civil aviation authority of the country of registry and, to the extent
not inconsistent therewith, the FAA. Notwithstanding compliance by AWA (or any
Permitted Sublessee) with its obligations under the Lease to maintain, service,
repair or overhaul adequately the Aircraft, the value of the Aircraft may
deteriorate. Such a deterioration in the value of the Aircraft would not, in and
of itself, constitute a breach by AWA of its obligations under the Leases. See
"Description of the Equipment Notes -- The Leases".
INSURANCE
AWA is responsible for the maintenance of public liability, property damage
and all-risk aircraft hull insurance on the Aircraft to the extent described in
the Leases. The failure of AWA to adequately insure the Aircraft will affect the
proceeds which could be obtained upon an Event of Loss and, thus, may affect the
proceeds available to repay the holders of the related Equipment Notes.
With respect to any hull insurance required, AWA may maintain deductibles
of up to $1.0 million per Aircraft. See "Description of the Equipment Notes --
The Leases -- Insurance".
ABSENCE OF A PUBLIC MARKET FOR THE CERTIFICATES
There has been no market for the Certificates prior to the sale of the
Certificates. The Underwriter has advised AWA that the Underwriter currently
intends to make a market in the Certificates as permitted by applicable law. The
Underwriter, however, is not obligated to make a market in the Certificates and
any such market-making may be discontinued at any time at the sole discretion of
the Underwriter. Accordingly, no assurance can be given as to the development or
liquidity of any market for the Certificates.
33
<PAGE> 34
USE OF PROCEEDS
The Certificates are being issued in connection with four separate
leveraged lease transactions with respect to the refinancing of the current
indebtedness of the Owner Trustees previously incurred to finance the purchase
of the Aircraft. Such indebtedness bore interest at a weighted average rate per
annum of approximately 9.755% as of June 9, 1997 and matures in July 2008.
Neither AWA nor Holdings will receive any of the proceeds from the sale of the
Certificates.
The proceeds from the sale of the Certificates are to be used by the
Trustee on behalf of the Trusts to purchase $93,888,000 aggregate principal
amount of Equipment Notes to be issued by the related Owner Trustees. Such
Equipment Notes will be issued under the Indentures on a non-recourse basis by
the Owner Trustees and will represent in the aggregate the entire debt portion
of the leveraged lease transactions relating to all of the Aircraft. The
proceeds from the sale of the Equipment Notes will be used to repay all of the
current indebtedness of the Owner Trustees with respect to the Aircraft, and any
proceeds remaining after such repayment may be used to pay certain costs and
expenses of the Original Lessee, such as break-funding costs and redemption
premiums, incurred in the refinancing and which would otherwise be borne
directly by the Original Lessee (as defined below).
When originally acquired, the Aircraft were delivered directly to a
U.S.-domiciled subsidiary of GPA. The Aircraft were leased from the Owner
Trustees to such subsidiary as original lessee (the "Original Lessee") and
sublessor. After a period of storage the Aircraft were, in September 1990,
subleased by the Original Lessee to AWA. See "Certain Transactions". In
addition, three of these Aircraft at the time of lease to the Original Lessee
were, and continue to be, subject to certain cross-border transactions with
foreign lessors. See "Description of the Equipment Notes -- Cross-Border
Leases". In connection with the refinancing of the Aircraft, the Original
Lessee's interests under leases between the Owner Trustees and the Original
Lessee, as lessee, are being assigned to AWA and the leases will be amended and
restated as leases between the Owner Trustees and AWA, with the Original Lessee
being released from future obligations thereunder.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
AWA for the periods indicated. The ratio of earnings to fixed charges represents
the number of times that fixed charges were covered by earnings. In computing
the ratio, earnings consist of income (loss) before income taxes and
extraordinary items plus fixed charges, less capitalized interest. Fixed charges
consist of interest expense including amortization of debt expense, one-third of
rental expense, which is considered representative of an interest factor, and
capitalized interest.
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
-------------------------------------------- ----------------------------
THREE MONTHS
ENDED YEAR ENDED PERIOD FROM PERIOD FROM YEAR ENDED
MARCH 31, DECEMBER 31, AUGUST 26 TO JANUARY 1 TO DECEMBER 31,
------------- ------------- DECEMBER 31, AUGUST 25, -------------
1997 1996 1996 1995 1994 1994 1993 1992
----- ----- ----- ----- ------------ ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1.69 1.71 1.22 1.73 1.38 * 1.28 *
</TABLE>
- ---------------
* For the period ended August 25, 1994, earnings were insufficient to cover
fixed charges by $201.2 million. For the year ended December 31, 1992,
earnings were insufficient to cover fixed charges by $131.8 million.
34
<PAGE> 35
CAPITALIZATION
The following table sets forth the capitalization of AWA at March 31, 1997.
The table should be read in conjunction with AWA's financial statements and the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Long-term debt, including current maturities................ $ 377,896
Stockholder's equity:
Common Stock (1,000 shares authorized and 1,000 shares
issued and outstanding)................................ --
Additional paid-in capital.................................. 539,301
Retained earnings........................................... 84,081
----------
Total stockholder's equity................................ 623,382
----------
Total capitalization........................................ $1,001,278
==========
</TABLE>
35
<PAGE> 36
SELECTED FINANCIAL AND OPERATING DATA
The selected data presented below under the captions "Statements of
Operations Data" and "Balance Sheet Data" for, and as of, (i) the years ended
December 31, 1996 and 1995, the period August 26, 1994 through December 31,
1994, the period January 1, 1994 to August 25, 1994, and each of the years in
the two-year period ended December 31, 1993, are derived from the financial
statements of AWA, which financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants and (ii) the periods ended
March 31, 1997 and 1996 are derived from the unaudited condensed financial
statements of AWA. In the opinion of management, the unaudited condensed
financial statements reflect all adjustments, which are of a normal recurring
nature, necessary for a fair presentation. The balance sheets as of December 31,
1996 and 1995, and the related statements of income, cash flows and
stockholder's equity for the years ended December 31, 1996 and 1995, the period
August 26, 1994 through December 31, 1994, and the period January 1, 1994
through August 25, 1994, and the report thereon, are included elsewhere in this
prospectus. The independent auditors' report as of and for the years ended
December 31, 1996 and 1995, the period August 26, 1994 through December 31,
1994, and the period January 1, 1994 through August 25, 1994 contains an
explanatory paragraph that states the financial statements of the Reorganized
Company reflect the impact of adjustments to reflect the fair value of assets
and liabilities under fresh start reporting. As a result, the financial
statements of the Reorganized Company are presented on a different basis than
those of the Predecessor Company and, therefore, are not comparable in all
respects.
<TABLE>
<CAPTION>
REORGANIZED COMPANY
----------------------------------------------------------------
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31, AUGUST 26 TO
----------------------- ----------------------- DECEMBER 31,
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating revenues............ $ 462,187 $ 413,150 $1,739,526 $1,550,642 $ 469,766
Operating income.............. 33,463 34,318 68,666(2) 154,732(3) 38,871
Income (loss) before income
taxes and extraordinary
items....................... 25,918 25,420 34,493 108,378 19,736
Income (loss) before
extraordinary items......... 13,944 13,727 9,610 54,770 7,846
Extraordinary gain
(loss)(4)................... -- -- (1,105) (984) --
Net income.................... 13,944 13,727 8,505 53,786 7,846
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital deficiency.... $ (188,483) $ (75,785) $ (170,907) $ (70,416) $ (47,927)
Total assets.................. 1,602,082 1,651,928 1,597,677 1,588,709 1,545,092
Long-term debt, less current
maturities(5)............... 333,685 371,588 330,148 373,964 465,598
Total stockholder's equity
(deficiency)................ 623,382 667,155 622,780 649,472 595,446
OPERATING DATA:
Available seat miles (in
millions)................... 5,791 4,955 21,625 19,421 6,424
Revenue passenger miles (in
millions)................... 3,982 3,504 15,321 13,313 3,972
Passenger load factor (%)..... 68.8 70.7 70.9 68.5 61.8
Yield per revenue passenger
mile (cents)................ 10.94 11.07 10.69 10.91 11.02
Passenger revenue per
available seat mile
(cents)..................... 7.52 7.83 7.57 7.48 6.81
Operating cost per available
seat mile (cents)........... 7.40 7.65 7.73(2) 7.19(3) 6.71
Full time equivalent employees
(at end of period).......... 10,015 8,933 9,652 8,712 10,715
<CAPTION>
PREDECESSOR COMPANY(1)
----------------------------------------
YEAR ENDED
JANUARY 1 TO DECEMBER 31,
AUGUST 25, -------------------------
1994 1993 1992
------------ ------------ ----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating revenues............ $939,028 $1,325,364 $1,294,140
Operating income.............. 107,506 121,054 (74,812)
Income (loss) before income
taxes and extraordinary
items....................... (201,209) 37,924 (131,761)
Income (loss) before
extraordinary items......... (203,268) 37,165 (131,761)
Extraordinary gain
(loss)(4)................... 257,660 -- --
Net income.................... 54,392 37,165 (131,761)
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital deficiency.... $(163,572) $ (124,375) $ (201,567)
Total assets.................. -- 1,016,743 1,036,441
Long-term debt, less current
maturities(5)............... -- 620,992 647,015
Total stockholder's equity
(deficiency)................ -- (254,262) (294,613)
OPERATING DATA:
Available seat miles (in
millions)................... 11,636 17,190 19,271
Revenue passenger miles (in
millions)................... 8,261 11,221 11,781
Passenger load factor (%)..... 71.0 65.3 61.1
Yield per revenue passenger
mile (cents)................ 10.68 11.11 10.31
Passenger revenue per
available seat mile
(cents)..................... 7.58 7.25 6.30
Operating cost per available
seat mile (cents)........... 7.15 7.01 7.10
Full time equivalent employees
(at end of period).......... 10,849 10,544 10,233
</TABLE>
- ---------------
(1) Includes net expenses incurred by the Predecessor Company in connection with
its reorganization of $273.7 million for the period January 1 to August 25,
1994 and $25.0 million and $16.2 million for the years ended December 31,
1993 and 1992, respectively.
(2) Reflects a $65.1 million nonrecurring special charge related to AWA's
renegotiation of its AVSA aircraft purchase agreement and writedown of
certain aircraft related inventory and equipment and underutilized
facilities as well as certain other adjustments. The special charge
increased cost per available seat mile by .30 cents for the year ended
December 31, 1996.
(3) Costs associated with AWA's outsourcing of its heavy aircraft maintenance
resulted in a pretax restructuring charge of approximately $10.5 million and
an increase in cost per available seat mile of .05 cents for the year ended
December 31, 1995.
(4) Includes (i) an extraordinary loss of $1.1 million in 1996 relating to
prepayment of the 10 3/4% Notes, (ii) an extraordinary loss of $984,000 in
1995 resulting from the exchange of debt by AWA and (iii) an extraordinary
gain of $257.7 million in the period from January 1 to August 25, 1994
resulting from the discharge of indebtedness pursuant to the consummation of
the plan of reorganization.
(5) Includes certain balances reported as "Estimated Liabilities Subject to
Chapter 11 Proceedings" for the Predecessor Company.
36
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company adopted a holding company structure effective midnight December
31, 1996 when Holdings became the parent company of AWA. Management believes the
holding company structure improves the Company's ability to manage separate
business segments effectively and that the holding company provides a platform
for further expansion of the Company's businesses, including its leisure travel
businesses. The Company intends to continue to evaluate investment and expansion
opportunities which allow the Company to capitalize on its key strengths and
market position.
1996 IN REVIEW
In 1996, AWA had net income of $8.5 million. The 1996 earnings included a
$65.1 million pretax nonrecurring special charge resulting from AWA's decisions
to order certain new aircraft and cancel a prior order, and to make certain
other related adjustments (See Note 12, "Restructuring and Other Nonrecurring
Special Charges" in Notes to Financial Statements). Excluding this charge, net
income for the year was $48.7 million. Excluding the special charge, these
results reflected one of the best years in the airline's history. Another
measure AWA uses to evaluate its financial performance is EBITDAR (operating
income before depreciation, amortization, rent and nonrecurring charges). AWA's
EBITDAR margin for 1996 was 28.3% which AWA believes was the highest EBITDAR
margin among the major U.S. airlines.
For the first six months of 1996, AWA posted record results. Net income
before extraordinary item for that period was $43.2 million, an increase of
65.8% over the first half of 1995. Revenues rose to $877.1 million, due in part
to the growth plan announced in September 1995, which increased capacity by
8.6%, a 13.8% increase in passenger traffic and solid passenger revenue yields.
Higher year-over-year operating costs, primarily from higher fuel and passenger
traffic related expenses, were more than offset by the favorable revenue
performance.
In the third quarter, AWA experienced a setback in the 1996 trend of record
results with a net loss of $45.7 million, which included the $65.1 million
nonrecurring special charge discussed above. The decline in earnings resulted
from a number of factors, including the $65.1 million charge, lower yields
caused by untimely revenue decisions made in June and July 1996, high jet fuel
prices and operating dependability difficulties encountered during the summer of
1996. AWA took action to address these problems as follows:
REVENUE MANAGEMENT
- Established a full time revenue recovery team led by senior management,
to review and address the problems that led to poor revenue management
decisions.
- Increased staffing of and upgraded the revenue management team.
- Conducted a market-by-market review and addressed pricing/yield issues.
- Implemented policies and procedures to enhance controls over the revenue
management process.
- Committed to $7.3 million in spending for new revenue management systems.
FUEL COST
- Established a hedging program to manage AWA's exposure to fluctuating
fuel prices.
OPERATIONS
- Initiated Get The Product Right . . . Together, a comprehensive program
designed to improve operational and customer service performance,
including increasing the airline's maintenance workforce, adding two
additional overnight maintenance stations and increasing reservations
staffing and technology.
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<PAGE> 38
- Implemented a structured "work out process" whereby teams of front-line
employees develop solutions to operational problems.
- Authorized the acquisition of an additional spare aircraft.
The fourth quarter of 1996 saw a return to record profitability with pretax
earnings of $16.8 million. Net income for the quarter was $12.1 million.
Bolstered by a record 69.1% load factor, revenues for the fourth quarter were a
record $439.9 million, an 11% improvement over 1995. Operating cost per
available seat mile ("CASM") (excluding special charges) decreased 2.6% from
7.38 cents per ASM in the fourth quarter of 1995 to 7.19 cents per ASM in the
1996 fourth quarter, despite a 23.1% increase in the average price of fuel
consumed. Operational reliability also showed marked improvement as the
percentage of scheduled aircraft miles completed averaged more than 98% in the
1996 fourth quarter as compared to a low of 96% in the third quarter of 1996.
SELECTED OPERATING DATA
The table below sets forth selected operating data for AWA. The data for
the year ended December 31, 1994 is on a combined basis for the Reorganized and
Predecessor Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------------------
PERCENT COMBINED PERCENT PERCENT
CHANGE BASIS CHANGE CHANGE
1997 1996 1997-1996 1996 1995 1994 1996-1995 1995-1994
----- ----- --------- ------ ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available seat miles (in millions)..... 5,791 4,955 16.9 21,625 19,421 18,060 11.3 7.5
Revenue passenger miles (in
millions)............................ 3,982 3,504 13.6 15,321 13,313 12,233 15.1 8.8
Load factor (percent).................. 68.8 70.7 (2.7) 70.9 68.5 67.7 3.5 1.2
Yield per revenue passenger mile
(cents).............................. 10.94 11.07 (1.2) 10.69 10.91 10.79 (2.0) 1.1
Revenue per available seat mile
Passenger (cents).................... 7.52 7.83 (4.0) 7.57 7.48 7.31 1.2 2.3
Total (cents)........................ 7.98 8.34 (4.3) 8.04 7.98 7.80 0.8 2.3
Passenger enplanements (in
thousands)........................... 4,590 4,305 6.6 18,178 16,848 15,669 7.9 7.5
Average stage length (miles)........... 768 700 9.7 732 686 676 6.7 1.5
Average passenger journey (miles)...... 1,088 968 12.4 1,042 986 979 5.7 0.7
Average daily aircraft utilization
(hours).............................. 12.4 11.5 7.8 11.8 11.4 11.2 3.5 1.8
Aircraft (end of period)............... 101 95 6.3 101 93 87 8.6 6.9
Full time equivalent employees (end of
period).............................. 10,015 8,933 12.1 9,652 8,712 10,715 10.8 (18.7)
</TABLE>
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<PAGE> 39
The table below sets forth the major components of operating expense per
ASM for AWA for the applicable periods. The data for the year ended December 31,
1994 is shown on a combined basis for the Reorganized and Predecessor Company.
(See Note 1, "Summary of Significant Accounting Policies -- (a) Basis of
Presentation" in Notes to Financial Statements).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------------------------------
PERCENT COMBINED PERCENT PERCENT
CHANGE BASIS CHANGE CHANGE
1997 1996 1997-1996 1996 1995 1994 1996-1995 1995-1994
---- ---- --------- ---------- ---------- -------- --------- ---------
(IN CENTS) (IN CENTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and related costs............ 1.74 1.91 (8.9) 1.78 1.97 1.83 (9.6) 7.7
Aircraft rents........................ .95 .95 -- .94 .89 .89 5.6 --
Other rents and landing fees.......... .53 .54 (1.9) .52 .56 .58 (7.1) (3.4)
Aircraft fuel......................... 1.19 .99 20.2 1.08 .90 .88 20.0 2.3
Agency commissions.................... .66 .66 -- .62 .64 .64 (3.1) --
Aircraft maintenance materials and
repairs............................. .54 .55 (1.8) .58 .34 .25 70.6 36.0
Depreciation and amortization......... .21 .27 (22.2) .24 .25 .40 (4.0) (37.5)
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets................. .11 .13 (15.4) .12 .17 .07 (29.4) nm
Restructuring charges and other
nonrecurring special charges........ -- -- -- .30 .05 -- nm nm
Other................................. 1.47 1.65 (10.9) 1.55 1.42 1.45 9.2 (2.1)
---- ---- --- --- ---
7.40 7.65 (3.3) 7.73 7.19 6.99 7.5 2.9
==== ==== === === ===
</TABLE>
- ---------------
nm -- not meaningful.
RESULTS OF OPERATIONS
AWA's operating results are significantly affected by general economic
conditions as well as competitive factors, jet fuel price levels, government
regulations, taxes on jet fuel and taxes specific to the air transport industry
and other conditions affecting the airline industry. In recent periods, airlines
have achieved generally improved operating results as a result of more favorable
economic conditions and as a result of focusing on their areas of relative
strength, eliminating service to under-performing markets and rationalizing
operations, route systems and pricing strategies.
Due to the greater demand for air travel during the summer months, revenues
in the airline industry in the second and third quarters of the year tend to be
greater than revenues in the first and fourth quarters of the year. Other
factors that are not necessarily seasonal also significantly affect results,
including the extent and nature of price and other competition from other
airlines, changing levels of operations, international events, fuel prices and
general economic conditions.
The following discussion provides an analysis of AWA's results of
operations and reasons for material changes therein for the (i) three month
periods ended March 31, 1997 and 1996 and (ii) years ended December 31, 1996 and
1995, and the combined periods from January 1 through August 25, 1994, when AWA
completed its reorganization and emerged from bankruptcy protection, and August
26 through December 31, 1994. AWA's results of operations for the periods
subsequent to August 25, 1994 have not been prepared on a basis of accounting
consistent with its results of operations for periods prior to August 26, 1994
due to the implementation of fresh start reporting upon AWA's emergence from
bankruptcy.
IMPACT OF FRESH START REPORTING
In connection with its emergence from bankruptcy in August 1994, AWA
adopted fresh start reporting in accordance with Statement of Position 90-7
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7") of the American Institute of Certified Public Accountants. Fresh
start reporting significantly affects AWA's statements of income including the
financial statement accounting for
39
<PAGE> 40
income taxes. However, actual cash flows, including cash taxes payable, do not
materially change as a result of fresh start reporting.
Under fresh start reporting, the reorganization value of AWA has been
allocated to its assets and liabilities on a basis substantially consistent with
purchase accounting. The portion of reorganization value not attributable to
specific tangible assets has been recorded as "Reorganization Value in Excess of
Amounts Allocable to Identifiable Assets". Certain fresh start reporting
adjustments, primarily related to the adjustment of AWA's assets and liabilities
to fair market values, have had and will have a significant effect on AWA's
statements of income. The more significant adjustments relate to (i) reduced
rent expense due to the revaluation of aircraft leases to market rates, (ii)
reduced maintenance expense due to the write off of previously capitalized
overhauls, (iii) reduced depreciation expense on property and equipment due to
the revaluation of such assets to fair value, (iv) the addition of amortization
expense relating to reorganization value in excess of amounts allocable to
identifiable assets, (v) increased interest expense due to the revaluation of
aircraft leases to market rates, and (vi) increased income tax expense
principally because the amortization of excess reorganization value is not
deductible for income tax purposes, giving rise to an effective tax rate for
financial reporting purposes that is significantly greater than the current U.S.
corporate statutory rate of 35%.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
For the three months ended March 31, 1997 and 1996, AWA realized net income
of $13.9 million and $13.7 million, respectively. Net income for the three month
period in 1997 included income tax expense for financial reporting purposes of
$12.0 million compared to $11.7 million in 1996. AWA's results of operations for
interim periods are not necessarily indicative of such results for an entire
year due to seasonal factors as well as competitive and general economic
conditions.
Passenger revenues increased $47.7 million or 12.3% to $435.5 million
during the three months ended March 31, 1997 due primarily to a 13.6% increase
in revenue passenger miles. Yield decreased 1.2% to 10.94 cents from 11.07 cents
due primarily to a 9.7% increase in stage length. Capacity, as measured in ASMs,
increased 16.9% in the 1997 first quarter as compared to 1996 due to the effect
of AWA's strategic growth plan which was initiated in February 1996. Load factor
decreased by 1.9 points to 68.8%. Passenger revenue per available seat mile
("RASM") decreased to 7.52 cents from 7.83 cents. Cargo and other revenues
increased 5.1% to $26.6 million for the first quarter of 1997 as a result of
higher available capacity.
CASM decreased 3.3% to 7.40 cents in the first quarter of 1997 from 7.65
cents for the 1996 period, despite a 24.7% increase in the average price per
gallon of fuel. Excluding fuel and related taxes, CASM declined 6.7% when
compared with the first quarter of 1996. The changes in the components of
operating expense per ASM are explained as follows:
- Salaries and related costs per ASM decreased 8.9% due to continued
improvement in productivity as full-time equivalent headcount increased
12.1% versus a 16.9% increase in ASMs.
- Aircraft fuel expense per ASM increased 20.2% due to a 24.7% increase in
the average price per gallon of fuel from 60.15 cents in the 1996 quarter
to 75.03 cents in 1997.
- Depreciation and amortization expense per ASM decreased 22.2% due in part
to lower 1997 depreciation expense as certain ramp equipment was
depreciated to net realizable value in 1996.
- Amortization of excess reorganization value per ASM decreased 15.4%
primarily due to the 16.9% increase in ASMs.
- Other operating expenses per ASM decreased 10.9% to 1.47 cents from 1.65
cents as increases in passenger traffic-related costs such as CRS booking
fees, catering costs, and credit card discount fees, and fuel taxes were
more than offset by the 16.9% increase in ASMs.
Net nonoperating expenses decreased $1.4 million to $7.5 million in the
first quarter of 1997 from $8.9 million in 1996. Excluding interest income and
expense associated with intercompany notes, the year-
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<PAGE> 41
over-year change was primarily due to a net decrease in interest expense as AWA
reduced outstanding debt by $42.3 million.
Income tax expense for financial reporting purposes for the three months
ended March 31, 1997 was relatively unchanged when compared to the 1996 quarter.
1996 COMPARED WITH 1995
In 1996, AWA realized net income of $8.5 million which included a pretax,
nonrecurring special charge of $65.1 million (See Note 12, "Restructuring and
Other Nonrecurring Special Charges" in Notes to Financial Statements). Excluding
the nonrecurring special charge, AWA recorded net income of $48.7 million.
Comparative amounts for 1995 were net income of $60.3 million (excluding a $10.5
million restructuring charge), and income tax expense for financial reporting
purposes of $53.6 million.
The decline in pretax income (excluding the nonrecurring special charge and
before extraordinary item) for the 1996 period resulted from untimely revenue
decisions made in June and July of 1996, high jet fuel prices and operating
dependability difficulties encountered during the summer of 1996. Industry
capacity increases into Las Vegas and aggressive fare sale activity also
adversely impacted 1996.
Total operating revenues were $1.7 billion in 1996 compared to $1.6 billion
in 1995. Passenger revenues for 1996 were $1.6 billion, an increase of 12.8%
over the prior year. Cargo and other revenues increased 3.4% to $101.8 million
in 1996. Other revenues consist primarily of alcoholic beverage sales, contract
service sales and service charges.
Capacity, as measured by ASMs, increased 11.3% in 1996 compared to 1995 as
AWA completed the first year of a two-year strategic growth plan. Revenue
passenger miles increased 15.1% in 1996. Load factor for the 1996 period
increased by 3.5% (2.4 points) to a company record of 70.9%, despite the 11.3%
capacity increase. Revenue per passenger mile (yield) decreased 2.0%, and RASM
increased by 1.2% in 1996 from 1995.
CASM increased to 7.73 cents in 1996 from 7.19 cents in 1995 primarily due
to a nonrecurring special charge of $65.1 million and increases in jet fuel
prices. Excluding the nonrecurring special charge, and jet fuel and related
taxes, CASM increased year-over-year only 1.0% to 6.24 cents in 1996. The
changes in the components of operating expense per available seat mile
(excluding the nonrecurring special charge) are explained as follows:
- The 9.6% decrease in salaries and related costs per ASM was primarily
related to the $12.1 million reduction in salaries related to AWA's
outsourcing of its heavy aircraft maintenance in December 1995 and a
reduction in AWArd Pay and incentive pay due to AWA's decline in income.
In addition, AWA continued to improve productivity as full-time
equivalent head count increased 10.8% versus an 11.3% increase in ASMs.
- Aircraft rents per ASM increased 5.6% primarily due to a net addition of
eight leased aircraft to the fleet during 1996.
- Rentals and landing fees per ASM decreased primarily due to the 11.3%
increase in ASMs.
- The average price per gallon of aircraft fuel increased 19.1% to 66.49
cents in 1996 from 55.82 cents in 1995. This increase in fuel price
increased 1996 operating expense by approximately $37.5 million.
- Aircraft maintenance materials and repairs expense per ASM increased
70.6% due primarily to an increase in capitalized maintenance which
increased capitalized maintenance amortization expense by $27.7 million
in 1996 when compared with 1995. The unamortized balance of capitalized
maintenance grew to $102.5 million at December 31, 1996, an increase of
$47.5 million from December 31, 1995. In addition, maintenance expense
per ASM increased further in the 1996 period due to the classification
for accounting purposes of fees paid to outside vendors to complete
aircraft maintenance following the outsourcing of that work in late 1995.
This increase in maintenance expense was substantially offset by a
reduction in maintenance payroll expense as discussed above.
41
<PAGE> 42
- Amortization of reorganization value in excess of identifiable assets
expense per ASM decreased 29.4% primarily due to the reduction in the
unamortized balance of excess reorganization value as the result of (i)
utilization of tax attributes of the pre-reorganization company,
including net operating loss carryforwards, such reduction amounting to
$16.7 million in 1996 and $50 million in 1995, and (ii) recognition of a
deferred tax asset of $74.7 million in 1995.
- Other operating expenses per ASM increased 9.2% primarily due to the 4.3
cents per gallon federal fuel tax for which AWA became liable commencing
October 1, 1995, an increase in interrupted trip expense due to the
operating dependability difficulties discussed above, and an increase in
passenger traffic related costs.
- Contributing to the increase in operating cost per ASM was the effect of
the first class installation program that was completed in late 1995 and
reduced 1996 ASMs by 2.6% but had no significant effect on operating
costs.
Net nonoperating expenses decreased $12.2 million to $34.2 million in 1996
from $46.4 million in 1995 due primarily to a net decrease in interest expense
resulting from reduced levels of debt and lower interest rates.
Income tax expense for financial reporting purposes in 1996 decreased to
$24.9 million from $53.6 million in 1995 due principally to lower pretax income.
AWA incurred extraordinary charges in 1996 and 1995 of $1.1 million and
$984,000, respectively, for the partial prepayment of its 10 3/4% Notes. These
amounts were net of income tax benefit of $918,000 and $984,000, respectively.
YEAR ENDED DECEMBER 31, 1995 AND THE COMBINED PERIOD FROM AUGUST 26, 1994
THROUGH DECEMBER 31, 1994, AND JANUARY 1, 1994 THROUGH AUGUST 25, 1994
For the periods ended December 31, 1995 and 1994, AWA realized net income
of $53.8 million and a combined $62.2 million, respectively. Net income for 1995
included income tax expense for financial reporting purposes of $53.6 million
compared to a combined $13.9 million in 1994. The increase in income tax expense
for financial reporting purposes resulted principally from the adoption of fresh
start reporting. Net income for the combined periods of 1994 included
reorganization expense of $273.7 million and an extraordinary gain of $257.7
million.
Total operating revenues were $1.6 billion in 1995 compared to a combined
$1.4 billion for 1994. Passenger revenues increased 10% to $1.5 billion during
1995. Cargo and other revenues increased 10.7% to $98.4 million for 1995. The
balance of other revenues includes revenues generated primarily from alcoholic
beverage sales, contract service sales and service charges.
Capacity, as measured by ASM's, increased 7.5% in 1995 compared to the
combined 1994 period, primarily due to an increase in the average stage length
of 1.5% and the addition of six aircraft to the fleet. Revenue passenger miles
increased 8.8% in 1995 compared to the combined 1994 period while load factor
increased by 0.8 points and yield increased 1.1%.
CASM increased to 7.19 cents in 1995 from 6.99 cents for the combined 1994
period. The changes in the components of operating expense per available seat
mile are explained as follows:
- The increase in salaries and related costs per ASM is primarily the
result of accruals totaling $17.7 million in 1995 to provide for
performance awards related to AWA's profitability. In addition, such
costs were affected in May 1995 by a significant initial increase in
pilot salaries under their collective bargaining agreement and the
adoption of AWA's Total Pay program in January 1995. These pay increases
were effected in order to make employees' compensation levels more
competitive with that of other low cost carriers and local employers.
These pay increases were largely offset by improvements in productivity
and through a reduction in the size of the work force.
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<PAGE> 43
- Aircraft rent per ASM was flat primarily due to the decrease related to
the amortization of deferred credits recorded in AWA's adjustment of
operating leases to fair market value under fresh start reporting. Such
decrease was offset by a net addition of six aircraft to the fleet.
- Rentals and landing fees per ASM decreased primarily due to the 7.5%
increase in ASM's.
- The average price per gallon of aircraft fuel increased slightly to 55.8
cents in 1995 from 54.9 cents for the combined 1994 period.
- Aircraft maintenance materials and repairs expense per ASM increased
largely as the result of the change in classification of the
amortization expense associated with heavy engine and airframe overhauls
from depreciation and amortization expense to aircraft maintenance
materials and repairs expense in August 1994. For 1995 and the period
August 26 through December 31, 1994, amortization of capitalized
maintenance totaling $11.9 million and $356,000, respectively, is
included in aircraft maintenance materials and repairs expense.
Amortization of capitalized maintenance totaling $24 million for the
period January 1 through August 25, 1994 is included in depreciation and
amortization. In addition, costs associated with a new auxiliary power
unit repair agreement which commenced in April 1994 increased in 1995 as
compared to 1994.
- Depreciation and amortization expense per ASM decreased due to the $24
million change in the classification of the amortization expense
associated with capitalized aircraft maintenance materials and repairs
expense. In addition, the revaluation of property and equipment under
fresh start reporting reduced expense by $835,000 in 1995.
- Amortization of reorganization value in excess of identifiable assets
expense increased $20.8 million compared to 1994.
- A restructuring charge incurred in 1995 associated with AWA's
outsourcing of its heavy aircraft maintenance consisted of a provision
for employee severance and related cost of $10.5 million.
- Other operating expenses per ASM decreased primarily due to the
reduction in property taxes and the fixed nature of certain other costs.
Net nonoperating expenses decreased $281.5 million to $46.4 million in 1995
from a combined $327.9 million for 1994. This net decrease resulted from: a
decrease in reorganization expense of $273.7 million since AWA emerged from
bankruptcy; an increase in interest income of $10.7 million due to higher cash
and cash equivalent balances in 1995; partially offset by a net increase in
interest expense of $2.0 million because AWA did not accrue and pay interest on
unsecured prepetition long-term debt during its bankruptcy proceedings in
conformity with SOP 90-7, and an increase in interest expense due to the re-
valuation of aircraft leases to market rates as part of fresh start reporting.
Income tax expense for financial reporting purposes in 1995 increased to
$53.6 million from a combined $13.9 million in 1994 due principally to the
increase in the amortization of the excess reorganization value which is not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Unrestricted cash and cash equivalents and short-term investments decreased
to $165.7 million at March 31, 1997 from $176.6 million at December 31, 1996
primarily due to the repurchase of 1.91 million warrants to purchase Class B
Common Stock of Holdings for approximately $13.3 million by AWA. (See Note 4,
"Warrants" in Notes to Condensed Financial Statements.) Net cash provided from
operating activities decreased to $53.7 million for the quarter ended March 31,
1997 from $58.7 million in 1996 due principally to the payment in 1997 of
approximately $43 million in federal air transportation excise taxes. Net cash
used in investing activities decreased to $31.2 million for the first quarter
period of 1997 from $32.9 million for the 1996 period. Net cash used in
financing activities was $23.6 million for the first quarter compared to $13.6
million in the 1996 period primarily due to the warrant repurchase.
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<PAGE> 44
AWA has a working capital deficiency which increased to $188.5 million at
March 31, 1997 from $170.9 million at December 31, 1996. Operating with a
working capital deficiency is typical in the airline industry as tickets sold
for transportation which has not yet been provided are classified as a current
liability while the related income producing assets, the aircraft, are
classified as non-current. Despite the working capital deficiency, AWA expects
to meet all of its obligations as they become due.
AWA's long-term debt maturities through 1999 consist primarily of principal
amortization of notes payable secured by certain of AWA's aircraft. As of March
31, 1997, such maturities were $36 million, $43.2 million and $70.4 million,
respectively, for the remainder of 1997, 1998 and 1999. Management expects to
fund these requirements with cash from operations.
At March 31, 1997, Holdings had net operating loss carryforwards ("NOL")
and general business tax credit carryforwards of approximately $471.8 million
and $12.7 million, respectively. Under Section 382 of the Code, if a loss
corporation has an "ownership change" within a designated testing period, its
ability to use its NOL and credit carryforwards is subject to certain
limitations. AWA is a loss corporation within the meaning of Section 382. The
issuance of certain common stock by AWA pursuant to the plan of reorganization
and emergence from bankruptcy in 1994 resulted in an ownership change within the
meaning of Section 382. This ownership change has resulted in an annual
limitation (the "Section 382 Limitation") upon AWA's ability to offset any
post-change taxable income with pre-change NOL. Should AWA generate insufficient
taxable income in any post-change taxable year to fully utilize the Section 382
Limitation of that year, any excess limitation will be carried forward to use in
subsequent tax years, provided the pre-change NOL has not been exhausted nor has
the carryforward period expired.
AWA's reorganization and the associated implementation of fresh start
reporting gave rise to significant items of expense for financial reporting
purposes that are not deductible for income tax purposes. In large measure, it
is these nondeductible expenses that result in an effective tax rate (for
financial reporting purposes) significantly greater than the current U.S.
corporate statutory rate of 35%. Nevertheless, AWA's actual cash income tax
liability (i.e., income taxes payable) is considerably lower than income tax
expense shown for financial reporting purposes. This difference in financial
expense compared to actual income tax liability is in part attributable to tax
attributes (including NOLs, subject to certain limitations) of the Predecessor
Company that serve to reduce AWA's actual income tax liability. To the extent
the tax attributes of the Predecessor Company reduce AWA's actual income tax
liability below the amount of expense reflected in the financial statements,
that difference is applied to reduce the carrying balance of AWA's
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets.
In December 1994, AWA entered into a support contract with International
Aero Engines ("IAE") which provides for the purchase by AWA of six new V2500-A5
spare engines scheduled for delivery beginning in 1998 through 2000 for use on
AWA's A320 fleet. Such engines have an estimated aggregate cost of $42 million.
At March 31, 1997, AWA had firm commitments to AVSA S.A.R.L., an affiliate
of Airbus Industrie ("AVSA"), for a total of 17 Airbus A320-200 aircraft with
delivery beginning in 1999. The aggregate net cost of such aircraft is based on
formulae that include certain price indices (including indices for various
aircraft components such as metal products) for periods preceding the various
delivery dates. Based on an assumed 5% annual price escalation, AWA estimates
such aggregate net cost to be approximately $850 million. AWA has arranged for
financing for up to one-half of the commitment relating to such aircraft and
will require substantial capital from external sources to meet its remaining
financial commitment. There can be no assurance that AWA will be able to obtain
such capital in sufficient amounts or on acceptable terms, and a default by AWA
under the AVSA agreement or any such commitment could have a material adverse
effect on AWA.
In November 1996, America West Airlines 1996-1 Pass Through Trusts issued
$218.6 million of Pass Through Certificates in connection with the refinancing
of eight Airbus A320 aircraft and three IAE V2500 spare jet engines. The
combined effective interest rate on the financing is 7.05%. The proceeds of the
transaction were used to refinance the indebtedness incurred by the owners of
the aircraft and engines leased to AWA. Under the arrangements, the financial
benefits of the transactions are shared among AWA, the equity investors in
leverage leases covering the aircraft and U.S. subsidiaries of GPA, the original
lessees
44
<PAGE> 45
under the restructured leases. Benefits to AWA include the agreed termination of
arrangements with GPA pursuant to which GPA could cause AWA to lease up to four
aircraft over the balance of the decade and a reduction in rental expense
approximating $500,000 per year.
The Pass Through Certificates were issued by separate pass through trusts.
The equipment notes are secured by a security interest in the aircraft and
engines and an assignment of AWA's leases of such equipment. Neither the
equipment notes nor the pass through certificates are direct obligations of, or
guaranteed by, AWA, and the corresponding debt and interest expense are not
included in AWA's financial statements.
As of March 31, 1997, AWA's fleet consisted of 101 aircraft of which 20
aircraft meet the FAA's Stage II (but not Stage III) noise reduction
requirements and must be retired or significantly modified prior to the year
2000. Management is currently considering its options regarding such aircraft.
If AWA determines to modify such aircraft to comply with Stage III, the required
capital expenditures for such modifications are currently estimated to be
approximately $2 million per aircraft. There can be no assurance that AWA will
be able to obtain such capital in sufficient amounts or on favorable terms.
Capital expenditures for the quarters ended March 31, 1997 and 1996 were
approximately $41 million and $32.8 million, respectively. Included in these
amounts are capital expenditures for capitalized maintenance of approximately
$22.4 million for the first quarter of 1997 and $11.6 million for the first
quarter of 1996. Capital expenditures for the year ended December 31, 1996 were
approximately $155.7 million, including capitalized maintenance expenditures of
approximately $87.2 million.
Certain of AWA's long-term debt agreements contain minimum cash balance
requirements, leverage ratios, coverage ratios and other financial covenants
with which AWA was in compliance at March 31, 1997.
GOVERNMENT REGULATIONS
On August 20, 1996, the Small Business Job Protection Act of 1996
reinstated the federal air transportation excise taxes (the 10% ticket tax, the
6.25% air cargo tax and the $6.00 international departure tax) effective August
27, 1996. Management believes that AWA benefited from the expiration of the
federal air transportation excise taxes on December 31, 1995 and that the
reimposition of such excise taxes on August 27, 1996 had a negative impact on
AWA, although the amount of such benefit or negative impact directly resulting
from the excise taxes cannot be precisely determined. The reinstated federal air
transportation excise taxes expired on December 31, 1996 and on March 7, 1997,
the taxes were reimposed to September 30, 1997. It is unclear at this time
whether the taxes will expire on September 30, 1997, or will once again be
extended.
In addition, AWA's operating costs have been and will continue to be
affected by various safety, security and other regulations and requirements
applicable to its operations. The National Aviation Civilian Review Commission,
with the assistance of the Department of Transportation (the "DOT"), will
conduct an independent study of funding requirements for the FAA and develop a
cost allocation model for distribution of the cost of using the United States
aviation system to each segment of the system. The Review Commission will also
analyze and propose funding alternatives to the existing air transportation
excise taxes (primarily the 10% ticket tax) which currently fund the FAA, which
expired on December 31, 1996 but were reinstated effective March 7, 1997 through
September 30, 1997. The report of the Review Commission is scheduled to be
released in September 1997. AWA cannot forecast the results of the Review
Commission's activities or what proposals the Review Commission will make.
Implementation of these proposals could increase the cost of the airline
operations and could have a material adverse effect on AWA's operating results.
The President's Commission on Aviation Safety and Security and the U.S.
Congress recently adopted increased safety and security measures designed to
increase airline passenger security and protect against terrorist acts. These
measures place additional security and safety requirements on the airline
industry and result in additional operating costs. AWA cannot forecast what
additional costs or the impact on revenue that would be associated with
complying with such increased safety and security requirements.
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BUSINESS
OVERVIEW
AWA is the ninth largest commercial airline carrier in the United States,
operating through its principal hubs located in Phoenix, Arizona and Las Vegas,
Nevada, and a mini-hub located in Columbus, Ohio. Management believes AWA is the
lowest cost full service carrier in the United States. At March 31, 1997 AWA
served 57 destinations, including six destinations in Mexico and one in Canada,
with a fleet of 101 aircraft. AWA offers service to an additional 17
destinations through an alliance agreement with Continental and 17 commuter
service and regional destinations through an alliance agreement with Mesa.
AWA is the leading airline serving Phoenix and Las Vegas, with
approximately 36% and 23% of total revenue passenger miles, respectively, based
on the twelve months ended December 31, 1996. The Phoenix and Las Vegas airports
are the seventh and thirteenth largest airports and the fifth and eighth largest
domestic hubs in the United States as measured by passenger enplanements. AWA
believes that these hubs are well positioned for continued growth due to their
geographically favorable locations with access to key southwestern and west
coast markets, relatively low operating costs, year-round fair weather and
modern, uncongested facilities. Substantially all of AWA's passenger traffic is
channeled into or through its hubs, which serve as gateways for AWA's route
network. Through its hub-and-spoke system, AWA serves more markets with greater
frequency than would be possible with the same number of aircraft in a
point-to-point route system.
AWA operates with a low cost structure. AWA's operating cost per ASM for
the first three months of 1997 was 7.40 cents, which was approximately 21.1%
less than the average cost per ASM of the nine major domestic airlines. AWA
believes that its low cost structure is a significant competitive advantage
relative to other full service carriers and also enables AWA to compete
effectively against low cost carriers in its short-haul local markets. As a full
service airline, AWA believes that it distinguishes itself from other low cost
carriers by offering passenger services that include assigned seating, meal
service, participation in computerized reservation systems, interline ticketing,
first class cabins, baggage transfer and various other services.
Through America West Vacations, AWA arranges and sells vacation packages
that include hotel accommodations, air fare, ground transportation and a variety
of entertainment options. This business unit generated approximately $190
million in gross package sales in 1996. America West Vacations occupies a
substantial position in the Las Vegas destination market and arranges packages
for travel to the other traditional vacation destinations served by AWA,
including Arizona, California, Florida, Canada and Mexico. To further develop
this business, the Company intends to combine America West Vacations with AWA's
charter business and reorganize such operations as a separate subsidiary of
Holdings during 1997.
STRATEGY
The Company's strategy seeks to achieve additional revenue growth and
profitability by capitalizing on its key competitive strengths while maximizing
financial flexibility. The principal elements of the Company's strategy are (i)
strengthening AWA's position in its existing hubs through strategic expansion,
(ii) maintaining AWA's position as a leading low cost full service carrier,
(iii) focusing on airline reliability and customer service, (iv) operating a
modern and efficient fleet, (v) continuing to develop AWA's passenger base
through key alliances and (vi) pursuing opportunities to expand its leisure
travel businesses.
STRENGTHEN POSITION IN EXISTING HUBS THROUGH STRATEGIC EXPANSION
AWA's strategy is designed to capitalize on its strong position in its
Phoenix and Las Vegas hubs. In February 1996, AWA began implementation of a
two-year plan to expand its principal hub operations and increase connecting
traffic and service to longer-haul nonstop markets. Pursuant to this plan,
during 1996 AWA increased ASMs by 11.3% and added six new cities to AWA's route
network. In addition, AWA has increased flight frequencies to enhance service to
existing West Coast destinations and to expand connecting opportunities through
Phoenix to long-haul flights to the East and Midwest. AWA has also sought to
increase
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asset utilization through the expansion of its night flight service to Las
Vegas, utilizing aircraft for this service that otherwise would be idle
overnight. Pursuant to the growth plan, AWA added one new city to its route
network in the first quarter of 1997 and expects to introduce service to at
least one additional city by December 31, 1997.
MAINTAIN ITS POSITION AS A LEADING LOW COST AIRLINE
AWA is committed to maintaining its low cost structure, which it has
achieved primarily through employee productivity, favorable labor costs per ASM
and industry-leading asset utilization. AWA maintained low unit costs by
focusing on productivity at all levels. Additionally, the contract between AWA
and the Airline Pilots Association, which provides for fixed wage scale
increases of approximately 2.8% per year until the contract expires in April
2000, is, and will continue to be, a factor in maintaining AWA's low cost
structure. In 1996, AWA increased its ASMs by 11.3% while increasing its
full-time equivalent head count by 10.8%.
FOCUS ON RELIABILITY AND CUSTOMER SERVICE
AWA is committed to maintaining its reliability and to improving its
overall customer service. As a result of customer service and operational issues
encountered in the third quarter of 1996, AWA initiated a program entitled Get
the Product Right . . . Together, aimed at maximizing the airline's reliability
and further improving customer service. Following the implementation of this
program, AWA's completion rate increased from a low of 96% in the third quarter
of 1996 to an average of 98.4% and 99% in the fourth quarter of 1996 and the
first quarter of 1997, respectively. Consistent with its strategy of being a low
cost airline, this program is designed to be implemented without adversely
affecting AWA's cost structure. In May 1997, AWA was ranked number one in
customer satisfaction among the nine major domestic airlines, for flights of 500
miles or less, in the Airline Customer Satisfaction -- U.S. Flights Study
conducted by Frequent Flyer Magazine and J.D. Power and Associates.
OPERATE A MODERN AND EFFICIENT FLEET
AWA enjoys operational efficiencies due to its modern, fuel efficient
fleet. At March 31, 1997, AWA's fleet consisted of 60 Boeing 737s, 27 Airbus
A320s and 14 Boeing 757s, with an average age of approximately 10.2 years. Most
of AWA's existing aircraft are held under leases with considerable fleet plan
flexibility. As a result, in the event economic conditions change adversely, AWA
can reduce its fleet size and reduce its aircraft related financial obligations
by not renewing expiring aircraft leases.
CONTINUE TO DEVELOP PASSENGER BASE THROUGH ALLIANCES
AWA plans to continue to employ alliance agreements to expand its passenger
base and in some cases to achieve cost savings through the reduction of
redundant labor and facilities. AWA's alliance agreements generally provide for
code-sharing arrangements and linking of frequent flyer programs, and in some
cases involve coordination of flight schedules, sharing of ticket counter space,
coordination of ground handling operations and joint purchasing and marketing
efforts. AWA currently has alliance agreements with Continental, British
Airways, Northwest Airlines and Mesa. Management believes that AWA's
code-sharing activities result in increased travel and profitability for AWA and
AWA intends to pursue additional alliances as opportunities warrant.
EXPAND LEISURE TRAVEL BUSINESSES
The Company's strategic plan includes the expansion of its leisure tour
packaging and charter businesses which, the Company believes, present
opportunities for growth. The Company further believes that it will be
competitive in these businesses because of its low cost structure and expertise
gained in developing and managing America West Vacations and AWA's professional
and college sports chartering business. During 1997, the Company expects to
combine the America West Vacations and charter business under a separate
subsidiary of Holdings, establish a private label tour packaging business,
pursue the management of other airlines' vacation packaging businesses, expand
the scope of its vacation and charter products and introduce new package tour
destinations.
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OPERATIONS
AIRLINE OPERATIONS
AWA is the ninth largest commercial airline carrier in the United States,
operating through its principal hubs located in Phoenix, Arizona and Las Vegas,
Nevada, and a mini-hub located in Columbus, Ohio. AWA believes it is the lowest
cost full service carrier in the United States. At March 31, 1997, AWA served 57
destinations, including six destinations in Mexico and one in Canada, with a
fleet of 101 aircraft. AWA also offers service to additional destinations
through alliance agreements with Continental and Mesa.
AWA seeks to maximize its market share by operating primarily through hub
airports in Phoenix and Las Vegas and, to a lesser extent, through its mini-hub
in Columbus. The success of AWA's hub system depends on its ability to attract
passengers traveling to and from its hubs, as well as passengers traveling
through the hubs to AWA's other destinations. AWA believes the success of its
operations in Phoenix and Las Vegas is in part due to such airports being among
the world's largest 25 in passenger traffic and such cities being among the
fastest growing in the nation. In addition, AWA believes these hubs are well
positioned for continued growth due to their geographically favorable locations
with strategic access to key southwestern and west coast markets, relatively low
operating costs, year-round fair weather, and modern, uncongested facilities.
AWA is the leading airline serving Phoenix Sky Harbor International Airport
and McCarran International Airport in Las Vegas, based upon revenue passenger
miles, with approximately 36% and 23% of total revenue passenger miles,
respectively, for the twelve months ended December 31, 1996. In both markets
AWA's principal competitor is Southwest Airlines, with approximately 22% and 17%
of total revenue passenger miles in Phoenix and Las Vegas, respectively, for the
twelve months ended December 31, 1996. At March 31, 1997, AWA served 49
destinations from its Phoenix hub, 45 destinations from its Las Vegas hub and 12
destinations from Columbus. During 1996, AWA had approximately 49% of Columbus
revenue passenger miles compared to approximately 9% for US Airways, AWA's
principal competitor in Columbus. At March 31, 1997, AWA offered service to an
additional 17 destinations through its alliance with Continental and 17 commuter
service and regional destinations through its alliance with Mesa.
As a result of certain customer service and operational issues in the third
quarter of 1996, AWA initiated a program entitled Get the Product Right . . .
Together, aimed at maximizing the airline's on-time performance and further
improving customer service. If successfully implemented, management believes
this program will achieve significant advances in reliability through
refinements to hub connection schedules, the addition of an operational spare
aircraft and approximately 60 line mechanics, the establishment of two
additional overnight maintenance bases, and improved coordination with providers
of the airline's heavy aircraft maintenance. Management anticipates that those
initiatives, together with expanded training of front line staff, increased
staffing in critical areas (such as reservations), advanced technologies
installed during 1996, enhanced aircraft appearance as the result of first class
and new interior installations completed in 1996 and improved catering and
onboard entertainment, will all operate together to improve customer
satisfaction during 1997.
Alliances. AWA has alliance agreements with Continental, British Airways,
Northwest Airlines and Mesa. AWA's alliance agreement with Continental provides
for code-sharing arrangements, coordinating flight schedules, sharing ticket
counter space, linking frequent flyer programs and membership clubs, and
coordinating ground handling operations. Through code-sharing, each airline is
able to offer additional destinations to its customers without materially
increasing operating and capital expenses. AWA has achieved cost savings from
the Continental alliance primarily through the consolidation of airport
facilities and resources and the elimination of duplicative costs for labor and
equipment at key locations. In addition, through joint purchasing, both carriers
may receive greater volume discounts on certain cost items.
AWA's alliance agreement with British Airways includes code-sharing
arrangements, reciprocal frequent flyer privileges and ground handling
operations, and, using AWA's existing service, allows British Airways to offer
connecting service to and from British Airways' Phoenix gateway to eight
destinations served by AWA in the western United States. Through AWA's
code-share agreement with Northwest Airlines, AWA provides connecting service
from Northwest Airlines' Pacific routes to Las Vegas and Phoenix. AWA's
code-sharing agreement with Mesa, which adds 17 destinations to AWA's route
network, establishes Mesa as a feeder carrier for AWA at its Phoenix hub. The
code-sharing agreement with Mesa provides for coordinated flight schedules,
passenger handling and computer reservations under the AWA flight designator
code, thereby
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allowing passengers to purchase one air fare for their entire trip. On
code-sharing flights, Mesa operates under the name "America West Express" and
has incorporated AWA's color scheme and commercial logo on certain aircraft
utilized on these routes.
Leisure Travel Businesses. Through its America West Vacations division, AWA
arranges and sells vacation packages that include hotel accommodations, air
fare, ground transportation and a variety of entertainment options. This
business unit generated approximately $190 million in gross package sales in
1996, sold approximately 823,000 room nights and approximately 137,000 rental
car days, and handled approximately 557,000 passengers. America West Vacations
occupies a substantial position in the Las Vegas destination market and arranges
packages for travel to the other traditional vacation destinations served by AWA
including Arizona, California, Florida, Canada and Mexico. To further develop
this business, AWA expects to combine the America West Vacations with AWA's
charter business and reorganize these businesses as a separate subsidiary of
Holdings during 1997.
AIRCRAFT
At March 31, 1997, AWA operated a fleet of 60 Boeing 737s, 27 Airbus A320s
and 14 Boeing 757s as follows:
<TABLE>
<CAPTION>
AVERAGE
REMAINING
NUMBER AVERAGE LEASE
AIRCRAFT TYPE STATUS(1) AIRCRAFT AGE (YRS.) TERM (YRS.)
------------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C>
B737-100......................................... Owned 1 27.5 --
B737-200......................................... Leased 14 15.3 4.3
B737-200......................................... Owned 5 18.1 --
B737-300......................................... Leased 29 10.0 3.6
B737-300......................................... Owned 11 8.4 --
B757-200......................................... Leased 12 10.7 8.1
B757-200......................................... Owned 2 7.5 --
A320-200......................................... Leased 27 6.9 10.6
---
101 10.2 6.7
===
</TABLE>
- ---------------
(1) Each of the aircraft that is designated as owned serves as collateral for a
loan pursuant to which the aircraft was acquired by AWA or serves as
collateral for a non-purchase money loan.
As of March 31, 1997 and through December 1998, leases for 20 of AWA's
aircraft are scheduled to terminate (such aircraft are 12 Boeing B737-300s, two
Boeing B737-200s, four Airbus A320-231s, and two Boeing B757-200s). At the
option of the lessor, the lease for one of the B737-300 aircraft may be extended
for up to 48 months, and the leases for six of the B737-300 aircraft may each be
extended for up to 60 months, at set rates, which are currently less than market
rates. At the option of either the lessor or AWA, the leases for two Airbus A320
aircraft may be extended for a period of two years, and the lease for one Airbus
A320 aircraft may be extended for a period of one year. There are no contractual
options to extend any other of such leases. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
EMPLOYEES
At March 31, 1997, AWA employed 8,942 full-time and 2,500 part-time
employees, for an equivalent of 10,015 full-time employees.
LABOR RELATIONS
The airline business is labor intensive. Wages, salaries and benefits
represented approximately 23.1% of AWA's operating expenses for the year ended
December 31, 1996. To encourage increased productivity by its workforce, AWA
awards performance bonuses ("AWArd Pay") from 5% to 25% of base pay to eligible
non-executive non-union employees provided certain annually established
operating income targets are attained. Eligibility is determined at the time of
distribution. In February 1996, AWA paid performance awards amounting to 10.25%
of each eligible employee's base pay for 1995 performance. The operating income
targets
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established for 1996 were not achieved, largely as the result of AWA's
performance during the third quarter of that year. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." However, AWA's
Board of Directors concluded that the failure to achieve the 1996 operating
income target was due largely to circumstances beyond the control of the
eligible employees and that it was important to reward the eligible employees
for their substantial efforts in achieving AWA's first and second quarter record
performance and in AWA's return to record earnings in the fourth quarter.
Accordingly, in an exception to policy, in February 1997, the Board of Directors
elected to pay AWArd Pay performance bonuses equal to the minimum of 5% of
eligible employees' base pay in respect of 1996 performance.
There have been numerous attempts by unions to organize AWA's employees,
and AWA expects such organization efforts to continue in the future. Several
groups of AWA's employees have selected their collective bargaining
representatives and negotiations are in progress. AWA cannot predict at this
time the outcome or the terms of any future collective bargaining agreement and
therefore the effect, if any, on AWA's operations or financial performance.
AWA's pilots are represented by the Airline Pilots Association. In May
1995, a five-year collective bargaining agreement with AWA's pilots became
effective. The terms of this contract are consistent with AWA's productivity
objectives. Under this contract, pilot wage scales will increase 9.41% from
December 31, 1996 until April 29, 2000, or approximately 2.8% per year during
that period. Terms of the agreement include a single pay scale for all aircraft
types, flexible work rules, management's right to staff the airline and to enter
into strategic alliances and the preclusion of sympathy work stoppages.
In September 1994, the National Mediation Board ("NMB") certified the
Association of Flight Attendants as the collective bargaining representative of
AWA's flight attendants and contract negotiations are ongoing.
In January 1996, the International Brotherhood of Teamsters ("IBT") filed
an application with the NMB seeking to be certified as the bargaining
representative for AWA's mechanics, including related personnel. Following a
representation election in April 1996, the NMB certified the IBT as the
collective bargaining representative for that work group. AWA is currently
litigating the certification of the IBT and the matter is presently before the
Ninth Circuit Court of Appeals. To comply with the ruling of the lower court,
AWA has commenced negotiations with the IBT on a provisional basis.
In April 1996, the IBT filed an application with the NMB seeking to become
the collective bargaining representative of AWA's 40 stock clerks. The IBT lost
the representation election in July 1996. Following the announcement of those
election results, the IBT filed a claim of election interference against AWA.
Both AWA and the IBT filed submissions with the NMB in connection with the
election interference charge, and the matter will be decided by the NMB in due
course. If the NMB rules in favor of IBT, a rerun election will be ordered.
In September 1996, the Transportation Workers Union ("TWU") was certified
to represent AWA's approximately 40 dispatchers and contract negotiations have
commenced.
COMPETITION AND MARKETING
The airline industry is highly competitive and is susceptible to price
discounting, which involves the offering of discount or promotional fares to
passengers. Any such fares offered by one airline are normally matched by
competing airlines, resulting in lower industry yields with little or no
increase in traffic levels. AWA competes with other major full service airlines
based on price and, due to its low cost structure, is able to compete with other
low cost carriers in its short haul local markets. The entry of additional
carriers on many of AWA's routes (as well as increased competition from or the
introduction of new services by established carriers) could negatively impact
AWA's results of operations. AWA competes with a number of major airlines on
medium- and long-haul routes through its hubs and with Southwest Airlines for
short-haul flights at its Phoenix and Las Vegas hubs and with USAir at its
Columbus mini-hub.
Most tickets for travel on AWA are sold by travel agents through computer
reservation systems that have been developed and are controlled by other
airlines. Travel agents generally receive commissions based on the
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price of tickets sold. Accordingly, airlines compete not only with respect to
the price of tickets sold but also with respect to the amount of commissions
paid. Airlines often pay additional commissions in connection with special
revenue programs. Federal regulations have been promulgated that are intended to
diminish preferential schedule displays and other practices with respect to the
reservation systems that place AWA and other similarly situated users at a
competitive disadvantage to the airlines controlling the systems. Effective
January 8, 1996, AWA implemented electronic or paperless ticketing to respond to
customer needs and to reduce distribution costs for tickets booked directly
through AWA, and by year end 1996, approximately 21% of its tickets were
processed electronically.
FREQUENT FLYER PROGRAM
All major U.S. airlines have established frequent flyer programs to
encourage travel on that particular carrier. AWA offers the FlightFund program
that allows members to earn mileage credits by flying AWA, by using the services
of other program participants such as hotels, car rental firms and other
specialty services and by flying certain partner carriers. Through AWA's
alliance agreement with both Continental and British Airways, AWA has formed
frequent flyer program partnerships. FlightFund and Continental One Pass program
members may earn and redeem mileage credit in connection with flights to all AWA
and Continental destinations. FlightFund and British Airways Executive Club
members may also earn and redeem mileage credit for flights to all AWA and
British Airways destinations. In addition, AWA periodically offers special
short-term promotions that allow members to earn additional free travel awards
or mileage credits. When a FlightFund member accumulates mileage credits of
20,000 miles, AWA issues mileage award certificates that can be redeemed for
various travel awards, including first class upgrades and tickets on AWA or
other airlines participating in AWA's frequent flyer program. Most travel awards
are subject to blackout dates and capacity controlled seating. Mileage award
certificates automatically expire after two years if issued prior to April 1,
1993 and after three years for certificates issued after that date. Travel is
valid up to one year from the date of ticketing. FlightFund awards may also be
redeemed for flights to certain international destinations and Hawaii. AWA is
required to purchase space on other airlines to accommodate such award
redemption.
AWA accounts for the FlightFund program under the incremental cost method
whereby travel awards are valued at the incremental cost of carrying one
additional passenger. Costs including passenger food, beverages, supplies, fuel,
liability insurance, purchased space on other airlines and denied boarding
compensation are accrued as frequent flyer program participants accumulate
mileage to their accounts. Such unit costs are based upon expenses expected to
be incurred on a per passenger basis. No profit or overhead margin is included
in the accrual for these incremental costs.
FlightFund's membership at December 31, 1996 was approximately 2.7 million
participants. At December 31, 1996, 1995 and 1994, AWA estimated that
approximately 358,000, 342,000 and 369,000, respectively, travel awards were
expected to be redeemed. Correspondingly, AWA had an accrued liability of $11.3
million, $10.7 million and $9.8 million for 1996, 1995 and 1994, respectively.
The accrual is based upon AWA's estimates of mileage earned that will eventually
be redeemed for a travel award.
The number of FlightFund travel awards redeemed for round-trip travel for
the years ended December 31, 1996, 1995 and 1994, was approximately 130,000,
111,000 and 109,000, respectively, representing 2.3%, 2.3% and 2.6% of total
revenue passenger miles for each respective period. AWA does not believe that
the usage of free travel awards results in any significant displacement of
revenue passengers due to AWA's ability to manage frequent flyer travel.
FACILITIES
AWA's principal facilities are associated with its hub operations in
Phoenix, Las Vegas and Columbus. AWA operates from Terminal 4 of Phoenix Sky
Harbor International Airport pursuant to a lease agreement that includes 28
gates and approximately 255,000 square feet of space at March 31, 1997. AWA also
leases approximately 39,000 square feet of additional space at the airport for
administrative offices and pilot training and owns a 375,000 squire foot
maintenance and technical support facility that includes four hangar bays,
hangar shops, two flight simulator bays, and warehouse and commissary
facilities.
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In Las Vegas, AWA leases approximately 79,000 square feet of space a
McCarran International Airport, which includes seven gates and adjoining holding
room areas. At its Columbus mini-hub, AWA leases 30,000 square feet and seven
gates. Pursuant to AWA's alliance agreement with Continental, certain of the
station operations for both carriers have been consolidated in an effort to
reduce operating expenses.
Space for ticket counters, gates and back offices has also been obtained at
each of the other airports served by AWA, either by lease from the airport
operator or by sublease from another airline.
AWA owns 68,000 square foot America West Corporate Center at 222 S. Mill
Avenue in Tempe, Arizona. AWA currently leases approximately 389,000 square feet
of general office and other space in Phoenix and Tempe, Arizona.
GOVERNMENT REGULATIONS
NOISE ABATEMENT AND OTHER RESTRICTIONS
The Airport Noise and Capacity Act of 1990 provides, with certain
exceptions, that after December 31, 1999, no person may operate certain large
civilian turbo-jet aircraft in the United States that do not comply with Stage
III noise levels, which is the FAA designation for the quietest commercial jets.
These regulations require carriers to gradually phase out their noisier jets,
either replacing them with quieter Stage III jets or equipping them with hush
kits to comply with noise abatement regulations, over a five-year period
commencing December 31, 1994. At December 31, 1996, AWA's fleet consisted of 101
aircraft, all of which meet Stage III noise reduction requirements except for 21
aircraft that meet the FAA's Stage II (but not Stage III) noise reduction
requirements. The aircraft that do not meet the Stage III standards must be
retired or significantly modified prior to the year 2000. Management is
currently considering its options regarding these aircraft and expects to decide
whether to install hush kits on those aircraft or replace them with Stage III
aircraft.
Numerous airports served by AWA, including those at Boston, Denver, Los
Angeles, Minneapolis-St. Paul, New York City, San Diego, San Francisco, San
Jose, Orange County, Washington, D.C., Burbank and Long Beach have imposed
restrictions such as curfews, limits on aircraft noise levels, mandatory flight
paths, runway restrictions and limits on number of average daily departures,
which limit the ability of air carriers to provide service to or increase
service at such airports. AWA's Boeing 757-200s, Boeing 737-300s and Airbus
A320s all comply with the current noise abatement requirements of the airports
listed above.
FUEL TAX INCREASES
In August 1993, the federal government increased taxes on fuel, including
aircraft fuel, by 4.3 cents per gallon. Initially, commercial aviation fuel was
exempt from this tax; however, the exemption expired on September 30, 1995 and
AWA began paying such tax on October 1, 1995. The expiration of such exemption
increased AWA's annual operating expenses by approximately $15.1 million for
1996.
EXCISE TAXES
Effective March 7, 1997, the federal air transportation excise taxes (the
10% ticket tax based on the price of the ticket, the 6.25% air cargo tax based
on freight charges and the $6.00 per passenger international departure tax),
which had been effective from August 27, 1996 but had expired on December 31,
1996, were reinstated for the period ending September 30, 1997. As a result of
competitive pressure, AWA and other airlines have been limited in their
abilities to pass on the cost of the excise taxes to passengers through fare
increases.
PASSENGER FACILITY CHARGES
During 1990, Congress enacted legislation to permit airport authorities,
with prior approval from the DOT, to impose passenger facility charges ("PFCs")
as a means of funding local airport projects. These charges, which are intended
to be collected by the airlines from their passengers, are limited to $3.00 per
enplanement, and to no more than $12.00 per round trip. As a result of
competitive pressure, AWA and other airlines have been limited in their
abilities to pass on the cost of the PFCs to passengers through fare increases.
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AGING AIRCRAFT MAINTENANCE
The FAA issued several Airworthiness Directives ("ADs") in 1990 mandating
changes to the older aircraft maintenance programs. These ADs were issued to
ensure that the oldest portion of the nation's aircraft fleet remains airworthy.
The FAA requires that these aircraft undergo extensive structural modifications.
These modifications are required upon the accumulation of 20 years time in
service, prior to the accumulation of a designated number of flight cycles or
prior to 1994 deadlines established by the various ADs, whichever occurs later.
Four of AWA's aircraft are currently affected by these aging aircraft ADs and
are in compliance with such ADs. AWA constantly monitors its fleet of aircraft
to ensure safety levels which meet or exceed those mandated by the FAA or the
DOT.
FAA FUNDING
Congress recently enacted the FAA Reauthorization Act of 1996, which
established the Review Commission. The Review Commission, with the assistance of
the DOT, will conduct an independent study of FAA funding requirements through
the year 2002, and develop a cost allocation model for distribution of the cost
of using the United States aviation system to each segment of the system. The
Review Commission will also analyze funding and propose alternatives to the
excise taxes (primarily the 10% ticket tax) which currently fund the FAA. The
excise taxes had expired December 31, 1996 but were reinstated March 7, 1997 for
the period through September 30, 1997. The report of the Review Commission is
scheduled to be released on September 30, 1997.
AWA cannot forecast the results of the Review Commission's activities or
what proposals the Review Commission will make, but no change in the funding
mechanism is expected to be enacted prior to the completion of the Review
Commission's activities. Implementation of these proposals could significantly
increase the cost of airline operations and could have a material adverse impact
on AWA's operating results.
AIRCRAFT MAINTENANCE AND OPERATIONS
AWA is subject to the jurisdiction of the FAA with respect to aircraft
maintenance and operations, including equipment, dispatch, communications,
training, flight personnel and other matters affecting air safety. The FAA has
the authority to issue new or additional regulations. To ensure compliance with
its regulations, the FAA conducts regular safety audits and requires AWA to
obtain operating, airworthiness and other certificates which are subject to
suspension or revocation for cause. In addition, a combination of FAA and
Occupational Safety and Health Administration regulations on both federal and
state levels apply to all of AWA's ground-based operations. AWA is also subject
to the jurisdiction of the Department of Defense with respect to its voluntary
participation in their Commercial Passenger Airlift program administered by the
Air Force's Air Mobility Command. The carrier recently successfully underwent
its biannual capability survey and has been approved for continued use by the
military.
ADDITIONAL SECURITY AND SAFETY MEASURES
The Aviation Safety Commission and the U.S. Congress have recently adopted
increased safety and security measures designed to increase airline passenger
security and protect against terrorist acts. Such measures have resulted in
additional operating costs to the airline industry. Examples of increased
security measures include increased passenger profiling, enhanced pre-board
screening of passengers and carry-on baggage, positive bag match for profile
selections, continuous physical bag search at checkpoints, additional airport
security personnel, expanded criminal background and FBI fingerprint checks for
selected airport employees, significantly expanded use of bomb-sniffing dogs,
certification of screening companies and aggressive testing of existing security
systems.
The Aviation Safety Commission issued a final report on February 12, 1997
which reaffirms its earlier recommendations, including feasibility analyses of
the deployment and use of positive bag match systems, enhanced passenger
profiling procedures and advanced cockpit voice and flight data recorders. The
final report makes additional recommendations for certain safety and security
measures to be implemented by December 31, 1997, including the installation of
new ground proximity warning systems on all commercial
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aircraft, expansion of aging aircraft inspections to include non-structural
components, development of objective methods for carriers to monitor and improve
their own level of safety, and implementation of positive bag match based on
passenger profiling.
Future decisions which place increased security and safety requirements on
the airline industry could be significant. AWA cannot forecast, based upon the
final report of the Aviation Safety Commission, what additional security and
safety requirements may be imposed in the future or the costs or revenue impact
that would be associated with complying with such requirements, although such
costs and revenue impact could be significant.
SLOT RESTRICTIONS
At New York City's John F. Kennedy Airport and LaGuardia Airport, Chicago's
O'Hare International Airport and Washington's National Airport, which have been
designated "High Density Airports" by the FAA, there are restrictions on the
number of aircraft that may land and take-off during peak hours. In the future,
these take-off and landing time slot restrictions and other restrictions on the
use of various airports and their facilities may result in further curtailment
of services by, and increased operating costs for, individual airlines,
including AWA, particularly in light of the increase in the number of airlines
operating at such airports. In general, the FAA rules relating to allocated
slots at the High Density Airports contain provisions requiring the
relinquishment of slots for nonuse and permit carriers, under certain
circumstances, to sell, lease or trade their slots to other carriers. All slots
must be used on 80% of the dates during each two-month reporting period. Failure
to satisfy the 80% use rate will result in loss of the slot which would revert
to the FAA and be reassigned through a lottery arrangement.
AWA currently utilizes two slots at New York City's Kennedy Airport, four
slots at New York City's LaGuardia Airport, four slots at Chicago's O'Hare
International Airport and six slots at Washington's National Airport. Four of
the slots at Washington's National Airport are subject to expiration in December
1997, and AWA intends to file a timely application for renewal. Approval of such
application is discretionary with the FAA. The utilization rates by AWA of all
the foregoing slots ranged from 94% to 99% in 1996.
ENVIRONMENTAL MATTERS
AWA is subject to regulation under major environmental laws administered by
federal, state and local agencies, including laws governing air, water and waste
discharge activities. While AWA strives to comply with environmental laws and
regulations, AWA has incurred and may incur costs to comply with applicable
environmental laws, including soil and groundwater cleanup and other related
response costs. AWA believes, however, that under current environmental laws and
regulations these costs would not have a material adverse effect on AWA's
financial condition.
The Comprehensive Environmental Response Compensation and Liability Act of
1980, also known as Superfund, and comparable state laws impose liability
without regard to fault on certain classes of persons that may have contributed
to the release or threatened release of a "hazardous substance" into the
environment. These persons include the owner or operator of a facility and
persons that disposed or arranged for the disposal of hazardous substances. Many
airports in the United States, including Phoenix Sky Harbor International
Airport, are the subject of Superfund investigations or state implemented
groundwater investigations. Although AWA occupies facilities at some of these
affected airports, AWA does not believe that its operations have been included
within the ambit of any of these investigations.
The trend in environmental regulation is to place more restrictions and
limitations on activities that may affect the environment, and AWA expects that
the costs of compliance will continue to increase.
LEGAL PROCEEDINGS
AWA emerged from bankruptcy on August 25, 1994 after operating as a
debtor-in-possession since June 27, 1991, when AWA filed a voluntary petition to
reorganize under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court
confirmed AWA's plan of reorganization (the "Reorganization Plan") on August 10,
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1994. As contemplated by the Reorganization Plan, certain administrative and
priority tax claims remain pending against AWA, which, if ultimately allowed by
the Bankruptcy Court, would represent general obligations of AWA. Such claims
include claims of various state and local tax authorities, most of which
represent pre-bankruptcy tax obligations not paid during the pendency of the
bankruptcy proceedings and various other matters. In connection with the state
and local tax claims, AWA has reserved certain amounts believed by management to
be adequate. At March 31, 1997, approximately 399,000 shares of Holdings' Class
B Common Stock was with an escrow agent pending final resolution of claims in
connection with the bankruptcy. All other securities issued pursuant to the
bankruptcy have been distributed. The Company believes that it will reach final
settlement of all remaining unresolved claims such that the remaining
approximately 399,000 shares will be distributed during 1997.
Following the commencement of AWA's bankruptcy proceedings in June 1991,
the Commission requested information from AWA concerning disclosures made in
AWA's annual and quarterly reports filed with the Commission in 1991. This
inquiry ultimately led to a settlement with the Commission, pursuant to which
the Commission issued an "Order Instituting Proceedings Pursuant to Section 21C
of the Exchange Act and Opinion and Order of the Commission" (the "Order")
finding AWA's Form 10-K for the year ending December 31, 1990, violated Section
13(a) of the Exchange Act and Rule 13a-1 thereunder, and that AWA's Form 10-Q
for the first quarter of 1991 violated Section 13(a) of the Exchange Act and
Rule 13a-13 thereunder, and ordered that AWA cease and desist from violating
Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 promulgated under
the Exchange Act. The Order provided that AWA neither admits nor denies any
violation of the securities laws.
AWA leases six aircraft which may be subject to a claim in an unspecified
amount as a result of the Internal Revenue Service potentially disallowing
investment tax credits and accelerated depreciation claimed by the lessor of
such aircraft. Under the terms of indemnity agreements, if such tax benefits
were fully or partially disallowed, AWA's monthly obligation under the
agreements could be increased by up to approximately $15,000 per aircraft
(approximately $1,080,000 per year for all six aircraft) for the period from
1991 to 2013. The payment increase applicable to periods prior to the
determination of an indemnity obligation would be payable monthly over a
24-month period, with interest calculated at a specified prime rate. AWA is
unable to predict whether the Internal Revenue Service will prevail in matters
asserted against the lessor and, consequently, whether AWA will incur any
liability in connection with such claims or the amount of any such liability, if
incurred. Based on information and relevant documents available to AWA, however,
management currently believes that it is unlikely that the disposition of these
matters will have a material adverse effect on AWA's financial condition.
Following AWA's outsourcing of its heavy maintenance, on December 27, 1995
the IBT and five individuals commenced a lawsuit against AWA in the Federal
District Court for the Northern District of Arizona alleging that the individual
plaintiffs had been terminated because they were IBT committee members or open
supporters of the union and that AWA wrongfully terminated approximately 378
members of the mechanics and related craft or class in connection with the
outsourcing in violation of federal labor laws. In September 1996, the court
dismissed the claims of the four discharged mechanics who had signed release
agreements and found that the IBT did not have standing in its own behalf to
pursue a claim under the Railway Labor Act (the "RLA"). Later that month, the
IBT filed a second supplemental amended complaint seeking to assert claims under
the RLA on behalf of the current mechanics and the discharged mechanics who did
not sign releases. The main relief requested by the IBT is an injunction
requiring AWA to discontinue the subcontracting of heavy maintenance, and an
order of reinstatement for the discharged mechanics who did not release their
claims. The remaining plaintiff asserted an Arizona wrongful discharge claim and
sought punitive damages. The court's decision on AWA's motion to dismiss the
plaintiffs' second supplemental amended complaint is pending.
AWA is a named defendant in a number of additional lawsuits and proceedings
arising in the ordinary course of business. While the outcome of the
contingencies, lawsuits or other proceedings against AWA cannot be predicted
with certainty, management currently expects that any liability arising from
such matters, to the extent not provided for through insurance or otherwise,
will not have a material adverse effect on the financial results and operations
of AWA.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the executive officers and directors of AWA is
set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH AWA
---- --- -----------------
<S> <C> <C>
William A. Franke...... 60 Chairman of the Board
Richard R. Goodmanson.. 49 Director, President and Chief Executive Officer
Julia Chang Bloch...... 55 Director
Stephen F.
Bollenbach........... 54 Director
Frederick W. Bradley,
Jr. ................. 70 Director
James G. Coulter....... 37 Director
John F. Fraser......... 66 Director
John L. Goolsby........ 55 Director
Richard C. Kraemer..... 53 Director
John R. Power, Jr...... 41 Director
Larry L. Risley........ 52 Director
Frank B. Ryan.......... 60 Director
Richard P. Schifter.... 44 Director
John F. Tierney........ 52 Director
Raymond S. Troubh...... 71 Director
Ronald A. Aramini...... 51 Senior Vice President -- Operations
John R. Garel.......... 38 Senior Vice President -- Marketing and Sales
Stephen L. Johnson..... 40 Senior Vice President -- Legal Affairs
W. Douglas Parker...... 35 Senior Vice President and Chief Financial Officer
Michael R. Carreon..... 44 Vice President and Controller
C. A. Howlett.......... 53 Vice President -- Public Affairs
</TABLE>
DIRECTORS
Set forth below is information regarding AWA's directors:
WILLIAM A. FRANKE. Chairman of the Board (Executive Committee). Mr. Franke
was named Chairman of the Board of Directors of AWA in September 1992. From
January 1, 1994 to February 4, 1997, Mr. Franke served as AWA's Chief Executive
Officer and from May 23, 1996 to February 4, 1997 he served as AWA's President.
Mr. Franke also serves as Chairman of the Board and Chief Executive Officer of
Holdings. In addition to his responsibilities at AWA, Mr. Franke serves as
president of Franke & Company, Inc., a financial services company he has owned
since May 1987. Mr. Franke serves as a director of Phelps Dodge Corp., Central
Newspapers Inc., the Air Transport Association of America, Beringer Wine
Estates, Inc. and Mtel Latin America, Inc. Mr. Franke serves as a Director and
Chairman of the Board of Airplanes Limited and a controlling trustee and
chairman of Airplanes U.S. Trust, entities involved in aircraft financing and
leasing. Mr. Franke also serves as a managing partner of Newbridge Latin America
L.P. ("Newbridge"), an investment fund controlled by TPG Partners.
RICHARD R. GOODMANSON. Director, President and Chief Executive Officer.
Mr. Goodmanson joined AWA in June 1996 and became a member of AWA's Board of
Directors effective on October 15, 1996. Mr. Goodmanson also serves as President
and Director of Holdings. On February 4, 1997, Mr. Goodmanson was elected
President and Director of Holdings and President and Chief Executive Officer of
AWA. From 1992 until 1996, Mr. Goodmanson served as Senior Vice President of
Operations at Frito-Lay, Inc. From 1980 until 1992, Mr. Goodmanson served as a
principal at the consulting firm of McKinsey and Company, Inc.
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JULIA CHANG BLOCH. (Compensation Committee.) Ms. Bloch has been a member
of AWA's Board of Directors since August 26, 1994. Ms. Bloch also serves as a
director of Holdings. Ms. Bloch is currently the president of the United
States -- Japan Foundation. From June 1993 to June 1996, Ms. Bloch served as the
group executive vice president, corporate relations of Bank of America
Corporation. Ms. Bloch served as the U.S. Ambassador to Nepal from September
1989 through May 1993. Ms. Bloch is a board member of the American Refugee
Committee and the Himalaya Foundation and serves as a trustee of the Asian Art
Museum Foundation and the Asia Society.
STEPHEN F. BOLLENBACH. (Compensation Committee, Special Committee.) Mr.
Bollenbach has been a member of AWA's Board of Directors since August 26, 1994.
Mr. Bollenbach also serves as a director of Holdings. He has been president,
chief executive officer and a director of Hilton Hotels Corporation since
February 1996. He served as senior executive vice president and chief financial
officer of The Walt Disney Company from May 1995 to February 1996. Prior to May
1995, he was president and chief executive officer of Host Marriott Corp. He
served as executive vice president and chief financial officer of The Marriott
Corporation from 1992 until 1993. Mr. Bollenbach served as chief financial
officer of the Promus Companies from 1986 to 1990 and served as chief financial
officer for the Trump Organization from 1990 to 1992. Mr. Bollenbach is a
nominee for the Board of Directors of Time Warner, Inc. and serves as a director
of Ladbroke Group plc, Hilton Hotels Corporation and its subsidiaries, American
Gaming Association and Kmart Corporation.
FREDERICK W. BRADLEY, JR. (Compensation Committee, Executive Committee,
Special Committee.) Mr. Bradley has been a member of AWA's Board of Directors
since September 1992. Mr. Bradley also serves as a director of Holdings. Until
his retirement, Mr. Bradley was a senior vice president of Citibank/Citicorp's
Global Airline and Aerospace business. Mr. Bradley joined Citibank/Citicorp in
1958. In addition, Mr. Bradley is a member of the board of directors of Banner
Aerospace, First Citicorp Life Insurance Co., Shuttle, Inc. (USAir Shuttle) and
the Institute of Air Transport, Paris, France. Mr. Bradley also is chairman of
the board of directors of Aircraft Lease Portfolio Securitization 92-1 Ltd. and
Aircraft Lease Portfolio Securitization 94-1 Ltd. as well as President of IATA's
International Airline Training Fund of the United States.
JAMES G. COULTER. (Executive Committee.) Mr. Coulter has been a member of
AWA's Board of Directors since August 26, 1994. Mr. Coulter also serves as a
director of Holdings. Since 1992, Mr. Coulter has been a managing director of
Texas Pacific Group, an investment firm. From 1986 to August 1992, Mr. Coulter
was vice president of Keystone, Inc. (formerly Robert M. Bass Group, Inc.), a
private investment firm based in Fort Worth, Texas. From April 1993 until he
became a member of AWA's Board, Mr. Coulter was a member of the board of
directors of Continental. Mr. Coulter also serves as Co-Chairman of the Board of
Beringer Wine Estates, Inc. and is a director of Allied Waste Industries, Inc.,
Del Monte Holdings, Co. and Virgin Cinemas, Ltd.
JOHN F. FRASER. Mr. Fraser has been a member of AWA's Board of Directors
since August 26, 1994. Mr. Fraser also serves as a director of Holdings. Mr.
Fraser currently serves as vice chairman and director of Russel Metals, Inc.
(formerly Federal Industries Ltd.), and has served in such position since May
1995. Mr. Fraser joined Federal Industries Ltd. as president and chief executive
officer in 1978 and was elected chairman of the board in 1992. Mr. Fraser is a
director and chairman of the board of Air Canada, and a director of Bank of
Montreal, Centra Gas Manitoba Inc., Coca-Cola Beverages Ltd., Inter-City
Products Corporation, Shell Canada Limited, The Thomson Corporation and Manitoba
Telecom Services, Inc.
JOHN L. GOOLSBY. (Audit Committee, Special Committee.) Mr. Goolsby has
been a member of AWA's Board of Directors since August 26, 1994. Mr. Goolsby
also serves as a director of Holdings. He is the president and chief executive
officer of The Howard Hughes Corporation (formerly named Summa Corporation), a
subsidiary of the Rouse Company engaged in the development and management of
office and industrial buildings and large scale land development in Nevada and
Southern California. In addition, Mr. Goolsby serves as a director of Nevada
Power Company and Bank of America Nevada.
RICHARD C. KRAEMER. (Compensation Committee, Special Committee.) Mr.
Kraemer has been a member of AWA's Board of Directors since September 1992. Mr.
Kraemer also serves as a director of
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Holdings. Mr. Kraemer is currently president of Chartwell Capital, Inc., private
investment company. He served as Chief Executive Officer and President of UDC
Homes, Inc. ("UDC "), a Phoenix-based homebuilding company, from October 1994
until March 1996. Mr. Kraemer was President and Chief Operating Officer of UDC
from 1985 until October 1994. He was also a director of UDC from 1980 until
March 1996. UDC filed for protection under Chapter 11 of the Bankruptcy Code in
May 1995. The plan for the reorganization of UDC was confirmed by the bankruptcy
court on October 3, 1995 and consummated on November 16, 1995.
JOHN R. POWER, JR. (Executive Committee.) Mr. Power has been a member of
AWA's Board of Directors since August 26, 1994. Mr. Power also serves as a
director of Holdings. He is president of The Patrician Corporation, an
investment company. Prior to joining The Patrician Corporation, Mr. Power served
as senior manager at Continental Bank. Mr. Power also serves as a director of
NRS Services and a subsidiary of J.I. Case Corporation.
LARRY L. RISLEY. (Audit Committee.) Mr. Risley has been a member of AWA's
Board of Directors since August 26, 1994. Mr. Risley also serves as a director
of Holdings. He has been the chief executive officer and chairman of the board
of directors of Mesa since the founding of the company in 1983. From 1979 to
1982, Mr. Risley was president of Mesa Aviation Services, Inc.
FRANK B. RYAN. (Audit Committee.) Dr. Ryan has been a member of AWA's
Board of Directors since March 17, 1995. Dr. Ryan also serves as a director of
Holdings. Since August 1990, Dr. Ryan has been a professor of mathematics and of
computational and applied mathematics, and was formerly the vice president of
external affairs, of Rice University. From 1988 to 1990, Dr. Ryan served as
president and chief executive officer of Contex Electronics, Inc., an electronic
component manufacturing company. Dr. Ryan serves as a director of Danielson
Holding Corporation, Siena Holdings, Inc. and Sequoia Systems, Inc. and as a
governor advisor to Rice University.
RICHARD P. SCHIFTER. (Compensation Committee.) Mr. Schifter has been a
member of AWA's Board of Directors since August 26, 1994. Mr. Schifter also
serves as a director of Holdings. He has been a managing director of Texas
Pacific Group, an investment firm, since July 1994. Mr. Schifter serves of
counsel to the Washington, D.C. based law firm of Arnold & Porter, where he was
an associate from 1979 to 1986 and a partner from 1986 to July 1994. Mr.
Schifter serves on the board of directors of TPG Communications, Ryanair
Holdings plc and Mtel Latin America, Inc. and also serves as a managing partner
of Newbridge.
JOHN F. TIERNEY. Mr. Tierney has served as a member of AWA's Board of
Directors since December 1993. Mr. Tierney also serves as a director of
Holdings. Mr. Tierney is the assistant chief executive and finance director of
GPA and has served in such capacity since 1993. From 1981 to 1993, he served as
chief financial officer of GPA.
RAYMOND S. TROUBH. (Audit Committee.) Mr. Troubh has been a member of
AWA's Board of Directors since August 26, 1994. Mr. Troubh also serves as a
director of Holdings. He is a financial consultant and currently serves on the
board of directors of ADT Limited, ARIAD Pharmaceuticals, Inc., Becton,
Dickinson and Company, Diamond Offshore Drilling, Inc., Foundation Health
Corporation, General American Investors Company, The MicroCap Fund, Inc., Olsten
Corporation, Petrie Stores Corporation, Time Warner Inc., Triarc Companies, Inc.
and WHX Corporation.
EXECUTIVE OFFICERS
Set forth below is information regarding the executive officers of AWA
other than Mr. Franke and Mr. Goodmanson, who are described above.
RONALD A. ARAMINI. Senior Vice President -- Operations. Mr. Aramini joined
AWA in September 1996. From October 1993 until September 1996, Mr. Aramini
served as President and Chief Executive Officer of Allegheny Airlines, a
Pennsylvania-based regional airline subsidiary of US Air Group, Inc. Before
that, he served for three years at Air Wisconsin, including in positions as Vice
President -- Operations, Senior Vice President -- Operations, and President and
Chief Executive Officer. Prior to his position at Air Wisconsin, Mr. Aramini
served in various positions at Continental.
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JOHN R. GAREL. Senior Vice President -- Marketing and Sales. Mr. Garel
joined AWA in April 1995. From 1993 until early 1995, Mr. Garel was the Chief
Executive Officer of Cadmus Journal Services, a division of Cadmus
Communications. From 1990 until 1992, Mr. Garel served as Vice President,
Financial Planning and Analysis of Northwest Airlines and, thereafter, as Vice
President, Market Development and Area Marketing. Prior to that, Mr. Garel
worked for American Airlines in several management capacities.
STEPHEN L. JOHNSON. Senior Vice President -- Legal Affairs of both AWA and
Holdings. Mr. Johnson joined AWA in February 1995. From 1993 to 1994, Mr.
Johnson served as Senior Vice President and General Counsel to GE Capital
Aviation Services Limited. From 1989 to 1993 Mr. Johnson was employed by GPA,
from 1989 to 1991 as Vice President and Senior Counsel and from 1991 to 1993 as
Senior Vice President and General Counsel to GPA's Leasing Division. Prior to
joining GPA, Mr. Johnson was engaged in the private practice of law.
W. DOUGLAS PARKER. Senior Vice President and Chief Financial Officer of
both AWA and Holdings. Mr. Parker joined AWA in June 1995. From 1991 through
June of 1995, Mr. Parker worked in various capacities at Northwest Airlines,
including positions as Vice President -- Assistant Treasurer and Vice President
- -- Financial Planning and Analysis. From 1986 through 1991, Mr. Parker served in
various financial management positions at American Airlines.
MICHAEL R. CARREON. Vice President and Controller. Mr. Carreon joined AWA
in December 1994 as Senior Director -- Corporate Audit. On January 1, 1996, he
was appointed Vice President and Controller. From 1986 to 1994, Mr. Carreon held
accounting and audit-related management positions at United Airlines. Prior to
that, he served for five years in the Audit Services Practice of Arthur Andersen
& Co. in Chicago.
C. A. HOWLETT. Vice President -- Public Affairs of both AWA and Holdings.
Mr. Howlett joined AWA in January 1995. Prior to such time, Mr. Howlett
maintained a government relations practice as a principal at the law firm of
Lewis and Roca in Phoenix. Mr. Howlett's prior work experience has included
senior positions with Salt River Project, the City of Phoenix and The White
House where he served as special assistant to President Ronald Reagan for
intergovernmental affairs.
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CERTAIN TRANSACTIONS
AWA has certain alliance agreements with Continental and Mesa (the
"Alliance Agreements"). See "Business -- Operations". The Alliance Agreements
are designed to enhance AWA's growth in revenue passenger miles and operating
results. Continental and Mesa are principal stockholders of Holdings. AWA
entered into several agreements with Continental in 1994 and 1995 to implement
code-sharing arrangements and to coordinate ground handling operations. AWA paid
Continental approximately $21.7 million and received approximately $13.0 million
from Continental for such services in 1996. In September 1992, prior to Mesa
becoming a significant stockholder, AWA entered into a code-sharing agreement
with Mesa. Pursuant to this agreement, which establishes Mesa as a feeder
carrier for AWA at its hub in Phoenix, AWA assesses a per passenger charge for
facilities, reservations and other services from Mesa for enplanements on the
Mesa system. Such payments by Mesa to AWA totalled approximately $3.5 million
for 1996.
On October 14, 1994, AWA issued $13 million of its 11 1/4% Senior Unsecured
Notes due 2001 ("11 1/4% Notes") to Fidelity Management Trust Company and
certain of its affiliates ("Fidelity") and $10 million of such notes to Lehman
Brothers, Inc. ("Lehman") in satisfaction of certain claims and other
prepetition obligations totalling approximately $25 million held by Fidelity and
Lehman. Fidelity and Lehman are stockholders of Holdings. In connection with the
issuance of such notes, Fidelity and Lehman also received cash payments of $2.1
million and $1.3 million, respectively, representing the portion of claims and
other prepetition obligations not satisfied by the issuance of the notes and
other payments made in connection with the settlement of such claims. In
addition, Fidelity held an additional $100 million principal amount of the
11 1/4% Notes. In August 1995, AWA prepaid $48 million principal amount of the
11 1/4% Notes and exchanged the remaining $75 million principal amount of such
notes, held solely by Fidelity, for $75 million of AWA's 10 3/4% Senior
Unsecured Notes due 2005 (the "10 3/4% Notes"). In connection with such
transaction, Fidelity was paid a fee equal to 3 5/8% of the principal amount of
the new notes ($2,718,750). In the second quarter of 1996, AWA prepaid $25
million of the 10 3/4% Notes.
In February 1996, AWA helped facilitate the sale by certain principal
stockholders of 7,243,000 shares of its Class B Common Stock pursuant to AWA's
shelf registration statement filed with the Securities and Exchange Commission
(File No. 333-02129). The stockholders participating in such sale were TPG
Partners, TPG Parallel, Air Partners, Continental, Mesa and Lehman. Pursuant to
its obligations under a registration rights agreement entered into in August
1994, AWA entered into an underwriting agreement in connection with the
transaction containing customary provisions for transactions of such nature and
incurred expenses of approximately $250,000.
John F. Tierney, a director of Holdings and AWA, is the assistant chief
executive and finance director of GPA. AWA has entered into various aircraft
acquisitions and leasing arrangements with GPA at terms comparable to those
obtained from third parties for similar transactions. AWA currently leases eight
aircraft from GPA; the rental payments for such leases amounted to $29.5 million
for 1996. As of December 31, 1996, AWA was obligated to pay approximately $500
million under these leases which expire at various times throughout the year
2013.
In November 1996, the America West Airlines 1996-1 Pass Through Trusts
issued $218.6 million of pass through certificates representing fractional
undivided interests in such trusts. These certificates were issued to refinance
indebtedness incurred by the owner trustees of eight aircraft and three spare
engines (the "Equipment") which were subleased to AWA. Prior to the issuance of
the certificates, the Equipment was leased to certain United States subsidiaries
of GPA (the "GPA Subs," one of which is the Original Lessee), which subleased
the Equipment to AWA. As a result of the refinancing, the GPA Subs' interests
under leases between the owners of the Equipment and the GPA Subs were assigned
to AWA and the leases were amended and restated as leases between the owners and
AWA, with each GPA Sub being released from certain of its future obligations
thereunder.
Also as a result of the refinancing, GPA, the GPA Subs and AWA entered into
a Put Termination Agreement (the "Put Termination Agreement") which terminated
arrangements with GPA pursuant to which GPA could cause AWA to lease up to four
additional aircraft prior to June 30, 1999. Pursuant to the Put Termination
Agreement, AWA is obligated to make certain payments to the GPA Subs. For the
period from
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November 26, 1996 to December 31, 1996, the GPA Subs received $44,000 from AWA.
For the year 1997, the payments due to the GPA Subs under the Put Termination
Agreement are estimated to be $500,000. As compared to the payments AWA was
obligated to make under the prior subleases with respect to the Equipment, the
combined payments by AWA (i) under the Put Termination Agreement to the GPA Subs
and (ii) under the restated leases to the owners of the Equipment represent net
savings to AWA of approximately $8 million over the remaining 15-year term of
the leases. For the period from January 1, 1996, to November 26, 1996, payments
from AWA to the GPA Subs under the subleases relating to the Equipment totaled
approximately $30.4 million.
In connection with the transactions described in this Prospectus relating
to the issuance of the Certificates, the Put Termination Agreement will be
amended to provide for the obligation of AWA to pay the Original Lessee, over
the life of the Leases, certain amounts generally equal in the aggregate to (x)
the amounts which AWA would have been required to pay as monthly lease payments
under the subleases between AWA and the Original Lessee with respect to the
Aircraft (the "Prior Subleases", which will be terminated in connection with AWA
entering into the Leases) minus (y) the amount which AWA is required to pay as
Basic Rent under the Leases minus (z) an amount which results in a rent savings
to AWA, under the Leases as compared to the Prior Subleases, of approximately
$3.75 million. With respect to a particular Aircraft, an amount, generally equal
to the portion of the amount described in the preceding sentence to be paid with
respect to such Aircraft discounted to present value, must be paid in connection
with an Event of Loss (as defined herein) with respect thereto (as described
under "Description of the Equipment Notes -- The Leases -- Events of Loss").
Pursuant to the amendment of the Put Termination Agreement described above
and subject to a number of conditions specified therein, GPA will be obligated
to indemnify and reimburse AWA for certain of its costs and expenses (including
certain of those arising from indemnification obligations of AWA) incurred in
connection with the transactions contemplated by this Prospectus. In addition,
GPA has agreed to indemnify AWA against certain liabilities arising under
applicable securities laws with respect to certain information in this
Prospectus, and AWA has agreed to indemnify GPA against certain liabilities
arising under applicable securities laws with respect to certain other
information in this Prospectus.
After the consummation of the transaction described in this Prospectus, AWA
will continue to sublease four of its A320-200 aircraft from the Original
Lessee.
In May 1996, AWA purchased warrants to purchase 802,860 and 1,384,615
shares of AWA's Class B Common Stock from Continental and GPA, respectively, for
$6,531,266 and $11,609,997, respectively. As part of the holding company
formation transaction, the AWA warrants became rights to acquire shares of
Holdings' Class B Common Stock. In March 1997, AWA purchased warrants to
purchase 1,584,915, 159,580 and 167,028 shares of Holdings' Class B Common Stock
from TPG, TPG Parallel and Air Partners, respectively, for $11,062,706,
$1,113,868 and $1,165,855, respectively.
William A. Franke, Chairman of the Board of AWA and Chairman of the Board
and Chief Executive Officer of Holdings, serves as a Director and Chairman of
the Board of Airplanes Limited and the Controlling Trustee and Chairman of
Airplanes U.S. Trust. Such entities were formed to acquire indirectly certain
aircraft from GPA, two of which are leased indirectly to AWA. In 1997, AWA
expects to enter into leasing arrangements for two additional aircraft from
Airplanes U.S. Trust.
In 1994 and 1995, AWA loaned Mr. Franke $470,282 and $203,136,
respectively, for the purpose of enabling him to pay income taxes attributable
to certain grants of AWA's Class B Common Stock made to Mr. Franke in 1994. In
January 1996, AWA loaned Mr. Franke an additional $40,000 in connection with
such grants. The loans are each payable in two equal installments on September
26, 2000 and September 26, 2001. The 1994 loan bears interest (payable
semi-annually) at the rate of 8% per annum (11% per annum after maturity) and
the 1995 and 1996 loans bear interest at the rate of 6.02% per annum (10% per
annum after maturity). The loans are secured by a portion of the shares granted
to Mr. Franke, but are otherwise non-recourse to Mr. Franke.
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<PAGE> 62
In 1996, AWA loaned Mr. Franke $644,704 for the purpose of enabling him to
pay income taxes attributable to a grant of AWA's Class B Common Stock made to
him in 1996. The loan is payable in two equal installments on September 26, 2000
and September 26, 2001 and bears interest (payable semi-annually) at the rate of
5.65% per annum (10% per annum after maturity). The loan is secured by a portion
of the shares granted to Mr. Franke, but is otherwise nonrecourse to him.
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<PAGE> 63
DESCRIPTION OF THE CERTIFICATES
The Certificates offered hereby will be issued pursuant to four separate
Trust Supplements to be entered into between AWA and the Trustee pursuant to the
terms of the Basic Agreement. The following summary describes certain terms of
the Certificates, the Basic Agreement and the Trust Supplements, forms of which
have been filed as exhibits to the Registration Statement. The statements under
this caption are a summary and do not purport to be complete. The summary makes
use of terms defined in, and is qualified in its entirety by reference to, all
of the provisions of the Basic Agreement and the Trust Supplements. Except as
otherwise indicated, the following summary relates to each of the Trusts and the
Certificates issued by each Trust. The terms and conditions governing each of
the Trusts will be substantially the same, except as described under "--
Subordination" below and except that the principal amount, the interest rate,
scheduled repayments of principal and maturity date applicable to the Equipment
Notes held by each Trust and the Final Expected Distribution Date applicable to
each Trust will differ. Section references in parentheses are to the relevant
sections of the Basic Agreement, unless otherwise indicated.
GENERAL
The Certificates of each Trust will be issued in fully registered form only
and will be subject to the provisions described below under "-- Delivery and
Form; Book-Entry". (Section 3.01) Each Certificate will represent a fractional
undivided interest in the Trust created by the Pass Through Trust Agreement
pursuant to which such Certificate is issued. (Section 2.01) The Trust Property
will consist of (i) the Equipment Notes held in such Trust, all monies at any
time paid thereon and all monies due and to become due thereunder, (ii) the
rights of such Trust under the Intercreditor Agreement (including all monies
receivable in respect of such rights), (iii) except for the Class D Trust, all
monies receivable under the Liquidity Facility for such Trust and (iv) funds
from time to time deposited with the Trustee in accounts relating to such Trust.
(Section 1.01) Certificates will represent pro rata shares of the Equipment
Notes and other property held in the related Trust and will be issued in
denominations of $1,000 and integral multiples thereof, except one Certificate
which may be issued in a different denomination. (Sections 2.01 and 3.01)
The Certificates represent interests in the respective Trusts and all
payments and distributions thereon will be made only from the Trust Property of
the related Trust. (Section 3.08) The Certificates do not represent an interest
in or obligation of AWA or Holdings, any Trustee, Indenture Trustee, Owner
Trustee, Owner Participant, or any affiliate of any thereof. Each
Certificateholder by its acceptance of a Certificate agrees to look solely to
the income and proceeds from the Trust Property of the related Trust as provided
in the Pass Through Trust Agreements.
The Equipment Notes issued under an Indenture may be held in more than one
Trust and one Trust may hold Equipment Notes issued under more than one
Indenture.
SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Provider will be parties, on each
Distribution Date, so long as no Triggering Event shall have occurred (whether
or not continuing), all payments received by the Subordination Agent in respect
of the Equipment Notes and certain other payments will be distributed in the
following order: (a) payment of the Liquidity Obligations to the Liquidity
Provider and, if applicable to replenish Cash Collateral Accounts up to their
respective Required Amounts; (b) payment of Expected Distributions to the
holders of Class A Certificates; (c) payment of Expected Distributions to the
holders of Class B Certificates; (d) payment of Expected Distributions to the
holders of Class C Certificates; (e) payment of Expected Distributions to the
holders of Class D Certificates; and (f) payment of certain fees and expenses of
the Subordination Agent and each Trustee.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed in the following order: (a) to
reimburse the Subordination Agent, each Trustee, the Liquidity Provider, and any
Certificateholder, as the case may be, for the payment of Administration
Expenses; (b) to the Liquidity
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<PAGE> 64
Provider in payment of Liquidity Obligations and, so long as no Performing Note
Deficiency exists and no Liquidity Event of Default has occurred and is
continuing, to replenish Cash Collateral Accounts up to their respective
Required Amounts; (c) to reimburse the Subordination Agent, each Trustee and
each Certificateholder, as the case may be, for the payment of Certain Taxes and
Fees; (d) to pay Adjusted Expected Distributions to the holders of Class A
Certificates; (e) to pay Adjusted Expected Distributions to the holders of Class
B Certificates; (f) to pay Adjusted Expected Distributions to the holders of
Class C Certificates and (g) to pay Adjusted Expected Distributions to the
holders of Class D Certificates.
The priority of distributions after a Triggering Event will have the effect
in certain circumstances of distributing payments received in respect of one or
more junior series of Equipment Notes to more senior Classes of Certificates. If
this should occur, the interest accruing on the remaining Equipment Notes would
be less than the interest accruing on the remaining Certificates because the
Certificates would have a greater proportion of high interest rate junior
Classes of Certificates. As a result of such possible interest shortfalls, the
holders of one or more junior Classes of Certificates may not receive the full
amount due them after a Triggering Event even if all the Equipment Notes are
eventually paid in full.
PAYMENTS AND DISTRIBUTIONS
Payments of principal, Make-Whole Amount (if any) and interest with respect
to the Equipment Notes or other Trust Property held in each Trust will be
distributed by the Trustee to Certificateholders of such Trust on the date
receipt of such payment is confirmed except in the case of certain types of
Special Payments.
The Equipment Notes held in each Trust will accrue interest at the
applicable rate per annum for the Certificates issued by such Trust as set forth
on the cover page of this Prospectus, payable on January 2 and July 2 of each
year, commencing January 2, 1998, and such interest payments will be passed
through to Certificateholders of such Trust on each such date until the final
Distribution Date for such Trust, in each case subject to the Intercreditor
Agreement. Interest is calculated on the basis of a 360-day year consisting of
twelve 30-day months. Payments of interest on the Certificates to be issued by
each Trust (other than the Class D Trust) will be supported by a separate
Liquidity Facility to be provided by the Liquidity Provider for the benefit of
the holders of such Certificates in an amount sufficient to pay interest thereon
at the Stated Interest Rate for such Trust on three successive Regular
Distribution Dates. Notwithstanding the subordination provisions of the
Intercreditor Agreement, the Liquidity Facility for any Class of Certificates
does not provide for drawings thereunder to pay principal of or interest or
Make-Whole Amount on the Certificates of any other Class. Therefore, only the
holders of the Certificates to be issued by a particular Trust will be entitled
to receive and retain the proceeds of drawings under the Liquidity Facility for
such Trust. There is no Liquidity Facility for the Class D Trust. See
"Description of the Liquidity Facilities".
Payments of principal on the Equipment Notes held in each Trust are
scheduled to be received by the Trustee on January 2 or July 2 or both, in
certain years depending upon the terms of the Equipment Notes held in such
Trust, commencing January 2, 1998, in accordance with the principal repayment
schedule set forth herein in each case subject to the Intercreditor Agreement.
Scheduled payments of interest and principal on the Equipment Notes are herein
referred to as "Scheduled Payments", and January 2 and July 2 of each year are
herein referred to as "Regular Distribution Dates". See "Description of the
Equipment Notes -- Principal and Interest Payments". The Final Expected
Distribution Date for each Class of Certificates is set forth on the cover page
of this Prospectus.
The Trustee of each Trust will distribute, subject to the Intercreditor
Agreement, on each Regular Distribution Date to the Certificateholders of such
Trust all Scheduled Payments, the receipt of which is confirmed by the Trustee
on such Regular Distribution Date. Each Certificateholder of each Trust will be
entitled to receive a pro rata share of any distribution in respect of Scheduled
Payments made on the Equipment Notes held in such Trust. Each such distribution
of Scheduled Payments will be made by the Trustee of each Trust to the
Certificateholders of record of such Trust on the Record Date applicable to such
Scheduled Payment subject to certain exceptions. (Section 4.02) If a Scheduled
Payment is not received by the Trustee on a Regular Distribution Date but is
received within five days thereafter, it will be distributed to such holders of
record on the date received. If it is received after such five-day period, it
will be treated as a
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<PAGE> 65
Special Payment (as defined below) and distributed as described below, except
that payments received by the Trustee following default in respect of the
Equipment Notes on a Regular Distribution Date as a result of a drawing under
the Liquidity Facility shall be distributed on such Regular Distribution Date.
Any payment in respect of, or any proceeds of, any Equipment Note or the
Trust Indenture Estate under (and as defined in) each Indenture (other than a
Scheduled Payment) (each, a "Special Payment") will be scheduled to be
distributed to the Certificateholders on the first business day which follows
the later to occur of (x) the 22nd day after the date the Trustees receive
written notice from the Subordination Agent of such Special Payment or (y) the
date the Subordination Agent receives or expects to receive such Special Payment
(the "Special Distribution Date"). (Intercreditor Agreement, Section 2.4(a))
Each Trustee will mail notice to the Certificateholders of the applicable Trust
stating the scheduled Special Distribution Date, the related Record Date, the
amount of such Special Payment, and the reason for the Special Payment. In the
case of a redemption or purchase of the Equipment Notes held in the related
Trust, such notice will be mailed not less than 20 days prior to the date such
Special Payment is scheduled to be distributed, and in the case of any other
Special Payment, such notice will be mailed as soon as practicable after the
Trustee has confirmed that it has received funds for such Special Payment.
(Section 4.02(c)) Each distribution of a Special Payment, other than a final
distribution, on a Distribution Date for any Trust will be made by the Trustee
to the Certificateholders of record of such Trust on the Record Date applicable
to such Special Payment. (Section 4.02(b)) See "-- Indenture Events of Default
and Certain Rights Upon an Indenture Event of Default" and "Description of the
Equipment Notes -- Redemption".
Each Pass Through Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the Certificateholders of
such Trust, one or more accounts (the "Certificate Account") for the deposit of
payments representing Scheduled Payments on the Equipment Notes held in such
Trust. Each Pass Through Trust Agreement also requires that the Trustee
establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the "Special Payments
Account") for the deposit of payments representing Special Payments, which
account shall be non-interest bearing except in certain circumstances where the
Trustee may invest amounts in such account in certain permitted investments.
Pursuant to the terms of each Pass Through Trust Agreement, the Trustee is
required to deposit any Scheduled Payments relating to the applicable Trust
received by it in the Certificate Account of such Trust and to deposit any
Special Payments so received by it in the Special Payments Account of such
Trust. (Section 4.01) All amounts so deposited will be distributed by the
Trustee on a Regular Distribution Date or a Special Distribution Date, as
appropriate. (Section 4.02)
Distributions by the Trustee from the Certificate Account or the Special
Payments Account of each Trust on a Regular Distribution Date or a Special
Distribution Date in respect of Certificates issued by such Trust in definitive
form will be made to each Certificateholder of record of such Certificates on
the applicable Record Date. (Section 4.02) The final distribution for each
Trust, however, will be made only upon presentation and surrender of the
Certificates for such Trust at the office or agency of the Trustee specified in
the notice given by the Trustee of such final distribution. The Trustee will
mail such notice of the final distribution to the Certificateholders of such
Trust, specifying the date set for such final distribution and the amount of
such distribution. (Section 11.01) See "-- Termination of the Trusts".
Distributions in respect of Certificates issued in global form will be made as
described in "-- Delivery and Form; Book-Entry" below.
If any Regular Distribution Date or Special Distribution Date is not a
business day, distributions scheduled to be made on such Regular Distribution
Date or Special Distribution Date will be made on the next succeeding business
day without additional interest.
POOL FACTORS
Unless there has been a redemption, purchase or a default in the payment of
principal or interest in respect of one or more issues of the Equipment Notes
held in a Trust, as described in "-- Indenture Events of Default and Certain
Rights Upon an Indenture Event of Default" and "Description of the Equipment
Notes Redemption", the Pool Factor with respect to each Trust will decline in
proportion to the scheduled repayments of principal on the Equipment Notes held
in such Trust as described below in "Description of the
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<PAGE> 66
Equipment Notes -- General". In the event of such redemption, purchase or
default, the Pool Factor and the Pool Balance of each Trust so affected will be
recomputed after giving effect thereto and notice thereof will be mailed to the
Certificateholders of such Trust. Each Trust will have a separate Pool Factor.
The "Pool Balance" for each Trust or for the Certificates issued by any
Trust indicates, as of any date, the original aggregate face amount of the
Certificates of such Trust less the aggregate amount of all payments made in
respect of the Certificates of such Trust other than payments made in respect of
interest or Make-Whole Amount thereon or reimbursement of any costs and expenses
in connection therewith. The Pool Balance for each Trust or for the Certificates
issued by any Trust as of any Regular Distribution Date or Special Distribution
Date shall be computed after giving effect to the payment of principal, if any,
on the Equipment Notes or other Trust Property held in such Trust and the
distribution thereof to be made on that date. (Section 1.01)
The "Pool Factor" for each Trust as of any Regular Distribution Date or
Special Distribution Date is the quotient (rounded to the seventh decimal place)
computed by dividing (i) the Pool Balance of such Trust as of such date by (ii)
the original aggregate face amount of the Certificates of such Trust. The Pool
Factor for each Trust as of any Regular Distribution Date or Special
Distribution Date shall be computed after giving effect to the payment of
principal, if any, on the Equipment Notes or other Trust Property held in such
Trust and the distribution thereof to be made on that date. (Section 1.01)
Assuming that no redemption, purchase or default, in respect of any Equipment
Notes shall have occurred, the Pool Factor for each Trust will be 1.0000000 on
the date of issuance of the Certificates; thereafter, the Pool Factor for each
Trust will decline as described herein to reflect reductions in the Pool Balance
of such Trust. The amount of a Certificateholder's pro rata share of the Pool
Balance of a Trust can be determined by multiplying the par value of the
holder's Certificate of such Trust by the Pool Factor for such Trust as of the
applicable Regular Distribution Date or Special Distribution Date. Notice of the
Pool Factor and the Pool Balance for each Trust will be mailed to
Certificateholders of such Trust on each Regular Distribution Date and Special
Distribution Date. (Section 4.03)
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As of the date of sale by the Trustee of the Certificates and assuming that
no redemption, purchase or default in the payment of principal, in respect of
any Equipment Notes shall occur, the Scheduled Payments of principal on the
Equipment Notes held in the Class A Trust, the Class B Trust, the Class C Trust
and the Class D Trust, and the resulting Pool Factors for such Trusts after
taking into account each Scheduled Payment, are set forth below:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
TRUST TRUST TRUST
EQUIPMENT EQUIPMENT EQUIPMENT
NOTES CLASS A NOTES CLASS B NOTES CLASS C
SCHEDULED TRUST SCHEDULED TRUST SCHEDULED TRUST
PAYMENTS OF EXPECTED PAYMENTS EXPECTED PAYMENTS OF EXPECTED
DATES PRINCIPAL POOL FACTOR OF PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR
----- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
June 17, 1997................ $ 0 1.0000000 $ 0 1.0000000 $ 0 1.0000000
January 2, 1998.............. 1,068,314 0.9767434 400,626 0.9767429 400,624 0.9767431
July 2, 1998................. 0 0.9767434 0 0.9767429 0 0.9767431
January 2, 1999.............. 1,068,286 0.9534875 400,606 0.9534871 400,606 0.9534872
July 2, 1999................. 0 0.9534875 0 0.9534871 0 0.9534872
January 2, 2000.............. 1,068,240 0.9302325 400,588 0.9302322 400,588 0.9302323
July 2, 2000................. 0 0.9302325 0 0.9302322 0 0.9302323
January 2, 2001.............. 1,068,286 0.9069765 400,606 0.9069763 442,654 0.9045355
July 2, 2001................. 0 0.9069765 0 0.9069763 2,100,766 0.7825823
January 2, 2002.............. 1,068,286 0.8837206 400,606 0.8837204 2,407,534 0.6428206
July 2, 2002................. 0 0.8837206 0 0.8837204 4,096,740 0.4049976
January 2, 2003.............. 1,068,286 0.8604646 400,606 0.8604645 2,782,088 0.2434924
July 2, 2003................. 0 0.8604646 253,258 0.8457625 4,156,446 0.0022033
January 2, 2004.............. 1,068,286 0.8372086 3,469,322 0.6443621 37,954 0.0000000
July 2, 2004................. 0 0.8372086 4,744,512 0.3689347 0 0.0000000
January 2, 2005.............. 1,068,240 0.8139537 3,851,818 0.1453299 0 0.0000000
July 2, 2005................. 2,598,272 0.7573908 2,503,452 0.0000000 0 0.0000000
January 2, 2006.............. 5,289,582 0.6422397 0 0.0000000 0 0.0000000
July 2, 2006................. 5,483,446 0.5228683 0 0.0000000 0 0.0000000
January 2, 2007.............. 5,684,412 0.3991219 0 0.0000000 0 0.0000000
July 2, 2007................. 5,892,748 0.2708402 0 0.0000000 0 0.0000000
January 2, 2008.............. 6,108,716 0.1378570 0 0.0000000 0 0.0000000
July 2, 2008................. 6,332,600 0.0000000 0 0.0000000 0 0.0000000
<CAPTION>
CLASS D
TRUST
EQUIPMENT
NOTES CLASS D
SCHEDULED TRUST
PAYMENTS EXPECTED
DATES OF PRINCIPAL POOL FACTOR
----- ------------ -----------
<S> <C> <C>
June 17, 1997................ $ 0 1.0000000
January 2, 1998.............. 884,492 0.9344821
July 2, 1998................. 3,152,084 0.7009944
January 2, 1999.............. 1,410,556 0.5965087
July 2, 1999................. 3,406,386 0.3441839
January 2, 2000.............. 1,509,720 0.2323527
July 2, 2000................. 2,323,786 0.0602204
January 2, 2001.............. 473,090 0.0251767
July 2, 2001................. 339,886 0.0000000
January 2, 2002.............. 0 0.0000000
July 2, 2002................. 0 0.0000000
January 2, 2003.............. 0 0.0000000
July 2, 2003................. 0 0.0000000
January 2, 2004.............. 0 0.0000000
July 2, 2004................. 0 0.0000000
January 2, 2005.............. 0 0.0000000
July 2, 2005................. 0 0.0000000
January 2, 2006.............. 0 0.0000000
July 2, 2006................. 0 0.0000000
January 2, 2007.............. 0 0.0000000
July 2, 2007................. 0 0.0000000
January 2, 2008.............. 0 0.0000000
July 2, 2008................. 0 0.0000000
</TABLE>
Any failure to make expected principal distributions on any Class of
Certificates on any Regular Distribution Date (other than the Final Legal
Distribution Date) will not constitute a PTC Event of Default with respect to
such Certificates.
REPORTS TO CERTIFICATEHOLDERS
On each Regular Distribution Date and Special Distribution Date, the
applicable Trustee will include with each distribution of a Scheduled Payment or
Special Payment, respectively, to Certificateholders of the related Trust a
statement, giving effect to such distribution to be made on such Regular
Distribution Date or Special Distribution Date, setting forth the following
information (per $1,000 aggregate principal amount of Certificate for such
Trust, as to (i) and (ii) below):
(i) the amount of such distribution allocable to principal and the amount
allocable to Make-Whole Amount (if any);
(ii) the amount of such distribution allocable to interest; and
(iii) the Pool Balance and the Pool Factor for such Trust. (Section 4.03)
With respect to the Certificates registered in the name of DTC's nominee on
the Record Date prior to each Distribution Date, the applicable Trustee will
request from DTC a securities position listing setting forth the names of all
DTC Participants reflected on DTC's books as holding interests in the
Certificates on such Record Date. On each Distribution Date, the applicable
Trustee will mail to each such DTC Participant the statement described above and
will make available additional copies as requested by such DTC participant for
forwarding to holders of Certificates. (Section 4.03(a)) See "-- Delivery and
Form; Book-Entry".
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In addition, after the end of each calendar year, the applicable Trustee
will furnish to each Certificateholder of each Trust at any time during the
preceding calendar year a report containing the sum of the amounts determined
pursuant to clauses (i) and (ii) above with respect to the Trust for such
calendar year or, in the event such person was a Certificateholder during only a
portion of such calendar year, for the applicable portion of such calendar year,
and such other items as are readily available to such Trustee and which a
Certificateholder shall reasonably request as necessary for the purpose of such
Certificateholder's preparation of its U.S. federal income tax returns. With
respect to Certificates registered in the name of DTC's nominee, such report and
such other items shall be prepared on the basis of information supplied to the
applicable Trustee by the DTC Participants and shall be delivered by such
Trustee to such DTC Participants to be available for forwarding by such DTC
Participants to Certificate Owners in the manner described above. (Section
4.03(b))
INDENTURE EVENTS OF DEFAULT AND CERTAIN RIGHTS UPON AN INDENTURE EVENT OF
DEFAULT
An event of default under an Indenture (an "Indenture Event of Default")
will include an event of default under the related Lease (a "Lease Event of
Default"). See "Description of Equipment Notes -- Indenture Events of Default;
Notice and Waiver". Since the Equipment Notes issued under an Indenture will be
held in more than one Trust, a continuing Indenture Event of Default under such
Indenture would affect the Equipment Notes held by each such Trust. There are no
cross-default provisions in the Indentures or the Leases. Consequently, events
resulting in an Indenture Event of Default under any particular Indenture may or
may not result in an Indenture Event of Default under any other Indenture. If an
Indenture Event of Default occurs in fewer than all of the Indentures,
notwithstanding the treatment of Equipment Notes issued under any Indenture
under which an Indenture Event of Default has occurred, payments of principal
and interest on the Equipment Notes issued pursuant to Indentures with respect
to which an Indenture Event of Default has not occurred will continue to be
distributed to the holders of the Certificates as originally scheduled, subject
to the Intercreditor Agreement. See "Description of the Intercreditor Agreement
- -- Priority of Distributions".
With respect to each Aircraft, the applicable Owner Trustee and Owner
Participant will, under the related Indenture, have the right under certain
circumstances to cure Indenture Events of Default that result from the
occurrence of a Lease Event of Default under the related Lease. If the Owner
Trustee or the Owner Participant exercises any such cure right, the Indenture
Event of Default will be deemed to have been cured.
Because the Equipment Notes outstanding under an Indenture will be held by
more than one Trust, the ability of the Certificateholders with respect to any
one Trust to cause the Indenture Trustee with respect to any Equipment Notes
held in such Trust to accelerate the Equipment Notes under the related Indenture
or to direct the exercise of remedies by the Indenture Trustee under the related
Indenture will depend, in part, upon the proportion between the aggregate unpaid
principal amount of the Equipment Notes outstanding under such Indenture and
held in such Trust and the aggregate unpaid principal amount of all Equipment
Notes outstanding under such Indenture. Because the Equipment Notes outstanding
under an Indenture will be held by more than one Trust, each Trust will hold
Equipment Notes with different terms from the Equipment Notes held in the other
Trusts and therefore the Certificateholders of a Trust may have divergent or
conflicting interests from those of the Certificateholders of the other Trusts
holding Equipment Notes relating to the same Indenture.
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Event of Default. In such event, one or more Trustees may resign as
Trustee of one or all such Trusts, and a successor trustee would then be
appointed in accordance with the terms of the applicable Pass Through Trust
Agreement. Fleet National Bank will be the initial Trustee under each Trust.
Upon the occurrence and during the continuation of any Indenture Event of
Default under any Indenture, the Controlling Party shall direct the Indenture
Trustee under such Indenture in the exercise of remedies thereunder and may
accelerate and sell all (but not less than all) of the Equipment Notes issued
under such Indenture to any person, subject to certain limitations. See
"Description of the Intercreditor Agreement --
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<PAGE> 69
Sale of Equipment Notes and Aircraft". The proceeds of such sale will be
distributed pursuant to the provisions of the Intercreditor Agreement. Any
proceeds received by the applicable Trustee upon any such sale shall be
deposited in the applicable Special Payments Account and shall be distributed to
the Certificateholders of such Trust on a Special Distribution Date. (Sections
4.01 and 4.02) The market for Equipment Notes at the time of the existence of
any Indenture Event of Default may be very limited, and there can be no
assurance as to the price at which they could be sold. If the Controlling Party
sells any such Equipment Notes for less than their outstanding principal amount,
certain Certificateholders will receive a smaller amount of principal
distributions than anticipated and will not have any claim for the shortfall
against AWA, any Owner Trustee, any Owner Participant or any Trustee.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date, distributed to the Trustee of any Trust by the Subordination
Agent on account of the Equipment Notes or other Trust Property held in such
Trust following an Indenture Event of Default under any Indenture shall be
deposited in the Special Payments Account for such Trust and shall be
distributed to the Certificateholders of such Trust on a Special Distribution
Date. (Sections 4.01 and 4.02) In addition, if, following an Indenture Event of
Default under any Indenture, the applicable Owner Participant or Owner Trustee
exercises its option to purchase the outstanding Equipment Notes issued under
such Indenture, the price paid by such Owner Participant or Owner Trustee for
the Equipment Notes issued under such Indenture and distributed to such Trust by
the Subordination Agent shall be deposited in the Special Payments Account for
such Trust and shall be distributed to the Certificateholders of such Trust on a
Special Distribution Date. (Sections 4.01 and 4.02)
Any funds representing payments received with respect to any defaulted
Equipment Notes held in a Trust, or the proceeds from the sale of any Equipment
Notes, held by such Trustee in the Special Payments Account for such Trust
shall, to the extent practicable, be invested and reinvested by such Trustee in
Permitted Investments pending the distribution of such funds on a Special
Distribution Date. (Section 4.04) Permitted Investments are defined as
obligations of the United States or agencies or instrumentalities thereof the
payment of which is backed by the full faith and credit of the United States and
which mature in not more than 60 days or such lesser time as is required for the
distribution of any such funds on a Special Distribution Date. (Section 1.01)
Each Pass Through Trust Agreement provides that the Trustee of the related
Trust shall, within 90 days after the occurrence of any default, give to the
Certificateholders of such Trust notice, transmitted by mail, of all uncured or
unwaived defaults with respect to such Trust known to it, provided that, except
in the case of default in the payment of principal, Make-Whole Amount, if any,
or interest on any Equipment Note the applicable Trustee shall be protected in
withholding such notice if and so long as it in good faith determines that the
withholding of such notice is in the interests of such Certificateholders.
(Section 7.01) The term "default" as used in this paragraph with respect to any
Trust only means the occurrence of an Indenture Event of Default under any
Indenture pursuant to which Equipment Notes held by such Trust were issued, as
described above, except that in determining whether any such Indenture Event of
Default has occurred, any grace period or notice in connection therewith shall
be disregarded.
Each Pass Through Trust Agreement contains a provision entitling the
Trustee of the related Trust, subject to the duty of such Trustee during a
default to act with the required standard of care, to be offered reasonable
security or indemnity by the holders of the Certificates of such Trust before
proceeding to exercise any right or power under such Pass Through Agreement at
the request of such Certificateholders. (Section 7.02(e))
In certain cases, the holders of the Certificates of a Trust evidencing
fractional undivided interests aggregating not less than a majority in interest
of such Trust may on behalf of the holders of all the Certificates of such Trust
waive any past default under the related Pass Through Trust Agreement or, if the
Trustee of such Trust is the Controlling Party, may direct the Trustee to
instruct the applicable Indenture Trustee to waive any past Indenture Event of
Default with respect to Equipment Notes held in such Trust and thereby annul any
direction given by such holders or the Trustee to such Indenture Trustee with
respect thereto, except (i) a default in the deposit of any Scheduled Payment or
Special Payment or in the distribution thereof, (ii) a default in payment of the
principal, Make-Whole Amount, if any, or interest with
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respect to any of the Equipment Notes held in such Trust and (iii) a default in
respect of any covenant or provision of the related Pass Through Trust Agreement
that cannot be modified or amended without the consent of each Certificateholder
of such Trust affected thereby. (Section 6.05) Each Indenture will provide that,
with certain exceptions, the holders of the majority in aggregate unpaid
principal amount of the Equipment Notes issued thereunder may on behalf of all
such holders waive any past Indenture Event of Default thereunder.
Notwithstanding the foregoing provisions of this paragraph, however, pursuant to
the Intercreditor Agreement, only the Controlling Party will be entitled to
waive any such past default or Indenture Event of Default.
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each other Certificateholder of the
same Class, (i) the Class B Certificateholders shall have the right to purchase
all, but not less than all, of the Class A Certificates, (ii) the Class C
Certificateholders shall have the right to purchase all, but not less than all,
of the Class A Certificates and the Class B Certificates and (iii) the Class D
Certificateholders shall have the right to purchase all, but not less than all,
of the Class A Certificates, the Class B Certificates and the Class C
Certificates, in each case at a purchase price equal to the Pool Balance of the
relevant Class or Classes of Certificates plus accrued and unpaid interest
thereon to the date of purchase without any Make-Whole Amount but including any
other amounts due to the Certificateholders of such Class or Classes. In each
case, if prior to the end of the ten-day period, any other Certificateholder of
the same Class notifies the purchasing Certificateholder that the other
Certificateholder wants to participate in such purchase, then such other
Certificateholder may join with the purchasing Certificateholder to purchase the
Certificates pro rata based on the interest in the Trust held by each
Certificateholder. (Section 6.01(b))
PTC EVENT OF DEFAULT
A PTC Event of Default is defined under each Pass Through Trust Agreement
as the failure to pay within 10 business days of the due date thereof: (i) the
outstanding Pool Balance of the applicable Class of Certificates on the Final
Legal Distribution Date for such Class or (ii) interest due on such Class of
Certificates on any Distribution Date (unless, in the case of the Class A, B or
C Certificates, the Subordination Agent shall have made an Interest Drawing with
respect thereto in an amount sufficient to pay such interest and shall have
distributed such amount to the Certificateholders entitled thereto). A PTC Event
of Default with respect to the most senior Class of Certificates resulting from
an Indenture Event of Default under all Indentures will constitute a Triggering
Event.
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
AWA will be prohibited from consolidating with or merging into any other
corporation or transferring substantially all of its assets as an entirety to
any other corporation unless (i) the surviving successor or transferee
corporation shall (a) be a "citizen of the United States" as defined in Section
40102(a)(15) of Title 49 of the United States Code, as amended, relating to
aviation (the "Federal Aviation Act"), (b) be a United States certificated air
carrier and (c) expressly assume all of the obligations of AWA contained in the
Pass Through Trust Agreements, the Refunding Agreements, the Indentures, the
Leases, and certain related documents; (ii) immediately after giving effect to
such transaction, no Indenture Event of Default shall have occurred and be
continuing; and (iii) AWA shall have delivered a certificate and an opinion or
opinions of counsel indicating that such transaction complies with such
conditions. (Section 5.02)
The Pass Through Trust Agreements, the Leases, the Indentures and the
Refunding Agreements will not contain any covenants or provisions which may
afford the applicable Trustee or Certificateholders protection in the event of a
highly leveraged transaction, including transactions effected by management or
affiliates, which may or may not result in a change in control of AWA.
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MODIFICATIONS OF THE PASS THROUGH TRUST AGREEMENTS AND CERTAIN OTHER AGREEMENTS
Each Pass Through Trust Agreement contains provisions permitting the
execution by AWA and the Trustee of one or more agreements supplemental to such
Pass Through Trust Agreement or, if applicable, to the Intercreditor Agreement,
any Refunding Agreement, any Liquidity Facility or any Indenture, without the
consent of the holders of any of the Certificates of the related Trust, (i) to
evidence the succession of another corporation to AWA and the assumption by such
corporation of AWA's obligations under such Pass Through Trust Agreement, (ii)
to add to the covenants of AWA for the benefit of holders of such Certificates
or to surrender any right or power in such Pass Through Trust Agreement
conferred upon AWA, (iii) to correct or supplement any provision of such Pass
Through Trust Agreement, the Intercreditor Agreement, any Refunding Agreement,
any Liquidity Facility or any Indenture which may be defective or inconsistent
with any other provision in such Pass Through Trust Agreement or to cure any
ambiguity, correct any mistake, or to modify any other provisions with respect
to matters or questions arising under such Pass Through Trust Agreement, the
Intercreditor Agreement, any Refunding Agreement, any Liquidity Facility or any
Indenture, provided such action shall not materially adversely affect the
interests of the holders of such Certificates, (iv) to add to such Pass Through
Trust Agreement such other provisions as may be expressly permitted by the Trust
Indenture Act and (v) to provide for a successor Trustee or to add to or change
any provision of such Pass Through Trust Agreement as shall be necessary to
facilitate the administration of the Trust thereunder by more than one Trustee,
provided that in each case, such modification does not adversely affect the
status of the Trust as a grantor trust under Subpart E, Part I of Subchapter J
of Chapter 1 of Subtitle A of the Code for U.S. federal income tax purposes.
(Section 9.01)
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the Certificates of the related
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust, and with the consent of the applicable Owner
Trustee (such consent not to be unreasonably withheld), of supplemental trust
agreements adding any provisions to or changing or eliminating any of the
provisions of such Pass Through Trust Agreement or, if applicable, the
Intercreditor Agreement, any Liquidity Facility or any Refunding Agreement or
modifying the rights of the Certificateholders, except that no such supplemental
agreement may, without the consent of the holder of each Certificate so affected
thereby, (a) reduce in any manner the amount of, or delay the timing of, any
receipt by the Trustee of payments on the Equipment Notes held in such Trust or
distributions in respect of any Certificate related to such Trust, or change the
date or place of any payment in respect of any Certificate, or make
distributions payable in coin or currency other than that provided for in such
Certificates, or impair the right of any Certificateholder of such Trust to
institute suit for the enforcement of any such payment when due, (b) permit the
disposition of any Equipment Note held in such Trust, except as provided in such
Pass Through Trust Agreement, or otherwise deprive any Certificateholder of the
benefit of the ownership of the applicable Equipment Notes, (c) alter the
priority of distributions specified in the Intercreditor Agreement, (d) reduce
the percentage of the aggregate fractional undivided interests of the Trust
provided for in such Pass Through Trust Agreement, the consent of the holders of
which is required for any such supplemental agreement or for any waiver provided
for in such Pass Through Trust Agreement, (e) modify any of the provisions
relating to supplemental agreements that may be executed with the consent of
Certificateholders as described in this paragraph or relating to the rights of
the Certificateholders in respect of the waiver of Events of Default or receipt
of payment or (f) adversely affect the status of the Trust as a grantor trust
under Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code
for U.S. federal income tax purposes. (Section 9.02)
TERMINATION OF THE TRUSTS
The obligations of AWA, if any, and the Trustee with respect to a Trust
will terminate upon the distribution to Certificateholders of such Trust of all
amounts required to be distributed to them pursuant to the applicable Pass
Through Trust Agreement and the disposition of all property held in such Trust.
The Trustee will send to each Certificateholder of record of such Trust notice
of the termination of such Trust, the amount of the proposed final payment and
the proposed date for the distribution of such final payment for such Trust. The
final distribution to any Certificateholder of such Trust will be made only upon
surrender of such
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Certificateholder's Certificates at the office or agency of the applicable
Trustee specified in such notice of termination. (Section 11.01)
THE TRUSTEE
Fleet National Bank will act as Trustee and as paying agent and registrar
for the Certificates of each Trust. With certain exceptions, the Trustee makes
no representations as to the validity or sufficiency of the Basic Agreement, the
Trust Supplements, the Refunding Agreements, the Intercreditor Agreement, the
Certificates, the Equipment Notes, the Indentures, the Leases or other related
documents. (Sections 7.03 and 7.14) The Trustee of any Trust shall not be
liable, with respect to the Certificates of such Trust, for any action taken or
omitted to be taken by it in good faith in accordance with the direction of the
holders of a majority in principal amount of outstanding Certificates of such
Trust. Subject to certain provisions, the Trustee shall be under no obligation
to exercise any of its rights or powers under any Pass Through Trust Agreement
at the request of any holders of Certificates issued thereunder unless there
shall have been offered to the Trustee reasonable indemnity. (Section 7.02(e))
Each Pass Through Trust Agreement provides that the Trustee, in its individual
or any other capacity, may acquire and hold Certificates issued thereunder and,
subject to certain conditions, may otherwise deal with AWA, any Owner Trustees
or the Indenture Trustees with the same rights it would have if it were not the
Trustee. (Section 7.04)
The Trustee may resign with respect to any or all of the Trusts at any
time, in which event AWA will be obligated to appoint a successor trustee. If
the Trustee ceases to be eligible to continue as Trustee with respect to a Trust
or becomes incapable of acting as Trustee or becomes insolvent, AWA may remove
such Trustee, or, alternatively, any Certificateholder of such Trust for at
least six months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of such Trustee and
the appointment of a successor trustee. (Sections 7.07 and 7.08) Any resignation
or removal of the Trustee with respect to a Trust and appointment of a successor
trustee for such Trust does not become effective until acceptance of the
appointment by the successor trustee. Pursuant to such resignation and successor
trustee provisions, it is possible that a different trustee could be appointed
to act as the successor trustee with respect to each Trust. All references in
this Prospectus to the Trustee should be read to take into account the
possibility that the Trusts could have different successor trustees in the event
of such a resignation or removal.
The Basic Agreement provides that AWA will pay, or cause to be paid, the
Trustee's fees and expenses and indemnify, or cause to be indemnified, the
Trustee against certain liabilities. (Section 7.06)
DELIVERY AND FORM; BOOK-ENTRY
GENERAL
Upon issuance, each Class of Certificates will be represented by one or
more fully registered global certificates (the "Global Certificates"). Each
Global Certificate will be deposited with, or on behalf of, The Depository Trust
Company ("DTC ") and registered in the name of Cede & Co. ("Cede") or its
nominee. No person acquiring an interest in such Global Certificates
("Certificate Owner") will be entitled to receive a certificate representing
such person's interest in such Certificates, except as set forth below under "--
Definitive Certificates." Unless and until Definitive Certificates are issued
under the limited circumstances described herein, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants (as defined below), and all references herein to distributions,
notices, reports and statements to Certificateholders shall refer, as the case
may be, to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of such Global Certificates, or to DTC Participants for
distribution to Certificate Owners in accordance with DTC procedures.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and
"clearing agency" registered pursuant to section 17A of the Exchange Act. DTC
was created to hold securities for its participants ("DTC Participants") and to
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entries, thereby eliminating the need for
physical transfer of certificates. DTC Participants include securities brokers
and
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dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
DTC Participant either directly or indirectly ("Indirect Participants").
Certificate Owners that are not DTC Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, the Global Certificates may do so only through DTC Participants
and Indirect Participants. In addition, Certificate Owners will receive all
distributions of principal and interest from the Trustee through DTC
Participants or Indirect Participants, as the case may be. Under a book-entry
format, Certificate Owners may experience some delay in their receipt of
payments, because such payments will be forwarded by the Trustee to Cede, as
nominee for DTC. DTC will forward such payments in same-day funds to DTC
Participants who are credited with ownership of the Certificates in amounts
proportionate to the principal amount of each such DTC Participant's respective
holdings of beneficial interests in the Global Certificates. DTC Participants
will thereafter forward payments to Indirect Participants or Certificate Owners,
as the case may be, in accordance with customary industry practices. The
forwarding of such distributions to the Certificate Owners will be the
responsibility of such DTC Participants. Unless and until the Definitive
Certificates are issued under the limited circumstances described herein, the
only "Certificateholder" will be Cede, as nominee of DTC. Certificate Owners
will not be recognized by the Trustee as Certificateholders, as such term is
used in the Basic Agreement, and Certificate Owners will be permitted to
exercise the rights of Certificateholders only indirectly through DTC and DTC
Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
the Certificates among DTC Participants on whose behalf it acts with respect to
the Certificates and to receive and transmit distributions of principal,
Make-Whole Amount, if any, and interest with respect to the Certificates. DTC
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Certificates similarly are required to make book-
entry transfers and receive and transmit such payments on behalf of their
respective customers. Accordingly, although Certificate Owners will not possess
the Certificates, the Rules provide a mechanism by which Certificate Owners will
receive payments and will be able to transfer their interests.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect Participants, the ability of a Certificate Owner to pledge
the Certificates to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to such Certificates, may be limited
due to the lack of a physical certificate for such Certificates.
DTC will take any action permitted to be taken by a Certificateholder under
the Basic Agreement only at the direction of one or more DTC Participants to
whose accounts with DTC the Certificates are credited. Additionally, DTC has
advised that in the event any action requires approval by Certificateholders of
a certain percentage of beneficial interest in each Trust, DTC will take such
action only at the direction of and on behalf of DTC Participants whose holders
include undivided interests that satisfy any such percentage. DTC may take
conflicting actions with respect to other undivided interests to the extent that
such actions are taken on behalf of DTC Participants whose holders include such
undivided interests.
Neither AWA nor the Trustee will have any liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Certificates held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that AWA believes to be reliable, but AWA takes
no responsibility for the accuracy thereof.
DEFINITIVE CERTIFICATES
Certificates will be issued in certificated form ("Definitive
Certificates") to Certificate Owners or their nominees, rather than to DTC or
its nominee, only if (i) DTC advises the Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as depository
with respect to such Certificates and AWA is unable to locate a qualified
successor, (ii) AWA, at its option, elects to terminate the book-entry system
through DTC or (iii) after the occurrence of an Indenture Event of Default,
Certificate Owners with
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fractional undivided interests aggregating not less than a majority in interest
in such Trust advise the Trustee, AWA and DTC through DTC Participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the Certificate Owners' best interest. (Section
3.09(c))
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Certificate Owners through
DTC Participants of the availability of Definitive Certificates. Upon surrender
by DTC of the certificates representing the Certificates and receipt of
instructions for re-registration, the Trustee will reissue the Certificates as
Definitive Certificates to Certificate Owners. (Section 3.09(c))
Distributions of principal, Make-Whole Amount, if any, and interest with
respect to Certificates will thereafter be made by the Trustee directly in
accordance with the procedures set forth in the Basic Agreement and the
applicable Trust Supplements, to holders in whose names the Definitive
Certificates were registered at the close of business on the applicable record
date. Such distributions will be made by check mailed to the address of such
holder as it appears on the register maintained by the Trustee. (Section
4.02(a)) The final payment on any Certificate, however, will be made only upon
presentation and surrender of such Certificate at the office or agency specified
in the notice of final distribution to Certificateholders. (Section 11.01)
Definitive Certificates will be freely transferable and exchangeable at the
office of the Trustee upon compliance with the requirements set forth in the
Pass Through Trust Agreements. No service charge will be imposed for any
registration of transfer or exchange, but payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in connection therewith
shall be required. (Section 3.04)
If any Definitive Certificate at any time is mutilated, destroyed, stolen
or lost, such Definitive Certificate may be replaced at the cost of the
applicant (including a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any fees and expenses of the
Trustee and any registrar) at the office of the Trustee or the registrar, if
applicable, upon provision of evidence satisfactory to the Trustee or the
registrar, if applicable, that such Definitive Certificate was destroyed, stolen
or lost, together with such indemnity as the Trustee and the registrar may
require. Mutilated Definitive Certificates must be surrendered before
replacements will be issued. (Section 3.05)
CERTIFICATE AS TO COMPLIANCE
Each Pass Through Trust Agreement provides that AWA is required to furnish
to the Trustee, not less often than annually, a brief certificate from the
principal executive officer, principal financial officer or principal accounting
officer as to his or her knowledge of AWA's compliance with all conditions and
covenants under such Pass Through Trust Agreement (for such purposes, such
compliance shall be determined without regard to any period of grace or
requirement of notice provided under such Pass Through Trust Agreement).
(Section 8.04(d))
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DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes certain terms of the Liquidity Facilities
and certain provisions of the Intercreditor Agreement relating to the Liquidity
Facilities. Forms of the Liquidity Facilities and the Intercreditor Agreement
have been filed as exhibits to the Registration Statement. The statements under
this caption are a summary and do not purport to be complete. The summary makes
use of terms defined in, and is qualified in its entirety by reference to, all
of the provisions of the Liquidity Facilities and the Intercreditor Agreement.
The provisions of the Liquidity Facilities are substantially identical except as
otherwise indicated. Section references in parentheses are to relevant sections
of the Liquidity Facilities and the Intercreditor Agreement.
GENERAL
With respect to the Certificates to be issued by each Trust (other than the
Class D Trust), the Subordination Agent will enter into a separate Liquidity
Facility with the Liquidity Provider pursuant to which the Liquidity Provider
will make one or more advances to the Subordination Agent to pay interest on
such Certificates subject to certain limitations. The Liquidity Facility for
each Trust is intended to enhance the likelihood of timely receipt by the
Certificateholders of such Trust of the interest payable on the Certificates of
such Trust at the Stated Interest Rate therefor on three consecutive Regular
Distribution Dates. If interest payment defaults occur which exceed the amount
covered by or available under the Liquidity Facility for any Trust, the
Certificateholders of such Trust will bear their allocable share of the
deficiencies to the extent that there are no other sources of funds. Although
Kredietbank N.V., acting through its New York branch, is the Liquidity Provider
for each Trust entitled to the benefits of a Liquidity Facility, it may be
replaced by another entity with respect to one or more such Trusts under certain
circumstances. Therefore, the Liquidity Provider for a given Trust at any given
time may be different from the Liquidity Provider for any other Trust.
DRAWINGS
The initial stated amount available under the Liquidity Facilities for the
Class A Trust, the Class B Trust and the Class C Trust will be $5,190,959,
$1,965,200 and $1,999,723, respectively. Except as otherwise provided below, the
Liquidity Facility for each Trust will enable the Subordination Agent to make
Interest Drawings thereunder promptly after any Regular Distribution Date to pay
interest then due and payable on the Certificates of such Trust at the Stated
Interest Rate for such Trust to the extent that the amount, if any, available to
the Subordination Agent on such Regular Distribution Date is not sufficient to
pay such interest; provided, however, that the maximum amount available to be
drawn at any time under such Liquidity Facility to fund any shortfall of
interest on such Certificates will not exceed the Required Amount with respect
to such Liquidity Facility. The Liquidity Facility for any Trust does not
provide for drawings thereunder to pay for principal of, or Make-Whole Amount on
the Certificates of such Trust or any interest on the Certificates of such Trust
in excess of the Stated Interest Rate or principal of or interest or Make-Whole
Amount on, the Certificates of any other Trust. (Liquidity Facilities, Section
2.2; Intercreditor Agreement, Section 3.6)
Each payment by the Liquidity Provider under each Liquidity Facility
reduces pro tanto the amount available to be drawn under such Liquidity
Facility, subject to reinstatement as hereinafter described. With respect to any
Interest Drawings under the Liquidity Facility for any Trust, upon reimbursement
of the Liquidity Provider in full for the amount of such Interest Drawings plus
interest thereon, the amount available to be drawn under such Liquidity Facility
in respect of interest on the Certificates of such Trust shall be reinstated to
the then Required Amount of such Liquidity Facility; provided, however, that
such Liquidity Facility shall not be so reinstated at any time if (i) a
Liquidity Event of Default shall have occurred and be continuing or (ii) both
(A) a Triggering Event shall have occurred and be continuing and (B) a
Performing Note Deficiency exists. With respect to any other drawings under such
Liquidity Facility, amounts available to be drawn thereunder are not subject to
reinstatement. The stated amount of the Liquidity Facility for any Trust will be
automatically reduced from time to time to an amount equal to the next three
successive interest payments due on the Certificates of such Trust (without
regard to expected future payment of principal of such Certificates) at the
Stated Interest Rate for such Trust. The Liquidity Provider will be paid a fee
on the average amount available to be drawn under the initial Liquidity Facility
until the earlier of the date when the
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commitment under the Liquidity Facility terminates and the date when a Downgrade
Drawing, if any, is made, in an amount and on the dates specified in the
Liquidity Facilities. (Liquidity Facilities, Sections 2.2, 2.3 and 2.4(a);
Intercreditor Agreement, Section 3.6(g) and (j))
If at any time the debt rating of the Liquidity Provider issued by either
Rating Agency is lower than the applicable Threshold Rating, then the Liquidity
Provider for the related Trust or the Subordination Agent, in consultation with
AWA (whose recommendations the Subordination Agent will accept), may arrange for
a Replacement Facility (as defined below). In the event that such Liquidity
Facility is not replaced with a Replacement Facility within the period specified
in the Intercreditor Agreement after notice of the downgrading and as otherwise
provided in the Intercreditor Agreement, the Subordination Agent shall request
the Downgrade Drawing in an amount equal to all available and undrawn amounts
thereunder and shall hold the proceeds thereof in the Cash Collateral Account
for such Trust as cash collateral to be used for the same purposes and under the
same circumstances as cash payments of Interest Drawings under such Liquidity
Facility would be used. (Liquidity Facilities, Sections 2.2(b) and 2.6;
Intercreditor Agreement, Section 3.6(c) and (f))
A "Replacement Facility" for any Trust will mean an irrevocable liquidity
facility in substantially the form of the initial Liquidity Facility for such
Trust, including reinstatement provisions, or, subject to certain conditions, in
such other form (which may include a letter of credit) as shall permit the
Rating Agencies to confirm in writing their respective ratings then in effect
for the Certificates (before downgrading of such ratings, if any, as a result of
the downgrading of the Liquidity Provider), in a face amount equal to the
Required Amount for such Liquidity Facility and issued by a person having
unsecured debt ratings which are equal to or higher than the Threshold Rating.
(Intercreditor Agreement, Section 1.1)
The Liquidity Facility for each Trust provides that the Liquidity
Provider's obligations thereunder will expire on the earliest of (i) 15 days
later than the Final Legal Distribution Date for the Certificates of such Trust;
(ii) the date on which the Subordination Agent delivers a certificate certifying
that all of the Certificates of such Trust have been paid in full; (iii) the
date on which the Subordination Agent delivers a certificate certifying that a
Replacement Facility has been substituted for such Liquidity Facility; (iv) the
date on which the Liquidity Provider makes the Final Drawing; and (v) the date
on which no amount is or may (by reason of reinstatement) become available for
drawing under such Liquidity Facility. (Liquidity Facilities, Sections 1.1(a)
and 2.4(b))
The Subordination Agent, in consultation with AWA (whose recommendations
the Subordination Agent will accept), may, subject to certain limitations,
arrange for a Replacement Facility at any time to replace the Liquidity Facility
for any Trust. If such Replacement Facility is provided at any time after a
Downgrade Drawing under such Liquidity Facility, all funds on deposit in the
relevant Cash Collateral Account will be returned to the Liquidity Provider
being replaced. (Intercreditor Agreement, Section 3.6(e))
The Intercreditor Agreement provides that the Subordination Agent shall
hold the proceeds of a Final Drawing (defined below) made in accordance with the
provisions set forth under "-- Liquidity Events of Default" below in the Cash
Collateral Account for the related Trust as cash collateral to be used for the
same purposes and under the same circumstances, and subject to the same
conditions, as cash payments of Interest Drawings under such Liquidity Facility
would be used. The Intercreditor Agreement further provides that the
Subordination Agent shall not fail to take any action which may be expressly
required to be taken by the Subordination Agent in order to make a Final Drawing
under a Liquidity Facility. (Intercreditor Agreement, Section 3.6(i))
Drawings (other than a Final Drawing) under any Liquidity Facility will be
made by delivery by the Subordination Agent of a certificate in the form
required by such Liquidity Facility. Upon receipt of such a certificate, the
Liquidity Provider is obligated to make payment of the drawing requested thereby
in immediately available funds. Upon payment by the Liquidity Provider of the
amount specified in any drawing under any Liquidity Facility, the Liquidity
Provider will be fully discharged of its obligations under such Liquidity
Facility with respect to such drawing and will not thereafter be obligated to
make any further payments under such Liquidity Facility in respect of such
drawing to the Subordination Agent or any other
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person or entity who makes a demand for payment in respect of interest on the
related Certificates. (Liquidity Facilities, Section 2.2)
REIMBURSEMENT OF DRAWINGS
Amounts drawn under any Liquidity Facility by reason of an Interest Drawing
or a Final Drawing, and any portion of a Downgrade Drawing applied to the
payment of interest on the Certificates, will be immediately due and payable,
together with interest on the amount of such drawing at a rate equal to (i) in
the case of an Interest Drawing or the portion of a Downgrade Drawing applied to
the payment of interest on the Certificates, with respect to the period from the
date of its borrowing to (but excluding) the third business day following the
applicable Liquidity Provider's receipt of the notice of the applicable drawing,
at the Base Rate plus 1.50% per annum, and thereafter, at LIBOR for the
applicable Interest Period plus 1.50% per annum and (ii) in the case of a Final
Drawing, at the Base Rate; provided that the Subordination Agent will be
obligated to reimburse such amounts only to the extent that the Subordination
Agent has available funds therefor. The "Base Rate" will be a per annum interest
rate, determined as provided in each Liquidity Facility, equal to the higher of
(i) the base commercial lending rate announced from time to time by the
Liquidity Provider and (ii) the rate quoted by the Liquidity Provider to dealers
in the New York federal funds market for overnight offering of dollars by the
Liquidity Provider for deposit, plus 0.50% per annum. "LIBOR" with respect to an
Interest Period will be an interest rate, determined as provided in each
Liquidity Facility, equal to the rate per annum at which deposits in U.S.
dollars are offered for such Interest Period by the Liquidity Provider to prime
banks in the London interbank market. The "Interest Period " with respect to a
drawing which bears interest based on LIBOR will be each of the following
periods: (i) the period beginning on the date such drawing began to bear
interest based on LIBOR and ending on the next Regular Distribution Date and
(ii) each subsequent period commencing on the last day of the immediately
preceding Interest Period and ending on the next Regular Distribution Date.
(Liquidity Facilities, Sections 1.1, 2.5 and 3.7)
The amount drawn under the Liquidity Facility for any Trust by reason of
the Downgrade Drawing and deposited in the Cash Collateral Account will be
treated as follows: (i) such amount will be released on any Regular Distribution
Date to the Liquidity Provider to the extent that such amount exceeds the
Required Amount for such Trust; (ii) any portion of such amount withdrawn from
the Cash Collateral Account for such Trust to pay interest on the related
Certificates will be treated in the same way (including interest payable
thereon) as Interest Drawings; and (iii) the balance of such amount will be
invested in Eligible Investments. (Liquidity Facilities, Section 2.6;
Intercreditor Agreement, Section 3.6(f)) The Downgrade Drawing under any
Liquidity Facility (other than any portion thereof applied to the payment of
interest on the Certificates) will bear interest at a rate equal to (i) during
the period from the date of its borrowing to (but excluding) the third business
day following the applicable Liquidity Provider's receipt of the notice of such
Downgrade Drawing, at the Base Rate, and (ii) thereafter, at LIBOR for the
applicable Interest Period plus 0.40% per annum; provided that the Subordination
Agent will be obligated to pay such amount only to the extent that the
Subordination Agent has funds available therefor. (Liquidity Facilities,
Sections 2.6 and 3.7)
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Liquidity Facility (each, a "Liquidity Event
of Default ") will consist of: (i) the acceleration of all the Equipment Notes;
and (ii) the failure to pay all of the Equipment Notes at maturity. A Liquidity
Event of Default shall not occur upon an automatic acceleration of the Equipment
Notes as a result of certain bankruptcy events related to AWA. (Liquidity
Facilities, Section 1.1)
If (i) both (A) a Triggering Event shall have occurred and be continuing
and (B) a Performing Note Deficiency exists or (ii) a Liquidity Event of Default
shall have occurred and be continuing, the Liquidity Provider may, in its
discretion, make a final drawing ("Final Drawing") of all available and undrawn
amounts under the Liquidity Facilities whereupon (i) the Liquidity Provider
shall have no further obligation to make drawings under the Liquidity Facility,
(ii) any drawing remaining unreimbursed shall be automatically converted into a
Final Drawing under such Liquidity Facility, and (iii) all amounts owing to the
Liquidity Provider shall automatically become accelerated. (Liquidity
Facilities, Section 6.1) Notwithstanding the foregoing, the Subordination Agent
will be obligated to pay amounts owing to the Liquidity Provider only to
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<PAGE> 78
the extent of funds available therefor after giving effect to the payments in
accordance with the provisions set forth under "Description of the Intercreditor
Agreement -- Priority of Distributions". (Liquidity Facilities, Section 2.9)
Upon the circumstances described below under "Description of the
Intercreditor Agreement -- Intercreditor Rights", the Liquidity Provider may
become the Controlling Party with respect to the exercise of remedies under the
Indentures. (Intercreditor Agreement, Section 2.6(c))
LIQUIDITY PROVIDER
The Liquidity Provider will be the Belgian bank Kredietbank N.V., acting
through its New York branch. Kredietbank N.V. was established in 1935. As of
December 31, 1996 Kredietbank N.V. had total assets of 3,624 billion Belgian
francs (approximately $105 billion). Kredietbank N.V. provides commercial,
investment banking and capital market services nationally and internationally to
public, corporate and banking customers and has offices in 26 countries.
Kredietbank N.V. currently has long-term unsecured debt ratings of Aa2 from
Moody's and AA- from Standard & Poor's and short-term unsecured debt ratings of
P-1 from Moody's and A1+ from Standard & Poor's.
The New York branch of Kredietbank N.V. is licensed and subject to
supervision and regulation by the Superintendent of Banks of the State of New
York. It is examined by the New York State Banking Department and is subject to
banking laws and regulations applicable to a foreign bank that operates a New
York branch. It is also subject to review and supervision by the Federal Reserve
Bank.
Kredietbank N.V. has been active in aircraft finance since the mid 1980s
and has a significant portfolio of loans secured by modern commercial jet and
turboprop aircraft. Kredietbank N.V. has established business relationships with
most leading international airlines and aircraft manufacturing companies.
The information set forth above concerning Kredietbank N.V. and its New
York branch was provided by Kredietbank N.V. and AWA takes no responsibility for
the accuracy thereof.
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<PAGE> 79
DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes certain provisions of the Intercreditor
Agreement. A form of the Intercreditor Agreement has been filed as an exhibit to
the Registration Statement. The summary does not purport to be complete. The
summary makes use of terms defined in, and is qualified in its entirety by
reference to, all of the provisions of the Intercreditor Agreement. Section
references in parentheses are to relevant sections of the Intercreditor
Agreement, unless otherwise indicated.
INTERCREDITOR RIGHTS
CONTROLLING PARTY
Pursuant to the Intercreditor Agreement, each Trustee and the Liquidity
Provider shall agree that, with respect to any Indenture at any given time, the
Indenture Trustee will be directed (a) in taking, or refraining from taking, any
action with respect to such Indenture or the related Equipment Notes by the
holders of at least a majority of the outstanding principal amount of such
Equipment Notes (provided that, for so long as the Subordination Agent is the
registered holder of the Equipment Notes, the Subordination Agent shall act with
respect to this clause (a) in accordance with the directions of the Trustees
representing holders of Certificates representing an undivided interest in such
principal amount of Equipment Notes), so long as no Indenture Event of Default
shall have occurred and be continuing thereunder, and (b) after the occurrence
and during the continuance of an Indenture Event of Default thereunder, in
taking, or refraining from taking, any action with respect to such Indenture or
such Equipment Notes, including exercising remedies thereunder (including
accelerating such Equipment Notes or foreclosing the lien on the Aircraft
securing such Equipment Notes), by the Controlling Party. (Section 2.6(a)) See
"Description of the Certificates -- Indenture Events of Default and Certain
Rights Upon an Indenture Event of Default" for a description of the rights of
the Certificateholders of each Trust to direct the respective Trustee.
The Person who shall be the Controlling Party with respect to any Indenture
shall be: (w) the Class A Trustee; (x) upon payment of Final Distributions to
the holders of Class A Certificates, the Class B Trustee; (y) upon payment of
Final Distributions to the holders of Class B Certificates, the Class C Trustee;
and (z) upon payment of Final Distributions to the holders of Class C
Certificates, the Class D Trustee. For purposes of giving effect to the
foregoing, the Trustees (other than the Controlling Party) shall irrevocably
agree (and the Certificateholders (other than the Certificateholders represented
by the Controlling Party) shall be deemed to agree by virtue of their purchase
of Certificates) that the Subordination Agent, as record holder of the Equipment
Notes, shall exercise its voting rights in respect of the Equipment Notes as
directed by the Controlling Party. (Section 2.6(b)) Notwithstanding the
foregoing, the Liquidity Provider with the greatest amount of unreimbursed
Liquidity Obligations payable to it under the Liquidity Facilities shall have
the right to elect to become the Controlling Party with respect to any such
Indenture at any time from and including the date which is 18 months after the
earlier of (i) the acceleration of the Equipment Notes under such Indenture and
(ii) a Final Drawing with respect to the Liquidity Facilities, if, in the case
of clause (i) or (ii) above, at the time of such election all Liquidity
Obligations have not been paid in full. (Section 2.6(c))
SALE OF EQUIPMENT NOTES AND AIRCRAFT
Following the occurrence and during the continuation of any Indenture Event
of Default under any Indenture, the Controlling Party shall direct the related
Indenture Trustee in the exercise of remedies thereunder and may accelerate and,
subject to the provisions of the immediately following sentence, sell all (but
not less than all) of the Equipment Notes issued under such Indenture to any
person. So long as any Certificates remain outstanding, during the period ending
on the date which is nine months after the earlier of (x) the acceleration of
the Equipment Notes issued under any Indenture or (y) the bankruptcy or
insolvency of AWA, then without the consent of each Trustee, (a) no Aircraft
subject to the lien of such Indenture or such Equipment Notes may be sold if the
net proceeds from such sale would be less than the Minimum Sale Price for such
Aircraft or such Equipment Notes, and (b) the amount and payment dates of
rentals payable by AWA under the Lease for such Aircraft may not be adjusted if,
as a result of such adjustment, the discounted present value of all such rentals
would be less than 75% of the discounted present value of the
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<PAGE> 80
rentals payable by AWA under such Lease before giving effect to such adjustment,
in each case, using the weighted average interest rate of the Equipment Notes
then outstanding under such Indenture as the discount rate. (Section 4.1(a))
After a Triggering Event occurs and any Equipment Note becomes a
Non-Performing Equipment Note, the Subordination Agent will be required to
obtain LTV Appraisals for the Aircraft as soon as practicable and additional LTV
Appraisals on or prior to each anniversary of the date of such initial LTV
Appraisals; provided that, if the Controlling Party reasonably objects to any
such LTV Appraisals, the Controlling Party shall have the right to obtain or
cause to be obtained substitute LTV Appraisals (including any LTV Appraisals
based upon physical inspection of the Aircraft). (Section 4.1(a))
PRIORITY OF DISTRIBUTIONS
So long as no Triggering Event shall have occurred, the payments in respect
of the Equipment Notes and certain other payments received on each Distribution
Date will be promptly distributed by the Subordination Agent on such
Distribution Date in the following order of priority:
(i) all accrued and unpaid Liquidity Obligations (other than the
principal amount of any drawing under the Liquidity Facilities and
any interest accrued on any Liquidity Obligations) (the "Liquidity
Expenses") to each Liquidity Provider;
(ii) interest accrued on all Liquidity Obligations to each Liquidity
Provider;
(iii) such amount necessary to pay or reimburse the Liquidity Provider for
all Liquidity Obligations then due (other than amounts payable as
described in clauses (i) and (ii) above) and, if applicable, to
replenish each Cash Collateral Account up to its respective Required
Amount;
(iv) Expected Distributions to the holders of Class A Certificates;
(v) Expected Distributions to the holders of Class B Certificates;
(vi) Expected Distributions to the holders of Class C Certificates;
(vii) Expected Distributions to the holders of Class D Certificates; and
(viii) certain fees and expenses of the Subordination Agent and the
Trustees. (Section 3.2)
Upon the occurrence of a Triggering Event and at all times thereafter, all
funds received by the Subordination Agent in respect of the Equipment Notes and
certain other payments will be promptly distributed by the Subordination Agent
in the following order of priority:
(i) such amount necessary to reimburse (a) the Subordination Agent for
any out-of-pocket costs and expenses actually incurred by it in the
protection of, or the realization of value of, the Equipment Notes
or any Trust Indenture Estate, (b) each Trustee for any amounts of
the nature described in clause (a) above, and (c) each Liquidity
Provider or any Certificateholder for payments, if any, made by it
to the Subordination Agent or any Trustee in respect of amounts
described in clause (a) above (collectively, the "Administration
Expenses");
(ii) all accrued and unpaid Liquidity Expenses to each Liquidity
Provider;
(iii) all accrued and unpaid interest on the Liquidity Obligations as
provided in the Liquidity Facilities to each Liquidity Provider;
(iv) such amount necessary to the Liquidity Provider (a) to pay in full
all Liquidity Obligations, whether or not then due (other than
amounts payable pursuant to clauses (ii) and (iii) above) and/or (b)
if applicable, so long as no Performing Note Deficiency exists and
no Liquidity Event of Default has occurred and is continuing, to
replenish the Cash Collateral Accounts up to their respective
Required Amounts;
(v) such amount necessary to reimburse or pay (a) the Subordination
Agent for any tax (other than taxes imposed on compensation paid
under the Intercreditor Agreement), expense, fee, charge or
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<PAGE> 81
other loss incurred by or any other amount payable to the
Subordination Agent in connection with the transactions
contemplated thereunder (to the extent not previously reimbursed),
(b) each Trustee for any tax (other than taxes imposed on
compensation paid under the applicable Trust Agreement), expense,
fee, charge, loss or any other amount payable to such Trustee under
the applicable Trust Agreements (to the extent not previously
reimbursed), and (c) each Certificateholder for payments, if any,
made by it in respect of amounts described in clause (a) above,
which shall be distributed to the applicable Trustee for the
account of such Certificateholder, in each such case pari passu on
the basis of all amounts described in clauses (a) through (c) above
(collectively, "Certain Taxes and Fees");
(vi) Adjusted Expected Distributions to the holders of Class A
Certificates;
(vii) Adjusted Expected Distributions to the holders of Class B
Certificates;
(viii) Adjusted Expected Distributions to the holders of Class C
Certificates; and
(ix) Adjusted Expected Distributions to the holders of Class D
Certificates (Section 3.3).
Interest Drawings under the Liquidity Facility and withdrawals from the
Cash Collateral Account, in each case in respect of interest on the Certificates
of any Trust (other than the Class D Trust), will be distributed to the Trustee
for such Trust, notwithstanding the priority of distributions set forth in the
Intercreditor Agreement. All amounts on deposit in the Cash Collateral Account
for any Trust which are in excess of the Required Amount for such Trust and all
investment earnings on such amounts on deposit in the Cash Collateral Account
shall be deposited in an account maintained by the Subordination Agent pursuant
to the Intercreditor Agreement. (Section 3.6).
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Notes, receives a request for its consent to any amendment,
modification or waiver under such Equipment Notes, the related Indenture, Lease,
Refunding Agreement or other related document, if no Indenture Event of Default
with respect thereto shall have occurred and be continuing, the Subordination
Agent shall request instructions with respect to each Series of Equipment Notes
from the Trustee of the Trust which holds such Equipment Notes. (Section
9.1(b)). The Trustee in turn will request directions from Certificateholders of
such Trust, provided that the Trustee is not required to request directions if
such consent will not adversely affect the Certificateholders or an Indenture
Event of Default shall have occurred and be continuing under the Pass Through
Agreement of such Trust. (Basic Agreement, Section 10.01) If any Indenture Event
of Default shall have occurred and be continuing with respect to such Indenture,
the Subordination Agent will exercise its voting rights as directed by the
Controlling Party. (Section 9.1(b))
THE SUBORDINATION AGENT
Fleet National Bank will be the Subordination Agent under the Intercreditor
Agreement. AWA and its affiliates may from time to time enter into banking and
trustee relationships with the Subordination Agent and its affiliates. The
Subordination Agent's address is 777 Main Street, Hartford, Connecticut 06115,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time by so notifying the Trustees
and the Liquidity Providers, in which event a successor Subordination Agent will
be promptly appointed. Either the Controlling Party or the Liquidity Provider
may remove the Subordination Agent for cause and may appoint a successor
Subordination Agent. No resignation or removal of the Subordination Agent will
be effective until a successor is appointed. No appointment of a successor
Subordination Agent will be effective until the Rating Agencies have delivered
written confirmation that such action would not result in a downgrade,
withdrawal or suspension of the rating of any Class of Certificates. (Section
8.1)
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<PAGE> 82
DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of four Airbus Industrie model A320-231 aircraft. The
Aircraft are designed to be in compliance with Stage III noise level standards,
which constitute the most restrictive Federal regulatory standards currently in
effect in the United States for aircraft noise abatement. The table below sets
forth certain additional information concerning the Aircraft.
<TABLE>
<CAPTION>
APPRAISED VALUE
MANUFACTURER'S AIRCRAFT ENGINE DELIVERY ------------------------------------------
SERIAL NUMBER TYPE TYPE DATE(1) AISI BK MBA
- -------------- --------------- --------- ----------------- ------------ ------------ ------------
<C> <S> <C> <C> <C> <C> <C>
66 Airbus A320-231 IAE V2500 December 29, 1989 $ 28,600,000 $ 27,670,000 $ 30,280,000
67 Airbus A320-231 IAE V2500 December 29, 1989 28,600,000 27,670,000 30,280,000
76 Airbus A320-231 IAE V2500 December 29, 1989 28,820,000 27,670,000 30,430,000
81 Airbus A320-231 IAE V2500 December 29, 1989 28,820,000 28,000,000 30,430,000
------------ ------------ ------------
$114,840,000 $111,010,000 $121,420,000
============ ============ ============
</TABLE>
- ---------------
(1) The delivery date indicated is for the purpose of the Leases. The original
delivery dates for the Aircraft from the manufacturer were in November and
December of 1989.
APPRAISED VALUE
The appraised values set forth in the foregoing chart were determined by BK
as of March 26, 1997, AISI as of March 19, 1997 and MBA as of March 31, 1997. As
part of this process, all three Appraisers performed "desktop" appraisals
without any physical inspection of the Aircraft. The Appraisals are based on
differing assumptions and methodologies, which vary among the Appraisers. The
Appraisers have delivered letters setting forth their respective Appraisals,
copies of which are annexed to this Prospectus as Appendix II. For a discussion
of the assumptions and methodologies used in preparing each of the Appraisals,
reference is hereby made to such reports.
An appraisal is only an estimate of value and should not be relied upon as
a measure of realizable value. The proceeds realized upon a sale of any Aircraft
may be less than the appraised value thereof. In addition, the value of the
Aircraft in the event of the exercise of remedies under the applicable Indenture
will depend on market and economic conditions at the time, the availability of
buyers, the condition of the Aircraft, whether the Aircraft are sold separately
or as a block and other factors. Accordingly, there can be no assurance that the
proceeds realized upon any such exercise with respect to the Equipment Notes and
the Aircraft pursuant to the applicable Indenture would be as appraised or
sufficient to satisfy in full remaining payments due on the Equipment Notes
issued thereunder or the Certificates.
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DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes certain provisions of the Equipment Notes,
the Indentures, the Leases, the Owner Trust Agreements and the Refunding
Agreements. Forms of the Equipment Notes, the Indentures, the Leases and the
Refunding Agreements have been filed as exhibits to the Registration Statement.
The statements under this caption are summaries and do not purport to be
complete. The summaries make use of terms defined in and are qualified in their
entirety by reference to all of the provisions of the Equipment Notes, the
Indentures, the Leases, the Owner Trust Agreements and the Refunding Agreements.
Except as otherwise indicated, the following summaries relate to the Equipment
Notes, the Indenture, the Lease, the Owner Trust Agreement and the Refunding
Agreement relating to each Aircraft. Section references in parentheses are to
relevant sections of the Indentures, the Leases, the Basic Agreement, and the
Refunding Agreements.
GENERAL
The Equipment Notes with respect to each Aircraft will be issued in four
series under a separate Indenture between the related Owner Trustee, as trustee
of the related Owner Trust created for the benefit of the applicable Owner
Participant who is the beneficial owner of the related Aircraft pursuant to a
trust agreement (each, an "Owner Trust Agreement "), and the related Indenture
Trustee. The Equipment Notes issued will be nonrecourse obligations of the
applicable Owner Trust. All Equipment Notes issued under the same Indenture will
relate to, and be secured by, an Aircraft, and such Aircraft will be leased to
AWA pursuant to a Lease between the Owner Trustee under the applicable Owner
Trust and AWA. Each Equipment Note will be authenticated under an Indenture by
the applicable Indenture Trustee. The Chase Manhattan Bank will act as Indenture
Trustee with respect to the issue of the Equipment Notes.
Under each Lease, until the lien of the related Indenture is discharged,
AWA will be unconditionally obligated to make or cause to be made rental and
other payments to the related Indenture Trustee on behalf of the related Owner
Trustee, which rental and other payments will be at least sufficient to pay in
full when due all scheduled payments required to be made on the Equipment Notes
issued with respect to the related Aircraft. The rental obligations of AWA under
each Lease will be general obligations of AWA. However, the Equipment Notes will
not be obligations of, or guaranteed by, AWA or Holdings.
SUBORDINATION
Series B Equipment Notes issued in respect of an Aircraft will be
subordinated in right of payment to Series A Equipment Notes issued in respect
of such Aircraft; Series C Equipment Notes issued in respect of such Aircraft
will be subordinated in right of payment to Series A and B Equipment Notes
issued in respect of such Aircraft; and Series D Equipment Notes issued in
respect of such Aircraft will be subordinated in right of payment to Series A, B
and C Equipment Notes issued in respect of such Aircraft. On each Equipment Note
payment date, (i) payments of interest and principal due on Series A Equipment
Notes issued in respect of any Aircraft will be made prior to payments of
interest and principal due on any Series B, C and D Equipment Notes issued in
respect of such Aircraft, (ii) payments of interest and principal due on Series
B Equipment Notes will be made prior to payments of interest and principal due
on any Series C and D Equipment Notes issued in respect of such Aircraft, and
(iii) payments of interest and principal due on Series C Equipment Notes will be
made prior to payments of interest and principal due on any Series D Equipment
Notes issued in respect of such Aircraft.
Only Equipment Notes having the same priority of payment may be held by the
same Trust; accordingly all of the Series A Equipment Notes will be held by the
Class A Trust, all of the Series B Equipment Notes will be held by the Class B
Trust, all of the Series C Equipment Notes will be held by the Class C Trust and
all of the Series D Equipment Notes will be held by the Class D Trust.
PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Trust will be passed through to the
Certificateholders of such Trust on the dates and at the rate per annum set
forth on the cover page of this Prospectus until the principal balance of such
Certificates has been
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<PAGE> 84
reduced to zero. Subject to the provisions of the Intercreditor Agreement,
scheduled principal payments made on the Equipment Notes held in each Trust will
be passed through to the Certificateholders of each such Trust in accordance
with the principal repayment schedule set forth herein until the principal
balance of such Certificates has been reduced to zero. See "Description of the
Intercreditor Agreement -- Priority of Distributions".
The aggregate original principal amounts of the Equipment Notes to be
issued with respect to each Aircraft, as such Equipment Notes will be held in
each of the Trusts, are as follows:
<TABLE>
<CAPTION>
MANUFACTURER'S CLASS A TRUST CLASS B TRUST CLASS C TRUST CLASS D TRUST
SERIAL NUMBER EQUIPMENT NOTES EQUIPMENT NOTES EQUIPMENT NOTES EQUIPMENT NOTES TOTAL
- -------------- --------------- --------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
66 $11,440,000 $ 4,290,000 $ 4,290,000 $ 3,500,000 $23,520,000
67 11,440,000 4,290,000 4,290,000 3,500,000 23,520,000
76 11,528,000 4,323,000 4,323,000 3,250,000 23,424,000
81 11,528,000 4,323,000 4,323,000 3,250,000 23,424,000
----------- ----------- ----------- ----------- -----------
Total $45,936,000 $17,226,000 $17,226,000 $13,500,000 $93,888,000
=========== =========== =========== =========== ===========
</TABLE>
Interest will be payable on the unpaid principal amount of each Equipment
Note at the rate applicable to such Equipment Note on January 2 and July 2 in
each year, commencing January 2, 1998. Such interest will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Overdue amounts of
principal and interest on each Series of Equipment Notes will bear interest at a
rate equal to 1% per annum over the applicable rate on such Series of Equipment
Notes. The principal of the Equipment Notes purchased by each Trust will be
payable on the dates and in the amounts set forth in Appendix III.
The final payment made under each Equipment Note is provided to be in an
amount sufficient to discharge in full the unpaid principal amount of, all
accrued and unpaid interest on, and any other amounts due under, such Equipment
Note. (Indentures, Section 2.02)
If any date on which a payment under the Equipment Notes becomes due and
payable is not a business day, such payment will be made on the next succeeding
business day without any additional interest.
All payments of the principal amount of, interest on and all other amounts
due with respect to an Equipment Note will be payable only from the income and
proceeds from the collateral pledged pursuant to the related Indenture (the
"Trust Indenture Estate"). (Indentures, Section 2.03) In the case of each
Equipment Note, each payment of principal amount and interest or other amounts
due thereon will, except as otherwise provided in the related Indenture, be
applied in the following order: (i) to the payment of accrued interest on such
Equipment Note (as well as any interest on any overdue principal amounts, any
overdue interest and any other overdue amounts thereunder) to the date of such
payment; (ii) to the payment of the principal amount of such Equipment Note (or
a portion thereof) then due thereunder; (iii) to the payment of Make-Whole
Amount, if any, and any other amount due under the related Indenture or under
such Equipment Note; and (iv) the balance, if any, remaining thereafter, to the
payment of the principal amount of such Equipment Note remaining unpaid (applied
to the installments of principal amount in the inverse order of their normal
maturity). (Indentures, Section 2.05)
REDEMPTION
The Equipment Notes issued with respect to any Aircraft will be redeemed,
in whole, in each case at a price equal to the aggregate unpaid principal amount
thereof together with accrued interest thereon to, but not including, the date
of redemption, and all other amounts payable under the related Indenture or
Refunding Agreement but without any Make-Whole Amount, upon the occurrence of an
Event of Loss with respect to such Aircraft if such Aircraft is not replaced by
AWA under the related Lease. (Indentures, Section 2.10)
Either the Owner Trustee or the Owner Participant may purchase all, but not
less than all, of the outstanding Equipment Notes issued under the related
Indentures at a price equal to the aggregate unpaid principal amount thereof,
plus accrued and unpaid interest thereon to, but not including, the date of
purchase and all other amounts then payable under the related Indenture or
Refunding Agreement but without any
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Make-Whole Amount (except as described in the second following sentence). This
option may be exercised (i) upon the Indenture Trustee with respect to the
related Equipment Notes taking action, or notifying the applicable Owner Trustee
that it intends to take action to foreclose the lien of the related Indenture or
otherwise commence the exercise of any significant remedy under such Indenture
or the related Lease, (ii) upon the Equipment Notes with respect to an Aircraft
having been accelerated or (iii) in the event there shall have occurred and be
continuing a Lease Event of Default. If such option is exercised at a time when
a Lease Event of Default shall have occurred and be continuing for less than 120
days (and the events described in clauses (i) and (ii) of the preceding sentence
do not apply), then the Make-Whole Amount will be added to the purchase price.
(Indentures, Section 2.12)
"Make-Whole Amount" means, with respect to any Equipment Note, the amount
(as determined by an independent investment banker selected by AWA and
reasonably acceptable to the related Indenture Trustee and Owner Participant) by
which (a) the present value of the remaining scheduled payments of principal and
interest from the redemption date to maturity of such Equipment Note computed by
discounting such payments on a semi-annual basis from its respective Payment
Date (assuming a 360-day year of twelve 30-day months) using a discount rate
equal to (i) in the case of Series A Equipment Notes and Series B Equipment
Notes, the Treasury Yield and (ii) in the case of Series C Equipment Notes and
Series D Equipment Notes, the Treasury Yield plus 0.75% exceeds (b) the
outstanding principal amount of such Equipment Note plus accrued interest.
(Indentures, Section 1.01)
For purposes of determining the Make-Whole Amount, "Treasury Yield " means,
at the time of determination with respect to any Equipment Note, the interest
rate (expressed as a semi-annual equivalent and as a decimal and, in the case of
United States Treasury bills, converted to a bond equivalent yield) determined
to be the per annum rate equal to the semi-annual yield to maturity for United
States Treasury securities maturing on the Average Life Date of such Equipment
Note and trading in the public securities markets either as determined by
interpolation between the most recent weekly average yield to maturity for two
series of United States Treasury securities, trading in the public securities
markets, (A) one maturing as close as possible to, but earlier than, the Average
Life Date of such Equipment Note and (B) the other maturing as close as possible
to, but later than, the Average Life Date of such Equipment Note, in each case
as published in the most recent H.15 (519) or, if a weekly average yield to
maturity for United States Treasury securities maturing on the Average Life Date
of such Equipment Note is reported on the most recent H.15 (519), such weekly
average yield to maturity as published in such H.15 (519). "H.15 (519)" means
the weekly statistical release designated as such, or any successor publication,
published by the Board of Governors of the Federal Reserve System. The date of
determination of a Make-Whole Amount shall be the third business day prior to
the applicable redemption date and the "most recent H.15 (519)" means the H.15
(519) published prior to the close of business on the third business day prior
to the applicable redemption date. (Indentures, Section 1.01)
"Average Life Date" for any Equipment Note is the date which follows the
redemption date by a period equal to the Remaining Weighted Average Life at the
redemption date of such Equipment Note. "Remaining Weighted Average Life" with
respect to any Equipment Note, at the redemption date of such Equipment Note, is
the number of days equal to the quotient obtained by dividing (a) the sum of
each of the products obtained by multiplying (i) the amount of each then
remaining scheduled payment of principal of such Equipment Note, including the
payment due on the maturity date of such Equipment Note, by (ii) the number of
days from and including such redemption date to but excluding the date on which
payment of principal is scheduled to be made; by (b) the then outstanding
principal amount of such Equipment Note. (Indentures, Section 1.01)
SECURITY
The Equipment Notes issued with respect to each Aircraft will be secured by
a perfected security interest in such Aircraft and an assignment to the related
Indenture Trustee of certain of the Owner Trustee's rights under the related
Lease, including the right to receive certain payments of rent thereunder, all
profits, revenues and other income of such Aircraft, all required hull insurance
and similar proceeds with respect to such Aircraft, all monies and securities
deposited with the related Indenture Trustee, and all proceeds of the
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<PAGE> 86
foregoing. Basic Rent (as defined herein) payments for each Aircraft are payable
semi-annually on each Basic Rent payment date. Such payments, together with
certain other payments that AWA is obligated to make or cause to be made under
the related Lease, have been assigned by the Owner Trustee under the related
Indenture to provide the funds necessary to make payments of principal and
interest due or expected to be due from the Owner Trustee on the Equipment Notes
issued under such Indenture and Liquidity Obligations under the related
Liquidity Facility. The balance of any such Basic Rent and other payments, after
payment of amounts due on the related Equipment Notes and certain other amounts,
including certain amounts owing to the Liquidity Provider, will be paid over to
the related Owner Participant. (Indentures, Sections 3.01 and 3.06)
Under the terms of each Lease, AWA's obligations in respect of each
Aircraft will be those of a lessee under a "net lease". Accordingly, AWA will be
obligated, among other things and at its expense, to cause each Aircraft to be
duly registered, to pay all costs of operating the Aircraft and to maintain,
service, repair and overhaul (or cause to be maintained, serviced, repaired and
overhauled) the Aircraft. Unless an Indenture Event of Default with respect to
an Aircraft has occurred and is continuing, the related Indenture Trustee may
not exercise the Owner Trustee's rights under the related Lease except such
Owner Trustee's right to receive rent. The assignment by the Owner Trustee to
the Indenture Trustee of its rights under the related Lease excludes certain
rights of the Owner Trustee and the Owner Participant, including the rights of
the Owner Trustee, the Owner Participant and their respective affiliates
relating to the proceeds of certain letters of credit issued for the account of
AWA referred to under "The Leases -- Lease Events of Default" in the amount of
$1 million for each Lease in respect of certain amounts which may become payable
by AWA, indemnity payments and interest in respect thereof payable by AWA for
certain matters, insurance proceeds payable to Wilmington Trust Company, in its
individual capacity and not as Owner Trustee (the "Trust Company"), the
Indenture Trustee in its individual capacity and to the Owner Participant under
public liability insurance maintained in respect of the Aircraft, insurance
proceeds payable to the Trust Company or to such Owner Participant under certain
insurance maintained by or for the benefit of the Owner Participant (whether
directly or through the Owner Trustee) and certain costs and expenses payable by
AWA to the Trust Company, the Owner Trustee, the Indenture Trustee or such Owner
Participant. (Indenture, Granting Clause and Section 1.01) The Equipment Notes
are not cross-collateralized, and consequently the Equipment Notes issued in
respect of any Aircraft are not secured by any of the other Aircraft (as
described in "-- The Leases -- Events of Loss") or the Leases related thereto.
Subject to the right of AWA to re-register the Aircraft in other
jurisdictions, and subject to the cooperation of the applicable Owner Trustee
and Indenture Trustee, AWA will keep each Aircraft registered under the Federal
Aviation Act and will record the Indenture and the Lease and other relevant
documents with respect to each Aircraft under the Federal Aviation Act. Such
recordation of the Indenture, the Lease and other relevant documents with
respect to each Aircraft will give the related Indenture Trustee a perfected
security interest in the related Aircraft whenever it is located in the United
States or any of its territories and possessions.
In addition, the Convention on the International Recognition of Rights in
Aircraft (the "Convention") provides that such security interest will also be
recognized, with certain limited exceptions, in those jurisdictions that have
ratified or adhere to the Convention. Each Aircraft may also be registered under
the laws of, and each Aircraft may be operated by AWA or be under sublease or
interchange arrangements in, countries that are not parties to the Convention.
The extent to which the related Indenture Trustee's security interest would be
recognized in Aircraft registered under the laws of or located in a country that
is not a party to the Convention is uncertain. Moreover, in the case of an
Indenture Event of Default, the ability of the related Indenture Trustee to
realize upon its security interest in an Aircraft could be adversely affected as
a legal or practical matter if such Aircraft were registered under the laws of
any jurisdiction other than the United States or located outside the United
States.
Certain of the Aircraft are subject to Cross-Border Leases. In connection
with the realization by the Indenture Trustee of its security interest in such
Aircraft, it may be desirable to have such Cross-Border Leases terminated. See
"-- Cross-Border Leases".
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Funds, if any, held from time to time by an Indenture Trustee with respect
to any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft or termination of the Lease, if any, relating thereto, will be invested
and reinvested by such Indenture Trustee. Such investment and reinvestment will
be at the direction of the related Owner Trustee or, in the event the Owner
Trustee shall so specify, by the Lessee, in certain investments described in the
related Indenture. (Indentures, Section 3.07) The net amount of any gain or loss
resulting from any such investments will be for the account of AWA.
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following table sets forth LTV Ratios for the Equipment Notes issued in
respect of each Aircraft as of the dates specified and was obtained by dividing
(i) the outstanding balance (assuming no payment default) of such Equipment
Notes determined immediately after giving effect to the payments scheduled to be
made on each such date by (ii) the assumed value (the "Assumed Aircraft Value")
of the Aircraft securing such Equipment Notes.
The tables contain forward-looking information that is based on the
assumption that the value of each Aircraft included in the Assumed Aircraft
Value opposite June 17, 1997, which Assumed Aircraft Value reflects the lesser
of the average and median value of such Aircraft as appraised by each of the
Appraisers, depreciates by 2% per year until the fifteenth year after the year
of delivery of such Aircraft by the manufacturers, by 4% per year thereafter
until the twentieth year after the year of such delivery and by 6% per year
thereafter. Other rates or methods of depreciation would result in materially
different LTV Ratios and no assurance can be given (i) that the depreciation
rates and methods assumed for the purposes of the table are the ones most likely
to occur or (ii) as to the actual value of any Aircraft. Thus the table should
not be considered a forecast or prediction of expected or likely LTV Ratios but
simply a mathematical calculation based on one set of assumptions.
<TABLE>
<CAPTION>
AIRCRAFT MANUFACTURER'S SERIAL AIRCRAFT MANUFACTURER'S SERIAL
NUMBER 66 NUMBER 67
---------------------------------- ----------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT OUTSTANDING AIRCRAFT
BALANCE VALUE LTV BALANCE VALUE LTV
DATE (MILLIONS) (MILLIONS) RATIO (MILLIONS) (MILLIONS) RATIO
- ---- ----------- ---------- ----- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
June 17, 1997............................. $23.52 $28.60 82.2% $23.52 $28.60 82.2%
January 2, 1998........................... 22.83 28.60 79.8 22.83 28.60 79.8
July 2, 1998.............................. 22.04 27.93 78.9 22.04 27.93 78.9
January 2, 1999........................... 21.22 27.93 76.0 21.22 27.93 76.0
July 2, 1999.............................. 20.37 27.27 74.7 20.37 27.27 74.7
January 2, 2000........................... 19.51 27.27 71.5 19.51 27.27 71.5
July 2, 2000.............................. 18.92 26.60 71.1 18.92 26.60 71.1
January 2, 2001........................... 18.33 26.60 68.9 18.33 26.60 68.9
July 2, 2001.............................. 17.72 25.94 68.3 17.72 25.94 68.3
January 2, 2002........................... 16.75 25.94 64.6 16.75 25.94 64.6
July 2, 2002.............................. 15.72 25.27 62.2 15.72 25.27 62.2
January 2, 2003........................... 14.66 25.27 58.0 14.66 25.27 58.0
July 2, 2003.............................. 13.55 24.61 55.1 13.55 24.61 55.1
January 2, 2004........................... 12.41 24.61 50.4 12.41 24.61 50.4
July 2, 2004.............................. 11.22 23.94 46.9 11.22 23.94 46.9
January 2, 2005........................... 9.99 23.94 41.7 9.99 23.94 41.7
July 2, 2005.............................. 8.71 23.28 37.4 8.71 23.28 37.4
January 2, 2006........................... 7.39 23.28 31.7 7.39 23.28 31.7
July 2, 2006.............................. 6.01 21.95 27.4 6.01 21.95 27.4
January 2, 2007........................... 4.59 21.95 20.9 4.59 21.95 20.9
July 2, 2007.............................. 3.12 20.62 15.1 3.12 20.62 15.1
January 2, 2008........................... 1.59 20.62 7.7 1.59 20.62 7.7
July 2, 2008.............................. 0.00 0.00 NA 0.00 0.00 NA
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
AIRCRAFT MANUFACTURER'S SERIAL AIRCRAFT MANUFACTURER'S SERIAL
NUMBER 76 NUMBER 81
------------------------------------ ------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT OUTSTANDING AIRCRAFT
BALANCE VALUE LTV BALANCE VALUE LTV
DATE (MILLIONS) (MILLIONS) RATIO (MILLIONS) (MILLIONS) RATIO
- ---- ----------- ---------- ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
June 17, 1997.......................... $23.42 $28.82 81.3% $23.42 $28.82 81.3%
January 2, 1998........................ 22.74 28.82 78.9 22.74 28.82 78.9
July 2, 1998........................... 21.95 28.15 78.0 21.95 28.15 78.0
January 2, 1999........................ 21.13 28.15 75.1 21.13 28.15 75.1
July 2, 1999........................... 20.28 27.48 73.8 20.28 27.48 73.8
January 2, 2000........................ 19.45 27.48 70.8 19.45 27.48 70.8
July 2, 2000........................... 18.87 26.81 70.4 18.87 26.81 70.4
January 2, 2001........................ 18.28 26.81 68.2 18.28 26.81 68.2
July 2, 2001........................... 17.67 26.14 67.6 17.67 26.14 67.6
January 2, 2002........................ 16.70 26.14 63.9 16.70 26.14 63.9
July 2, 2002........................... 15.67 25.47 61.5 15.67 25.47 61.5
January 2, 2003........................ 14.61 25.47 57.4 14.61 25.47 57.4
July 2, 2003........................... 13.51 24.80 54.5 13.51 24.80 54.5
January 2, 2004........................ 12.37 24.80 49.9 12.37 24.80 49.9
July 2, 2004........................... 11.19 24.13 46.4 11.19 24.13 46.4
January 2, 2005........................ 9.96 24.13 41.3 9.96 24.13 41.3
July 2, 2005........................... 8.68 23.46 37.0 8.68 23.46 37.0
January 2, 2006........................ 7.36 23.46 31.4 7.36 23.46 31.4
July 2, 2006........................... 6.00 22.12 27.1 6.00 22.12 27.1
January 2, 2007........................ 4.58 22.12 20.7 4.58 22.12 20.7
July 2, 2007........................... 3.11 20.78 14.9 3.11 20.78 14.9
January 2, 2008........................ 1.58 20.78 7.6 1.58 20.78 7.6
July 2, 2008........................... 0.00 0.00 NA 0.00 0.00 NA
</TABLE>
LIMITATION OF LIABILITY
The Equipment Notes will not be obligations of, or guaranteed by, AWA,
Holdings, the Owner Participants or the Trust Company. None of the Owner
Trustees, the Owner Participants or the Indenture Trustees, or any affiliates
thereof, will be personally liable to any holder of an Equipment Note or, in the
case of the Owner Trustees and the Owner Participants, to the Indenture Trustees
for any amounts payable under the Equipment Notes or, except with respect to the
Owner Trustee as provided in each Indenture, for any liability under such
Indenture. All payments of principal amount of, interest on, and all other
amounts due with respect to an Equipment Note will be payable only from the
related Trust Indenture Estate. (Indentures, Section 2.03)
Except as otherwise provided in the Indentures, the Trust Company will not
be answerable or accountable under the Indentures or under the Equipment Notes
under any circumstances except for its own willful misconduct, gross negligence,
the inaccuracy of a representation or warranty when made or the failure to
perform certain specified covenants. None of the Owner Participants will have
any duty or responsibility under any of the Indentures or the Equipment Notes to
the Indenture Trustees or to any holder of any Equipment Note.
INDENTURE EVENTS OF DEFAULT; NOTICE AND WAIVER
Indenture Events of Default under each Indenture will include: (a) the
occurrence and continuance of any Lease Event of Default under the related Lease
(other than the failure to make certain indemnity payments and other payments to
the related Trust Company, Owner Trustee, Indenture Trustee or Owner
Participant), (b) the failure by the Owner Trustee (other than as a result of a
Lease Default) to pay any amount when due under such Indenture or under any
Equipment Note issued thereunder and such failure shall have continued for, in
the case of principal and interest, ten calendar days and in all other cases
fifteen calendar days after notice thereof being given to the Owner Trustee from
the Indenture Trustee or any holder of the Equipment Notes, (c) the failure by
the Owner Participant, the Trust Company or the Owner Trustee to discharge
certain liens, continued for a period of thirty calendar days after an officer
of the Trust Company
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or of the Owner Participant with responsibility for or familiarity with the
transactions contemplated under the related Indenture or Refunding Agreement (or
any vice president) shall have actual knowledge of such lien, (d) any
representation or warranty made by the related Owner Trustee, Trust Company or
Owner Participant in such Indenture or the related Refunding Agreement or by any
person guaranteeing or supporting the obligations of the Owner Participant under
certain related documents or in any related guarantee or support agreement being
false or incorrect when made and in any respect materially adverse to the rights
and interests of the holders of the related Equipment Notes and remaining
unremedied after notice and specified cure periods, (e) certain failures by the
related Owner Trustee, Trust Company or Owner Participant to perform or observe
certain covenants or obligations for the benefit of the Indenture Trustee or
holders of Equipment Notes under such Indenture or the related Refunding
Agreement that are not remedied after notice and specified cure periods, (f) the
occurrence of certain events of bankruptcy, reorganization or insolvency of the
related Owner Trustee or Owner Participant or (g) any time when the related
Aircraft shall be registered in a jurisdiction outside the United States and the
related Owner Trustee, the Trust Company or the Owner Participant shall breach
certain covenants agreed upon pursuant to the related Refunding Agreement as a
result of which the lien of the related Indenture shall cease to be a valid and
duly perfected lien on the related Trust Indenture Estate. (Indentures, Section
4.02) There will not be any cross-default provisions in the Indentures or the
Leases. Consequently, events resulting in an Indenture Default under any
particular Indenture may or may not result in an Indenture Event of Default
occurring under any other Indenture.
The Indenture Trustee will give the holders of the Equipment Notes, the
Owner Trustee, AWA and the Owner Participant prompt written notice of any
Indenture Event of Default of which the Indenture Trustee has knowledge.
(Indentures, Section 5.01) If an Indenture Event of Default shall have occurred
and be continuing, the Indenture Trustee may exercise certain rights and powers
as enumerated under the related Indenture; if such Indenture Event of Default is
a Lease Event of Default, the Indenture Trustee may exercise certain remedies
pursuant to the related Lease, provided that such Indenture Trustee gives (i)
ten days' written notice to the related Owner Trustee and the Owner Participant
prior to the initial exercise of such remedies under the related Lease (if not
stayed or otherwise precluded by applicable law from giving such notice) and
(ii) thirty days' written notice to the related Owner Trustee and the Owner
Participant of its intention to sell the related Aircraft. See "-- Remedies"
below. (Indentures, Section 4.04)
In the event that AWA fails to pay any installment of Basic Rent due under
the related Lease, the Owner Participant may, within a specified period after
notice of such default, pay a sum equal to the amount of all, but not less than
all of the principal amount and interest due and payable on the Equipment Notes
(without regard to any acceleration thereof), unless AWA shall have theretofore
failed to pay Basic Rent in the manner required under the related Lease as to
each of the three immediately preceding Basic Rent payment dates or in the
aggregate more than six Basic Rent payment dates. In the event that AWA defaults
in any obligation under the related Lease (other than the payment of Basic Rent)
and such default can be remedied by the payment of money, the Owner Participant
may, within a specified period after notice of such default, instruct the Owner
Trustee to exercise the Owner Trustee's rights under the related Lease to
perform such obligation on behalf of AWA. In the event such Lease Event of
Default shall have been so remedied, then any declaration that the Lease is in
default and that the related Equipment Notes are due and payable based upon such
Lease Event of Default shall be deemed to be rescinded, and the Owner
Participant or the Owner Trustee, as the case may be, shall be subrogated to the
rights of the holders of the Equipment Notes to receive the applicable payment
from the Indenture Trustee. (Indentures, Section 4.03)
The holders of a majority in principal amount of the outstanding Equipment
Notes issued with respect to any Aircraft, by notice to the Indenture Trustee,
may on behalf of all the holders waive any existing default and its consequences
under the Indenture with respect to such Aircraft, except a default in the
payment of the principal amount of, or interest on, any such Equipment Notes or
a default in respect of certain other covenants or provisions of such Indenture
that cannot be modified or amended without the consent of each holder of
Equipment Notes affected thereby. (Indentures, Section 4.08)
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<PAGE> 90
REMEDIES
Each Indenture will provide that if an Indenture Event of Default occurs
and is continuing, the related Indenture Trustee may, and upon receipt of
written demand from the holders of a majority in aggregate unpaid principal
amount of the Equipment Notes outstanding under such Indenture shall, subject to
the applicable Owner Participant's or Owner Trustee's right to cure, as
discussed above, declare the unpaid principal amount of all such Equipment Notes
issued thereunder immediately due and payable, together with all accrued but
unpaid interest thereon (without a Make-Whole Amount); provided, however, that
such principal and interest will immediately and without further act become due
and payable upon the occurrence of certain events of bankruptcy, reorganization
or insolvency with respect to the related Owner Trustee, the related Owner
Participant or AWA. The holders of a majority in aggregate unpaid principal
amount of Equipment Notes outstanding under such Indenture may rescind any such
declaration at any time before the judgment or decree for the payment of the
money so due shall be entered if (i) there has been paid to the related
Indenture Trustee an amount sufficient to pay all overdue principal amount of
and interest on any such Equipment Notes, to the extent such amounts have become
due otherwise than by such declaration of acceleration and (ii) all other
Indenture Events of Default and potential Indenture Events of Default with
respect to any covenant or provision of such Indenture have been cured or
waived. (Indentures, Section 4.04)
Each Indenture will provide that if an Indenture Event of Default under
such Indenture has occurred and is continuing, the related Indenture Trustee may
exercise certain rights or remedies available to it under such Indenture or
under applicable law, including (if the corresponding Lease has been declared in
default) one or more of the remedies under such Indenture or such Lease with
respect to the Aircraft subject to such Lease. If there shall have occurred or
be continuing a Lease Event of Default, the related Indenture Trustee's right to
exercise remedies under such Indenture will be subject, with certain exceptions,
to its having proceeded to exercise one or more of the remedies under the Lease
to terminate the Lease or take possession of and/or sell the Aircraft; provided
that the requirement to exercise such remedies under such Lease shall not apply
in circumstances where such exercise has been stayed or prohibited by applicable
law or court order for a continuous period in excess of 60 days or such other
period as may be specified in Section 1110(a)(1)(A) of the Bankruptcy Code (plus
an additional period, if any, resulting from (i) the trustee or the debtor-in-
possession in such proceeding agreeing to perform its obligations under such
Lease with the approval of the applicable court, (ii) such Indenture Trustee's
consent to an extension of such 60-day or other period, (iii) AWA's assumption
during such 60-day or other period with the approval of the relevant court of
the related Lease pursuant to Section 365 of the Bankruptcy Code or (iv) such
Indenture Trustee's own failure to give any requisite notice (unless such
Indenture Trustee is stayed or otherwise precluded by applicable law from giving
such notice)). (Indentures, Section 4.04(a)) Except as otherwise provided, such
remedies may be exercised by the related Indenture Trustee to the exclusion of
the related Owner Trustee, subject to certain conditions specified in such
Indenture, and of AWA, subject to the terms of such Lease. Any Aircraft sold in
the exercise of such remedies will be free and clear of any rights of those
parties, including the rights of AWA under the Lease with respect to such
Aircraft. (Indentures, Section 4.04; Leases, Section 18)
If the Equipment Notes issued in respect of one or more Aircraft are in
default and the Equipment Notes issued in respect of the remaining Aircraft are
not in default, no remedies will be exercisable under the applicable Indentures
with respect to such remaining Aircraft.
Pursuant to each Indenture, notwithstanding any of the provisions of such
Indenture or the related Owner Trust Agreement to the contrary, each holder of
the related Equipment Notes, the related Indenture Trustee and the related Owner
Trustee will agree for the benefit of AWA that it will not take any action
contrary to AWA's rights under the related Lease, including the right of AWA to
possession and use and quiet enjoyment of the related Aircraft, except in
accordance with the provisions of such Lease. (Indentures, Section 10.05)
Section 1110 of the Bankruptcy Code provides that the right of lessors,
conditional vendors and holders of security interests with respect to
"equipment" (as defined in Section 1110 of the Bankruptcy Code) to take
possession of such equipment in compliance with the provisions of a lease,
conditional sale contract or security agreement, as the case may be, is not
affected by (a) the automatic stay provision of the Bankruptcy Code, which
provision enjoins repossessions by creditors for the duration of the
reorganization period, (b) the
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provision of the Bankruptcy Code allowing the trustee in reorganization to use
property of the debtor during the reorganization period, (c) Section 1129 of the
Bankruptcy Code (which governs the confirmation of plans of reorganization in
Chapter 11 cases) and (d) any power of the bankruptcy court to enjoin a
repossession. Section 1110 of the Bankruptcy Code provides, however, that the
right to take possession of equipment may not be exercised for 60 days following
the date of commencement of the reorganization proceedings and may not be
exercised at all after such 60-day period (or such longer period consented to by
the lessor, conditional vendor or holder of a security interest), if the trustee
in reorganization agrees to perform the debtor's obligations that become due on
or after such date and cures all existing defaults and within 30 days thereof,
any future defaults (other than defaults resulting solely from the financial
condition, bankruptcy, insolvency or reorganization of the debtor). "Equipment"
is defined in Section 1110 of the Bankruptcy Code, in part, as "an aircraft,
aircraft engine, propeller, appliance, or spare part (as defined in section
40102 of title 49) that is subject to a security interest granted by, leased to,
or conditionally sold to a debtor that is a citizen of the United States (as
defined in section 40102 of title 49) holding an air carrier operating
certificate issued by the Secretary of Transportation pursuant to chapter 447 of
title 49 for aircraft capable of carrying 10 or more individuals or 6,000 pounds
or more of cargo".
The Bankruptcy Reform Act amended Section 1110 by, among other things,
providing that all lessors of equipment first placed in service after the date
of enactment of that Act will be entitled to the benefits of Section 1110 even
if such lease is in essence a security interest. The Bankruptcy Reform Act also
provides that the lessor under a lease of equipment first placed in service on
or prior to the date of the enactment of that Act will be entitled to the
benefits of Section 1110 if the lessor and the lessee have expressed in the
applicable agreement or in a substantially contemporaneous writing that the
applicable agreement is to be treated as a lease for federal income tax
purposes. Each of the Leases relating to Aircraft placed in service prior to the
enactment of the Bankruptcy Reform Act contains such a written statement.
Milbank, Tweed, Hadley & McCloy, counsel to the Underwriter, has advised
the Indenture Trustees that, if AWA were to become a debtor under Chapter 11 of
the Bankruptcy Code, the applicable Owner Trustee, as lessor under each Lease,
and the related Indenture Trustee, as assignee of such Owner Trustee's rights
under such Lease pursuant to such related Indenture, would be entitled to the
benefits of Section 1110 of the Bankruptcy Code with respect to the airframe and
engines comprising the related Aircraft. This opinion is subject to certain
qualifications and assumptions, including the assumption that AWA is and will be
a citizen of the United States holding an air carrier operating certificate
issued by the Secretary of Transportation pursuant to chapter 447 of title 49 of
the U.S. Code for aircraft capable of carrying ten or more individuals or 6,000
pounds or more of cargo and the assumption that the applicable Aircraft has a
useful life in excess of the term of the related Lease, without giving effect to
any optional renewal period during which fair market rent would be paid (which
assumption will be supported by a letter to such effect issued by one of the
Appraisers). See "-- The Leases -- Events of Loss". The opinion of Milbank,
Tweed, Hadley & McCloy will not address the availability of Section 1110 with
respect to the bankruptcy proceedings of any possible sublessee of Aircraft
which may be subleased by AWA. The opinion of Milbank, Tweed, Hadley & McCloy
will not address the possible substitution or replacement of Aircraft after an
Event of Loss in the future, the consummation of which is conditioned upon the
contemporaneous delivery of an opinion of counsel to the effect that the related
Indenture Trustee's entitlement to Section 1110 benefits should not be
diminished as a result of such substitution or replacement. For a description of
certain limitations on the Indenture Trustee's exercise of rights contained in
the Indentures, see "-- Indenture Events of Default; Notice and Waiver".
In the event of bankruptcy, insolvency, receivership or similar proceedings
involving an Owner Participant, it is possible that, notwithstanding that the
applicable Aircraft is owned by the related Owner Trustee in trust, such
Aircraft and the related Lease and Equipment Notes might become part of such
proceeding. In such event, payments under such Lease or on such Equipment Notes
may be interrupted and the ability of the related Indenture Trustee to exercise
its remedies under the related Indenture might be restricted, though such
Indenture Trustee would retain its status as a secured creditor in respect of
the related Lease and the related Aircraft. Certain of the Aircraft are subject
to Cross-Border Leases. In connection with the realization by the Indenture
Trustee of its security interest in such Aircraft, it may be desirable to have
such Cross-Border Leases terminated. In this regard, the bankruptcy, insolvency,
receivership or like
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proceeding involving the Cross-Border Lessor or any partner therein might also
impede the ability of the Indenture Trustee to exercise its remedies under the
related Indenture. See "-- Cross-Border Leases".
MODIFICATION OF INDENTURES AND LEASES
Without the consent of holders of a majority in aggregate unpaid principal
amount of the Equipment Notes outstanding under any Indenture, the provisions of
such Indenture and the Lease, the Refunding Agreement and the Owner Trust
Agreement corresponding thereto may not be amended or modified, except to the
extent indicated below.
Certain provisions of any Indenture, and of the Lease, the Refunding
Agreement, and the Owner Trust Agreement related thereto, may be amended or
modified by the parties thereto without the consent of the relevant Indenture
Trustee or the holders of the Equipment Notes outstanding under such Indenture,
subject to certain conditions. In the case of each Lease, such provisions
include, among others, provisions relating to maintenance of, and modifications
to, the related Aircraft and the return to the related Owner Trustee of the
related Aircraft at the end of the term of such Lease. (Indentures, Section
9.01(a))
Without the consent of each holder of an affected Equipment Note then
outstanding, no amendment of or supplement to the related Indenture, Refunding
Agreement or any other related document may (a) modify certain provisions of
such Indenture, certain definitions under such Indenture, or the percentage of
holders of the Equipment Notes required to take or approve any action under such
Indenture, (b) reduce the amount, or change the time of payment or method of
calculation of any amount of principal, Make-Whole Amount, if any, or interest
with respect to any Equipment Note, or alter or modify certain provisions of
such Indenture with respect to the order of priorities in which distributions
thereunder shall be made among the holders of Equipment Notes, the related Owner
Trustee and AWA, (c) reduce, modify or amend any indemnities in favor of the
holders of Equipment Notes, (d) consent to any change in such Indenture or the
related Lease which would permit redemption of Equipment Notes earlier than
permitted under such Indenture, (e) release AWA from its obligations in respect
of certain payments under the related Lease or (f) permit the creation of any
lien on the related Trust Indenture Estate or deprive any holder of Equipment
Notes of the benefit of the lien of such Indenture on such Trust Indenture
Estate. (Indentures, Section 9.01(b))
INDEMNIFICATION
AWA will be required to indemnify each Indenture Trustee, each Owner
Participant, each Owner Trustee, each Pass Through Trustee and the Subordination
Agent, but not any Certificateholder, for certain losses, claims and other
matters (for example, among other things, AWA is not responsible for any losses,
claims, and other matters relating to any of such persons' failure to make a
payment to another person, which payment was made by AWA to such first person).
Under certain circumstances AWA is required to counter-indemnify the Original
Lessee for indemnities owing by the Original Lessee to each Owner Participant
against the loss of depreciation deductions and certain other benefits allowable
for certain income tax purposes with respect to the related Aircraft. Each Owner
Trustee indemnifies the Indenture Trustee for certain losses, claims and other
matters to the extent not reimbursed by AWA; however, recourse is limited to the
related Trust Indenture Estate. Prior to seeking indemnification from the Trust
Indenture Estate for any amount indemnified against by AWA under the related
Lease, the Indenture Trustee will demand and take necessary action to pursue
indemnification under such Lease. If necessary, the Indenture Trustee is
entitled to indemnification from the related Trust Indenture Estate for any
liability, obligation, loss, damage, penalty, claim or action to the extent not
reimbursed by AWA or others. The Indenture Trustee is not indemnified, however,
for, among other things, actions arising from its gross negligence (or
negligence in the handling of funds), willful misconduct or for the inaccuracy
of any representation or warranty made in its individual capacity under the
relevant Refunding Agreement. (Indentures, Section 7.01)
No Trust Company, Owner Participant or any director, officer, employee,
stockholder, partner, agent or affiliate of the Trust Company or Owner
Participant (the "Exculpated Person") will have any obligation, duty or
liability of any kind whatsoever to the Indenture Trustee or holders of any
Equipment Notes in connection with the exercise by any Exculpated Person of any
rights of an Owner Trustee under the related Lease and the
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other related documents, or the taking of any action or the failure to take any
action, in each case in connection with any rights of such Owner Trustee under
the applicable Indenture and the related Lease. (Indentures, Section 7.02)
Each Trust Company, Owner Trustee and Owner Participant is required to
indemnify the related Indenture Trustee and the holders of the Equipment Notes
issued with respect to the Aircraft in which such Owner Trustee has an interest
for certain losses that may be suffered as a result of its failure to discharge
certain liens or claims on or against the assets subject to the lien of the
related Indenture (Refunding Agreements, Section 13). The Indenture Trustee is
not under any obligation to take any action, risk liability or expend its own
funds under the relevant Indenture if it has reasonable grounds for believing
that repayment of such funds or adequate indemnity against such risk is not
reasonably assured to it. (Indentures, Section 5.03)
THE LEASES
Each Aircraft is leased by an Owner Trustee to AWA under the relevant
Lease.
TERMS AND RENTALS
Each Aircraft is leased separately under its respective Lease for a term
commencing on the date of the delivery of such Aircraft to the Original Lessee
and expiring on July 5, 2013, which in all cases is not earlier than the latest
maturity date of the Equipment Notes issued pursuant to the related Indenture,
unless earlier terminated as provided by the related Lease. Basic Rent payments
for each Aircraft are payable semi-annually on each Basic Rent payment date.
(Leases, Section 4 and Exhibit C) AWA's obligations to pay rent and to make, or
cause to be made, other payments under each Lease are unsubordinated unsecured
obligations of AWA and will rank pari passu in right of payment with all other
unsubordinated unsecured indebtedness of AWA. The rental obligations will be
effectively subordinated to any secured indebtedness of AWA to the extent of the
value of the assets securing such indebtedness and would be effectively
subordinated to all obligations of AWA's subsidiaries (if any). AWA has no right
to purchase any Aircraft at the conclusion of the Term of such Lease.
NET LEASE; MINIMUM PAYMENTS
AWA's obligations in respect of each Lease of an Aircraft are those of a
lessee under a "net lease". Lessee's obligations to pay all rent and perform all
other obligations under the Leases are, by the terms of the Leases, stated to be
absolute and unconditional. The Leases provide that (i) the Stipulated Loss
Value for each Aircraft, together with the payment of all rent then due
thereunder, as of any time shall be sufficient to pay in full the unpaid
principal amount of the related Equipment Notes and all accrued and unpaid
interest and (ii) Basic Rent payable on any Basic Rent payment date shall at
least equal the amount of principal and interest due and payable on the related
Equipment Notes on such Basic Rent payment date. (Leases, Section 4(b))
REGISTRATION; MAINTENANCE; MODIFICATIONS
AWA is obligated to cause the Aircraft to be duly registered with the FAA
in the name of the Owner Trustee (or with the aviation authority in certain
other jurisdictions in connection with the re-registration of the Aircraft in
such jurisdictions). Registration of the Aircraft in specified jurisdictions
outside the United States is subject to, among other conditions specified in the
related Refunding Agreement, the lien of the related Indenture continuing as a
valid and duly perfected security interest in the related Aircraft and the
related Lease. AWA is also obligated to the extent set forth in the related
Lease, to maintain, service, repair and overhaul the Aircraft (or cause the
Aircraft to be maintained, serviced, repaired and overhauled) in accordance with
good industry practice and so as to keep the Aircraft in as good a condition as
when delivered to AWA, ordinary wear and tear excepted, and in such condition as
is necessary to enable the airworthiness certification of such Aircraft to be
maintained in good standing at all times (a) under the Federal Aviation Act and
any other applicable law, or (b) under the applicable laws of any other
jurisdiction in which the Aircraft may be registered, except when any grounding
of the Aircraft is fleetwide in nature so long as AWA
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or a Permitted Sublessee is contesting in good faith such grounding. AWA is also
required to cause the Aircraft then subject to such Leases to be maintained in
accordance with maintenance standards required by, or substantially equivalent
to those required by, the central civil aviation authority of the country of
registry, and, to the extent not inconsistent therewith, the FAA. AWA will
maintain, service, repair and overhaul the Aircraft in the same manner and with
the same care as used by AWA with respect to similar aircraft owned by AWA and,
during any period in which a sublease permitted by the related Lease is in
effect, will cause to be performed all maintenance, service, repair and overhaul
of the Aircraft in the same manner and with the same care as used by the
Permitted Sublessee with respect to similar aircraft owned by such Permitted
Sublessee. (Leases, Section 6(d) and 6(e))
AWA will not permit the Aircraft to be maintained, used, serviced, repaired
or operated in violation of any law of any government having jurisdiction, or in
violation of any airworthiness certificate, license or registration to the
extent mandatory for operators similar to AWA or the Permitted Sublessee, except
to the extent AWA (or any Permitted Sublessee) is in good faith contesting the
validity of any such requirements by appropriate proceedings which, among other
things specified in each Lease, do not impair the interest of the Owner Trustee
in the Aircraft or the validity or the priority of the Lien of the Indenture.
(Leases, Section 6(c)) AWA must make (or cause to be made) all alterations,
modifications and additions to each Airframe and Engine necessary to meet the
applicable standards of the FAA or any other applicable governmental authority
having jurisdiction. AWA (or a Permitted Sublessee) may make other alterations,
modifications and additions to any Airframe or any Engine as AWA (or a Permitted
Sublessee) may deem desirable in the proper conduct of its business, so long as
such alterations, modifications or additions do not, among other things
specified in the related Lease, diminish the value, utility or remaining useful
life, or impair the condition or airworthiness of such Airframe or Engine, below
the value, utility or remaining useful life or condition or airworthiness
thereof immediately prior to such alteration, modification or addition (assuming
such Airframe or Engine was in the condition required by the terms of the
related Lease). Title to parts incorporated or installed in or added to such
Airframe or Engine as a result of such alterations, modifications or additions
vests in the Owner Trustee subject to certain exceptions. In certain
circumstances, AWA (or a Permitted Sublessee) is permitted to remove from an
Airframe or Engine parts which were added by AWA (or a Permitted Sublessee) so
long as certain conditions are met and any such removal does not, among other
things specified in the related Lease, diminish or impair the value, utility,
remaining useful life, condition or airworthiness, which such Airframe or Engine
would have had at such time had such addition, alteration or modification not
occurred. (Leases, Section 9)
Subject to certain exceptions, including as set forth above, AWA is
obligated to replace or cause to be replaced all parts incorporated or installed
in or attached to any Airframe or any Engine that become worn out, lost, stolen,
destroyed, seized, confiscated, damaged beyond repair or permanently rendered
unfit for use. Replacement parts become subject to the related Lease and the
lien of the related Indenture in lieu of the part replaced. (Leases, Section
9(a))
SUBLEASING AND POSSESSION
AWA is permitted, subject to certain limitations, to sublease any Aircraft
to any Certificated Air Carrier or to certain foreign entities so long as the
term of any such sublease does not extend beyond the term of the related Lease.
In addition, subject to certain limitations, AWA is permitted to transfer
possession of any Airframe or any Engine other than by sublease, including
transfers of possession by AWA in connection with certain interchange and
pooling arrangements, transfers to the United States government and any
instrumentality or agency thereof, "wet leases" and transfers in connection with
maintenance or modifications.
Except that three of the Aircraft may not be used in Hong Kong or the
People's Republic of China (Leases, Section 8(h)), there are no general
geographical restrictions on AWA's (or any Permitted Sublessee's) ability to
operate the Aircraft. The extent to which the relevant Indenture Trustee's lien
would be recognized in any Aircraft if such Aircraft were located in certain
countries is uncertain. See "Description of the Equipment Notes -- Security".
While the Indenture Trustees' rights and remedies in the event of a default
under each Lease include the right to terminate such Lease and repossess the
Aircraft subject thereto, it may be difficult, expensive and time-consuming to
obtain possession of such Aircraft, particularly when such Aircraft has been
registered in a foreign jurisdiction or is located outside the United States or
is subleased to a
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foreign operator. Any such exercise of the right to repossess Aircraft will be
subject to the limitations and requirements of applicable law, which could
include the need to obtain approvals for deregistration or re-export of the
Aircraft, which may be subject to delays and to political risk. When a
defaulting Permitted Sublessee or other permitted transferee is the subject of a
bankruptcy, insolvency or similar event, such as protective administration,
additional limitations on the exercise of remedies may apply. Furthermore,
certain jurisdictions may accord higher priority to certain other liens or other
third-party rights over the Aircraft.
In addition, at the time of obtaining repossession of the Aircraft under
the related Lease or foreclosing on the lien on the Aircraft under the related
Indenture, an Airframe subject to such Lease may not be equipped with engines
owned by the applicable Owner Trustee and, in such case, AWA is required to
deliver engines attached to such Airframe of the same model and equivalent
modification status as the Engines or, at AWA's option, an engine of an improved
model suitable for installation and use on the Airframe without diminishing the
value, utility and remaining useful life of such Airframe, in each case having a
value, utility and remaining useful life at least equal to, and being in an
operating condition as good as, the Engines subject to such Lease. (Leases,
Section 16(c)) Notwithstanding AWA's agreement in the related Lease, in the
event AWA fails to transfer title to engines not owned by the applicable Owner
Trustee that are attached to an Airframe on repossession or return thereof, at
the time of obtaining repossession of the Aircraft it could be difficult,
expensive and time-consuming to assemble an Aircraft consisting of an Airframe
and related Engines subject to such Lease. See "Risk Factors -- Factors Relating
to the Certificates and the Offering -- Repossession".
LIENS
AWA is required to maintain each Aircraft, Airframe and Engine free of any
liens, other than specified permitted liens including the respective rights of
AWA, the relevant Owner Trustee, Owner Participant and Indenture Trustee and any
other rights as provided in the related Lease and any rights of others to
possession of the Aircraft in accordance with the terms of the related Lease
(including Permitted Sublessees); liens, the removal of which is the
responsibility of other parties; liens for taxes either not yet due or being
diligently contested in good faith by appropriate proceedings so long as such
proceedings or such liens do not, among other things as may be specified in the
related Lease, involve any material danger of the sale, forfeiture or loss of
such Aircraft, Airframe or Engine or any interest of the related Owner Trustee
or Indenture Trustee therein; inchoate materialmen's, mechanics' and other
similar inchoate liens arising in the ordinary course of AWA's business for sums
not overdue for a period of more than 45 days or being diligently contested in
good faith so long as such proceedings or such liens do not involve any material
danger of the sale, forfeiture or loss of such Aircraft, Airframe or Engines or
any interest of the related Owner Trustee or Indenture Trustee therein; judgment
liens discharged, vacated or reversed within a period of 30 days as specified
in, and subject to other limitations which may be contained in, the related
Lease, and any other lien with respect to which AWA (or a Permitted Sublessee)
has provided a bond adequate in the reasonable opinion of the Owner Participant
and the Indenture Trustee. (Leases, Section 14)
INSURANCE
Subject to certain exceptions, AWA is obligated, at its expense, to
maintain or cause to be maintained on each Aircraft, with reputable and
creditworthy insurers of recognized responsibility and standing experienced in
aircraft insurance, comprehensive aircraft and general public liability
insurance (exclusive of manufacturer's product liability insurance) and property
damage insurance in an amount not less than $350 million, combined single limit,
per occurrence or such higher amount, and of such types and terms as are
customarily carried by prudent certificated air carriers, similarly situated to
AWA, operating aircraft of similar size and engines. AWA is also obligated, at
its expense, to maintain or cause to be maintained, "all-risk" ground and flight
aircraft hull insurance and "all-risk" coverage including transit insurance with
respect to Engines while not installed on an Airframe, of such type, on such
terms and in such amounts as customarily maintained by prudent certificated air
carriers, similarly situated to AWA, operating aircraft of similar size and
engines; provided, however, that, subject to permitted deductibles, such
all-risk insurance shall be for an amount on an "agreed value" basis not less
than the Stipulated Loss Value (as set forth in the related Lease) determined
from time to time for such Aircraft. (Leases, Sections 12(a) and 12(b))
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Subject to certain exceptions, the proceeds of policies covering loss of or
damage to an Aircraft shall be payable, up to the Stipulated Loss Value for such
Aircraft, to the related Indenture Trustee for any loss involving proceeds in
excess of $500,000 and the entire amount of any loss involving proceeds of
$500,000 or less shall be paid to AWA (or a Permitted Sublessee) so long as no
Lease Event of Default or Lease Default exists. AWA (and any Permitted
Sublessee) may self-insure for such loss or damage to the extent of up to a $1
million deductible per Aircraft. (Leases, Sections 12(b) and 12(d))
In respect of each Aircraft, AWA is required to cause the related Owner
Trustee, Owner Participant and Indenture Trustee and certain other persons, but
not the Certificateholders, to be included as additional insureds as their
respective interests may appear under all insurance policies required by the
terms of the Lease with respect to such Aircraft. (Leases, Sections 12(a) and
12(b))
AWA may not operate (or permit any Permitted Sublessee to operate) any
Aircraft in any area that is excluded from coverage by any insurance policy in
effect with respect to such Aircraft and required by the related Lease unless
the Aircraft is covered by a United States government indemnity. (Leases,
Section 6(c))
AWA's obligation to provide any insurance required by any Lease shall be
satisfied if indemnification from the United States government is provided to
the extent and subject to the terms and conditions of such Lease. (Leases,
Section 12(k))
RENEWAL OPTION
Prior to the end of the Basic Term and subject to certain conditions, AWA
will have an option to renew each Lease for one Renewal Term consisting of a
period equal to five years. The Renewal Rent for the Renewal Term shall be the
"fair market rental value" of the Aircraft for such Renewal Term as determined
in accordance with the related Lease. (Leases, Section 20(i))
EVENTS OF LOSS
If an Event of Loss occurs with respect to any Airframe or any Airframe and
any Engines then installed thereon, AWA is obligated either (i) to replace such
Airframe or Airframe and Engines or (ii) to pay to the related Owner Trustee the
applicable Stipulated Loss Value, as adjusted, together with certain additional
amounts. If AWA elects to replace such Airframe or Airframe and Engines, it must
do so not later than the 120th day after the related Event of Loss, with an
airframe or airframe and engine(s), as applicable, meeting required
specifications and free and clear of all liens (other than certain permitted
liens) and having a value, utility and remaining useful life at least equal to,
and being in at least as good operating condition as, such airframe or airframe
and engines prior to the Event of Loss, assuming maintenance thereof in
accordance with the related Lease. If AWA elects to pay the Stipulated Loss
Value for such Airframe or Airframe and Engines, AWA must make such payment not
later than 120 days after the related Event of Loss. Upon making such payment,
together with all other amounts then due under the related Lease with respect to
such Airframe or Airframe and Engines, the Lease for such Aircraft shall
terminate and the obligation of AWA to make the scheduled Basic Rent payments
with respect thereto shall cease. (Leases, Section 11(a))
If an Event of Loss occurs with respect to an Engine, AWA is required to
replace such Engine within 60 days from the date of such Event of Loss with
another engine, free and clear of all liens (other than certain permitted
liens), meeting required specifications and having a value, utility and
remaining useful life at least equal to, and being in at least as good operating
condition as, the Engine being replaced (assuming that such Engine had been
maintained in accordance with the related Lease) suitable for installation and
use on the Airframe without diminishing the value, remaining useful life or
utility of such Airframe. (Leases, Section 11(b))
An "Event of Loss" with respect to an Aircraft, Airframe or Engine means
any of the following events with respect thereto:
(a) loss of such property or the use thereof due to theft or disappearance
for the period set forth in the relevant Lease;
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(b) destruction or damage of such property that renders repair uneconomic
or such property permanently unfit for normal use by AWA (or a
Permitted Sublessee) for any reason whatsoever;
(c) any loss or disappearance of or damage to or destruction of such
property which results in an insurance settlement with respect to such
property on the basis of an actual or constructive total loss;
(d) the condemnation, confiscation, appropriation, seizure or requisition
of title to any such property by any governmental entity which results
in the loss of title by Owner Trustee for ten days or more but
excluding requisition for use or hire which does not involve
requisition of title;
(e) the condemnation, confiscation, appropriation, seizure or requisition
of the use of such property by any governmental entity (other than a
requisition for use by the federal government of the United States or
any instrumentality or agency thereof bearing the full faith and
credit of the United States of America), which in any such case shall
have resulted in the loss of possession thereof by AWA for the period
set forth in the relevant Lease (or for such shorter period ending on
the date which is the next business day after the date of receipt of
an insurance settlement with respect to such property on the basis of
a total loss);
(f) the requisition for use of such property by the federal government of
the United States or any agency or instrumentality thereof bearing the
full faith and credit of the United States of America, which purports
to or does continue beyond the Term of the relevant Lease;
(g) as a result of any law, rule, regulation, order or other action by the
FAA, the Department of Transportation or any other governmental entity
having jurisdiction, the use of such Aircraft, Airframe or Engine in
the normal course of AWA's (or a Permitted Sublessee's) business of
air transportation of passengers shall have been prohibited for a
period of six consecutive months, unless AWA (or a Permitted
Sublessee), prior to the expiration of such six-month period, has
undertaken and is diligently carrying forward all steps which are
necessary or desirable to permit normal use of such item of equipment
by AWA (or a Permitted Sublessee), or, in any event, if such normal
use shall have been so prohibited by any such governmental entity for
the period set forth in the relevant Lease; or
(h) as otherwise provided in the relevant Lease.
An Event of Loss with respect to an Aircraft is deemed to have occurred if
an Event of Loss occurs with respect to the Airframe which is a part of such
Aircraft. An Event of Loss with respect to an Engine shall not, absent an Event
of Loss with respect to the relevant Airframe, be deemed an Event of Loss with
respect to such Airframe. (Leases, Section 1)
INDEMNIFICATION
Subject to certain exceptions, AWA has agreed to indemnify, among others,
each Owner Participant, each Owner Trustee, each of the Trustees and each of the
Indenture Trustees, but not the holders of the Certificates, for certain
liabilities, losses, fees and expenses and for certain other matters arising out
of the transactions described herein or relating to the Aircraft. In addition,
under certain circumstances AWA is required to indemnify such persons, but not
the holders of the Certificates, against certain taxes, levies, duties,
withholdings and for certain other matters (but excluding, among other things,
certain income and capital gains taxes) relating to such transactions or the
Aircraft. (Leases, Sections 10 and 13)
LEASE EVENTS OF DEFAULT
The Lease Events of Default include, among other things, (i) failure by AWA
to make any payment of Basic Rent, Renewal Rent or Stipulated Loss Value within
three business days after such payment is due, or any other payment of
Supplemental Rent within ten business days after the same shall have become due
and AWA has received written demand therefor by the party entitled thereto
(provided that failure to pay amounts owed under certain related documents shall
not constitute a Lease Event of Default unless the Owner Trustee
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or the Owner Participant delivers notice to AWA that such failure shall
constitute a Lease Event of Default); (ii) failure by AWA to perform or observe
any covenant, condition or agreement to be performed or observed by it under the
related Lease or certain related documents, and such failure shall have
continued unremedied after notice and specified cure periods; (iii) any
representation or warranty made by AWA under the related Refunding Agreement and
certain related documents or in any certificate furnished by AWA in connection
therewith, shall have proved to have been incorrect in any material respect when
made and continued unremedied after notice and specified cure periods; (iv) the
occurrence of certain events of bankruptcy, reorganization or insolvency of AWA;
(v) AWA's loss or suspension of its United States air carrier license or
certificate under Part 121 of the Federal Aviation Regulations or its
certificate of public convenience and necessity under Section 41102(a) of the
Federal Aviation Act or, subject to certain exceptions, its cessation of
business as, or cessation of a preponderance of its business to be, that of a
commercial passenger Certificated Air Carrier and (vi) the failure of AWA to
obtain and maintain (or cause to be obtained and maintained) insurance on or in
respect of any Aircraft in accordance with the provisions of the relevant Lease,
or the operation of any Aircraft outside of the scope or in violation of the
terms of such insurance. (Leases, Section 17) The Leases require AWA to provide
to the relevant Owner Trustee as beneficiary thereof irrevocable standby letters
of credit for drawdown upon the occurrence of certain Lease Defaults or Lease
Events of Default. These letters of credit will not be assigned to the related
Indenture Trustee under its Indenture.
There are no cross-default provisions in the Leases. Consequently, events
resulting in a Lease Event of Default under any particular Lease may or may not
result in a Lease Event of Default occurring under any other Lease. (Leases,
Section 17)
If a Lease Event of Default has occurred and is continuing and the related
Lease has been declared to be in default, the Owner Trustee may, subject to
certain limitations imposed by law, exercise one or more of the remedies
provided in such Lease with respect to the related Aircraft. Such remedies
include the right to repossess such Aircraft, to sell or re-lease such Aircraft
free and clear of AWA's rights and retain the proceeds and to require AWA to pay
liquidated damages as computed in accordance with such Lease. (Leases, Section
18)
SECTION 1110
In each Lease, AWA covenants and agrees that it will support any motion,
petition or application filed by the related Owner Trustee, as lessor under the
related Lease, with any bankruptcy court having jurisdiction over AWA, whereby
such Owner Trustee seeks recovery of possession of the Aircraft under Section
1110 of the Bankruptcy Code. (Lease, Section 8(i)) See "Description of the
Equipment Notes -- Remedies".
CERTAIN DEFINED TERMS UNDER THE LEASES
"Airframe" means, with respect to each Aircraft, such Aircraft (except
Engines or engines from time to time installed thereon) and any such model
aircraft (except Engines or engines from time to time installed thereon) which
may from time to time be substituted for such Aircraft (except Engines or
engines from time to time installed thereon) in accordance with the provisions
of the related Lease.
"Basic Rent" means, for any Aircraft, the scheduled basic rent in respect
of such Aircraft payable semi-annually for the Term of the related Lease.
"Basic Term" means, for any Aircraft, a term commencing on the date of
delivery of such Aircraft to the Original Lessee under the related Lease and
expiring not earlier than the latest maturity date of the Equipment Notes issued
pursuant to the related Indenture, unless earlier terminated as provided by the
related Lease.
"Certificated Air Carrier" means any corporation (except the United States
government) domiciled in the United States of America and holding a Certificate
of Convenience and Necessity issued under Section 41102(a) of the Federal
Aviation Act by the Department of Transportation.
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"Engine" means with respect to each Aircraft, (i) each of the two IAE Model
V2500 engines initially installed on the Airframe whether or not from time to
time thereafter no longer installed on the Airframe or installed on any other
aircraft or airframe, and (ii) any replacement engine which may from time to
time be substituted for any Engine in accordance with the provisions of the
related Lease.
"Lease Default" means an event or condition which would constitute a Lease
Event of Default with the lapse of time or the giving of notice or both.
"Lease Payment Dates" means, with respect to each Lease, January 2 and July
2 of each year, commencing on January 2, 1998.
"Permitted Sublessee" means any sublessee permitted under a Lease from time
to time.
"Renewal Rent" means the rent payable during the Renewal Term for any
Aircraft pursuant to the related Lease.
"Renewal Term" means the period following the end of the Basic Term if AWA
has exercised its renewal option for such Aircraft pursuant to the related
Lease.
"Supplemental Rent" means all amounts, liabilities and obligations (other
than Basic Rent or Renewal Rent) which AWA assumes or agrees to pay under each
Lease or the other agreements related thereto.
"Term" means, with respect to a Lease, collectively, the Basic Term and, if
AWA has exercised its renewal option for such Aircraft pursuant to such Lease,
the Renewal Term.
CROSS-BORDER LEASES
"Cross-Border Lease" means each of the lease agreements between a
Cross-Border Lessor and the applicable Cross-Border Lessee.
"Cross-Border Lessee" means each of the lessees of an Aircraft under a
Cross-Border Lease.
"Cross-Border Lessor" means each of the foreign lessors of an Aircraft.
Three Aircraft securing the obligations under the three related Indentures
are subject to Hong Kong Cross-Border Lease financings with terms expiring in
2006.
Under the terms of each of the Cross-Border Lease financings, title to the
relevant Aircraft is held by the relevant Owner Trustee as assignee of the title
holder of the Aircraft, which, under a hire purchase agreement, has been hired
by the original title holder to a Hong Kong entity acting as the Cross-Border
Lessor of such Aircraft. In summary, the Hong Kong lease financing documentation
provides that, subject to various terms and conditions, the Cross-Border Lessor
has the right to acquire title to the Aircraft from that relevant Owner Trustee
upon the termination of the hire purchase agreement. The relevant documents
further provide that the relevant Owner Trustee, as assignee of the Cross-Border
Lessee, in each of the Hong Kong transactions can concurrently re-acquire title
to the relevant Aircraft from the Cross-Border Lessor, if such lessor exercises
its option to acquire title to the relevant Aircraft upon the termination of the
hire purchase agreement, or the Owner Trustee, as assignee of the title holder
of the Aircraft, can retain title if the Cross-Border Lessor does not or cannot
exercise its option to acquire the Aircraft upon termination of the hire
purchase agreement. The rights of the Cross-Border Lessee under each of these
financings have been assigned to the relevant Owner Trustees. Under the terms of
the financing, the Owner Trustee, as assignee of the Cross-Border Lessee, has
the right to cause the termination of such cross-border financing upon the
occurrence and continuance of a Lease Event of Default under the related U.S.
Lease and the exercise of remedies under the U.S. Lease (to the extent not
stayed). By virtue of an agreed defeasance arrangement, the monetary obligations
of the Cross-Border Lessees under the Hong Kong Cross-Border Leases have been
assumed by certain financial institutions or other parties. The relevant Owner
Trustee's right to take title to the Aircraft free of the Cross-Border Lease
financing is not conditioned upon the payment of any sum by any such parties. In
addition, the relevant Cross-Border Lessor and the partners therein have
expressly agreed that, after giving effect to the provisions of the Cross-Border
Lease financing documentation, they shall not have any right to retain or assert
any interest in the relevant Aircraft upon the termination of the relevant
Cross-Border Lease financing.
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<PAGE> 100
The ability of an Indenture Trustee to realize upon its security interest
in an Aircraft that is subject to a Cross-Border Lease financing could be
adversely affected if the relevant Cross-Border Lessor or any partner therein
were to become a debtor in a bankruptcy or similar proceeding in its home
jurisdiction and a creditor, trustee in bankruptcy, liquidator, receiver or
similar official were to take the position that the related Aircraft should be
treated as part of the estate of such lessor or partner therein, as the case may
be (particularly, if at the same time the Indenture Trustee is seeking to
exercise remedies under the related Indenture). If such a position were to be
taken in such a proceeding, a delay in the clearing of title to such Aircraft
free of the Cross-Border Lease financing could occur. Such a delay might impede
the ability of an Indenture Trustee to realize upon the Aircraft collateral
securing the related Equipment Notes.
Legal opinions from Hong Kong and English counsel (based on certain
assumptions and qualifications) will be given to the effect that upon the
occurrence of an insolvency, bankruptcy, liquidation or any other similar event
with respect to the Cross-Border Lessor or any partner therein, neither the
Cross-Border Lessor nor any partner therein nor any trustee in bankruptcy,
liquidator, receiver or any other similar official in relation to the
Cross-Border Lessor or any partner therein would be entitled to acquire and
retain title to the relevant Aircraft. There can be no assurance, however, that
the circumstances or the law upon which such counsel based their opinions will
not change, that a court of competent jurisdiction in Hong Kong or England would
not find differently, that such opinions would prove to be correct or that the
law of another jurisdiction would not apply. In this regard, Hong Kong counsel
advises that the Sino-British Joint Declaration on the future of Hong Kong
provides that the laws of Hong Kong in force on June 30, 1997 will be maintained
except for laws that contravene the Basic Law. Hong Kong counsel will be giving
an opinion that, in their view, the Basic Law does not contain any provision
which would be contravened by any provision of Hong Kong law relevant to their
opinion referred to above, but that this is a matter for interpretation by the
Standing Committee of the National People's Congress of the People's Republic of
China, in which the power of interpretation of the Basic law is vested.
In connection with the realization by the Indenture Trustee of its security
interest in an Aircraft subject to a Cross-Border Lease Financing, it may be
desirable to have the related Cross-Border Leases terminated.
The information set forth above concerning Cross-Border Lease financings
was provided by GPA and AWA takes no responsibility for the accuracy thereof.
THE REFUNDING AGREEMENTS
TRANSFER OF OWNER PARTICIPANT INTERESTS
Subject to certain restrictions, the Owner Participant may transfer its
beneficial interest in the relevant Owner Trust. (Refunding Agreements, Section
10)
REGISTRATION OF AIRCRAFT
The Aircraft have been registered under the Federal Aviation Act in the
name of the relevant Owner Trustee. AWA may, under certain circumstances,
request the re-registration of such Aircraft in certain jurisdictions outside of
the United States, subject to, among other conditions specified in the related
Refunding Agreement, the lien of the related Indenture continuing as a perfected
security interest in such Aircraft and the related Lease. (Refunding Agreements,
Section 11)
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<PAGE> 101
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion describes the principal U.S. federal income tax
consequences to Certificateholders of the purchase, ownership and disposition of
the Certificates. In the opinion of Andrews & Kurth L.L.P., special tax counsel
to AWA ("Special Tax Counsel") such discussion is accurate in all material
respects of the matters discussed herein. Except as otherwise specified, the
discussion is addressed to beneficial owners of Certificates ("U.S.
Certificateholders") that are citizens or residents of the United States,
corporations, partnerships or other entities created or organized in or under
the laws of the United States or any State, estates the income of which is
subject to U.S. federal income taxation regardless of its source or a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have
authority to control all substantial decisions of the trust ("U.S. Persons")
that will hold the Certificates as capital assets. This discussion does not
address the tax treatment of U.S. Certificateholders that may be subject to
special tax rules, such as banks, insurance companies, dealers in securities or
commodities, tax-exempt entities, holders that will hold Certificates as part of
a straddle or holders that have a "functional currency" other than the U.S.
Dollar, nor does it address the tax treatment of U.S. Certificateholders that do
not acquire Certificates at the initial offering price as part of the initial
offering. This discussion does not describe any tax consequences arising under
the laws of any State, locality or taxing jurisdiction other than the United
States.
This discussion is based upon the tax laws of the United States as in
effect on the date of this Prospectus, as well as judicial and administrative
interpretations thereof (in final or proposed form) available on or before such
date. All of the foregoing are subject to change or differing interpretations,
which could apply retroactively. Prospective investors should note that no
rulings have been or will be sought from the Internal Revenue Service (the
"IRS ") with respect to any of the federal income tax consequences discussed
below, and no assurance can be given the IRS will not take contrary positions.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE CERTIFICATES.
TAX STATUS OF THE TRUSTS
In the opinion of Special Tax Counsel, each Trust will be classified as a
grantor trust under subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A
of the Code and not as an association taxable as a corporation for U.S. federal
income tax purposes. Accordingly, each U.S. Certificateholder will be subject to
federal income taxation as if it owned directly a pro rata undivided interest in
each asset owned by the corresponding Trust and paid directly, its share of fees
and expenses paid by such Trust.
TAXATION OF CERTIFICATEHOLDERS GENERALLY
A U.S. Certificateholder will be treated as owning its pro rata undivided
interest in each of the Equipment Notes and any other property held by the
related Trust. Accordingly, each U.S. Certificateholder's share of interest paid
on the Equipment Notes will be taxable as ordinary income, as it is paid or
accrued, in accordance with such owner's method of accounting for U.S. federal
income tax purposes. Any amounts received by a Trust from Interest Drawings
under the relevant Liquidity Facility will be treated for U.S. federal income
tax purposes as having the same characteristics as the payments they replace.
Each U.S. Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding Trust as provided in Section 162 or 212 of the Code.
Certain fees and expenses, including fees paid to the Trustee and the Liquidity
Provider, will be borne by parties other than the Certificateholders. It is
possible that such fees and expenses will be treated as constructively received
by the Trust, in which event a U.S. Certificateholder will be required to
include in income and will be entitled to deduct its pro rata share of such fees
and expenses. If a U.S. Certificateholder is an individual, estate or trust, the
deduction for such holder's share of such fees or expenses will be allowed only
to the extent that all of such holder's miscellaneous itemized deductions,
including such holder's share of such fees and expenses, exceed 2% of such
holder's adjusted gross income. In addition, in the case of U.S.
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<PAGE> 102
Certificateholders who are individuals, certain otherwise allowable itemized
deductions will be subject generally to additional limitations on itemized
deductions under the applicable provisions of the Code.
EFFECT OF SUBORDINATION OF SUBORDINATED CERTIFICATEHOLDERS
If any of the Class B Trust, the Class C Trust or the Class D Trust (such
Trusts being the "Subordinated Trusts" and the related Certificates being the
"Subordinated Certificates") receives less than the full amount of the receipts
of principal or interest paid with respect to the Equipment Notes held by it
(any shortfall in such receipts being the "Shortfall Amounts") because of the
subordination of the Equipment Notes held by such Trust under the Intercreditor
Agreement, the corresponding owners of beneficial interests in the Subordinated
Certificates (the "Subordinated Certificateholders") would probably be treated
for federal income tax purposes as if they had (1) received as distributions
their full share of such receipts, (2) paid over to the relevant preferred class
of Certificateholders an amount equal to their share of such Shortfall Amount,
and (3) retained the right to reimbursement of such amounts to the extent of
future amounts payable to such Subordinated Certificateholders with respect to
such Shortfall Amount.
Under this analysis, (1) Subordinated Certificateholders incurring a
Shortfall Amount would be required to include as current income any interest or
other income of the corresponding Subordinated Trust that was a component of the
Shortfall Amount, even though such amount was in fact paid to another class of
Certificateholders, (2) a loss would only be allowed to such Subordinated
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless (i.e., when it becomes clear that funds will not be
available from any source to reimburse such loss), and (3) reimbursement of such
Shortfall Amount prior to such a claim of worthlessness would not be taxable
income to Subordinated Certificateholders because such amount was previously
included in income. These results should not significantly affect the inclusion
of income for Subordinated Certificateholders on the accrual method of
accounting, but could accelerate inclusion of income to Subordinated
Certificateholders on the cash method of accounting by, in effect, placing them
on the accrual method.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of a Certificate, a U.S.
Certificateholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the disposition (other than any amount
attributable to accrued interest which will be taxable as ordinary income) and
the U.S. Certificateholder's adjusted tax basis in the related Equipment Notes
and any other assets held by the corresponding Trust. A U.S. Certificateholder's
adjusted tax basis will equal the holder's cost for its Certificate, plus any
market discount previously included in income or less any amortized bond premium
or any previously recognized losses or prior principal payments. Any gain or
loss generally will be capital gain or loss (other than accrued market discount
not previously included in income) if the Certificate was held as a capital
asset and will be long-term capital gain or loss if the Certificate has been
held for more than one year.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of
principal and interest on the Equipment Notes to, or on behalf of, any
beneficial owner of a Certificate that is not a U.S. Person (a "Non-U.S.
Certificateholder") will not be subject to U.S. federal withholding tax;
provided, in the case of interest, that (i) such Non-U.S. Certificateholder does
not actually or constructively own 10% or more of the total combined voting
power of all classes of the stock of any Owner Participant or any transferee of
such interest, (ii) such Non-U.S. Certificateholder is not a controlled foreign
corporation for U.S. tax purposes that is related to an Owner Participant or any
transferee of such interest and (iii) either (A) the Non-U.S. Certificateholder
certifies, under penalties of perjury, that it is not a U.S. Person and provides
its name and address or (B) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "financial institution") and holds the Certificate
certifies, under penalties of perjury, that such statement has been received
from the Non-U.S. Certificateholder by it or by another financial institution
and furnishes the payor with a copy thereof. Regulations proposed by the IRS on
April 15, 1996, if finalized in their current form, would modify the
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<PAGE> 103
certification requirements described in clause (iii) above with respect to
certain payments after December 31, 1997. AWA has no obligation to indemnify any
Certificateholder with respect to withholding taxes.
Any capital gain realized upon the sale, exchange, retirement or other
disposition of a Certificate by a Non-U.S. Certificateholder will not be subject
to U.S. federal income or withholding taxes if (i) such gain is not effectively
connected with a U.S. trade or business of the holder and (ii) in the case of an
individual, such holder is not present in the United States for 183 days or more
in the taxable year of the sale, exchange, retirement or other disposition or
receipt.
BACKUP WITHHOLDING
Payments made on the Certificates and proceeds from the sale of
Certificates will not be subject to a backup withholding tax of 31% unless, in
general, the Certificateholder fails to comply with certain reporting procedures
or otherwise fails to establish an exemption from such tax under applicable
provisions of the Code.
STATE TAX CONSIDERATIONS
The Trustee is a national banking association with its principal corporate
trust office in Hartford, Connecticut. Shipman & Goodwin LLP, special counsel
for the Trustee, has advised AWA that, in its opinion, prior to a default and
under currently applicable law, assuming that each Trust will not be classified
as an association taxable as a corporation for federal income tax purposes, but
rather will be classified as a grantor trust under Section 671 of the Code, (i)
the Trust will not be subject to any tax, fee or other governmental charge under
the laws of the State of Connecticut or any political subdivision thereof and
(ii) Certificateholders that are not residents of or otherwise subject to tax in
the State of Connecticut will not be subject to any tax, fee or other
governmental charge under the laws of the State of Connecticut or any political
subdivision thereof as a result of purchasing, owning or selling a Certificate.
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<PAGE> 104
ERISA CONSIDERATIONS
IN GENERAL
Title I of ERISA imposes certain requirements on employee benefit plans
subject to ERISA ("ERISA Plans"), and on those persons who are fiduciaries with
respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that an ERISA Plan's investment be made
in accordance with the documents governing the ERISA Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of Plans and certain persons (referred to as
"parties in interest" or "disqualified persons") having certain relationships to
such Plans, unless a statutory or administrative exemption is applicable to the
transaction. A party in interest or disqualified person who engages in a
prohibited transaction may be subject to excise taxes and other penalties and
liabilities under ERISA and the Code.
The U.S. Department of Labor has promulgated a regulation, 29 CFR Section
2510.3-101 (the "Plan Asset Regulation"), describing what constitutes the assets
of a Plan with respect to the Plan's investment in an entity for purposes of
ERISA and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan
invests in a Certificate, the Plan's assets would include both the Certificate
and an undivided interest in each of the underlying assets of the corresponding
Trust, including the Equipment Notes held by such Trust, unless it is
established that equity participation in the Trust by "benefit plan investors"
(including Plans and entities whose underlying assets include plan assets by
reason of an employee benefit plan's investment in the entity) is not
"significant" within the meaning of the Plan Asset Regulation. In that regard,
the extent to which there is equity participation in a particular Trust on the
part of benefit plan investors will not be monitored. If the assets of a Trust
were deemed to constitute the assets of a Plan, transactions involving the
assets of such Trust could be subject to the prohibited transaction provisions
of ERISA and Section 4975 of the Code unless a statutory or administrative
exemption were applicable to the transaction.
The fiduciary of a Plan that proposes to purchase and hold any Certificates
should consider whether such purchase and holding may involve the indirect
extension of credit to a party in interest or a disqualified person. In
addition, whether or not the assets of a Trust are deemed to be Plan Assets
under the Plan Asset Regulation, if Certificates are purchased by a Plan and
Certificates of a subordinate Class are held by a party in interest or a
disqualified person with respect to such Plan, the exercise by the holder of the
subordinate Class of Certificates of its right to purchase the senior Classes of
Certificates upon the occurrence and during the continuation of a Triggering
Event could be considered to constitute a prohibited transaction unless a
statutory or administrative exemption were applicable. Depending on the identity
of the Plan fiduciary making the decision to acquire or hold Certificates on
behalf of a Plan, PTCE 91-38 (relating to investments by bank collective
investment funds), PTCE 84-14 (relating to transactions effected by a "qualified
professional asset manager"), PTCE 95-60 (relating to investment by an insurance
company general account), PTCE 90-1 (relating to investments by insurance
company pooled separate accounts) or PTCE 96-23 (relating to transactions
effected by an "in-house asset manager") (collectively, the "Class Exemptions")
could provide an exemption from the prohibited transaction provisions of ERISA
and Section 4975 of the Code. There can be no assurance that any of these Class
Exemptions or any other exemption will be available with respect to any
particular transaction involving the Certificates.
Governmental plans and certain church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the provisions of Section 4975
of the Code, may nevertheless be subject to state or other federal laws that are
substantially similar to the foregoing provisions of ERISA and the Code.
Fiduciaries of any such plans should consult with their counsel before
purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
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<PAGE> 105
CLASS A CERTIFICATES
In addition to the Class Exemptions, an individual exemption may apply to
the purchase, holding and secondary market sale of Class A Certificates by
Plans, provided that certain specified conditions are met. In particular, the
U.S. Department of Labor has issued an administrative exemption to the
Underwriter, Prohibited Transaction Exemption 90-24 (55 Fed. Reg. 20,548 (1990))
(the "Underwriters Exemption"), which generally exempts from the application of
certain, but not all, of the prohibited transaction provisions of Section 406 of
ERISA and Section 4975 of the Code certain transactions relating to the initial
purchase, holding and subsequent secondary market sale of pass-through
certificates which represent an interest in a trust, the assets of which include
equipment notes secured by leases, provided that certain conditions set forth in
the Underwriters Exemption are satisfied.
The Underwriters Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of Class A Certificates to be
eligible for exemptive relief thereunder. In particular, the acquisition of
Class A Certificates by a Plan must be on terms that are at least as favorable
to the Plan as they would be in an arm's length transaction with an unrelated
party; the rights and interests evidenced by the Certificates must not be
subordinated to the rights and interests evidenced by other Certificates of the
same trust estate; the certificates at the time of acquisition by the Plan must
be rated in one of the three highest generic rating categories by Moody's,
Standard & Poor's, Duff & Phelps Inc. or Fitch Investors Services, L.P.; and the
investing Plan must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act.
The Underwriters Exemption does not apply to the Class B Certificates, the
Class C Certificates or the Class D Certificates. Even if all of the conditions
of the Underwriters Exemption are satisfied with respect to the Class A
Certificates, no assurance can be given that the Underwriters Exemption would
apply with respect to all transactions involving the Class A Certificates or the
assets of the Class A Trust. In particular, it appears that the Underwriters
Exemption would not apply to the purchase by Class B Certificateholders, Class C
Certificateholders or Class D Certificateholders of Class A Certificates in
connection with the exercise of their rights upon the occurrence and during the
continuance of a Triggering Event. Therefore, the fiduciary of a Plan
considering the purchase of a Class A Certificate should consider the
availability of the exemptive relief provided by the Underwriters Exemption, as
well as the availability of any other exemptions with respect to transactions to
which the Underwriters Exemption may not apply.
By acceptance of a Class A Certificate, each Certificateholder that is a
Plan will be deemed to have represented that it is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act.
CLASS B, CLASS C AND CLASS D CERTIFICATES
The Class B Certificates, Class C Certificates and Class D Certificates may
not be acquired with the assets of a Plan; provided, however, that such
Certificates may be acquired with the assets of an insurance company general
account that may be deemed to contain Plan assets if the conditions of
Prohibited Transaction Class Exemption 95-60 (60 Fed. Reg. 35,925) have been
satisfied. By the acceptance of a Class B, C or D Certificates, each
Certificateholder will be deemed to have represented that either (i) no Plan
assets have been used to purchase such Certificate or (ii) the purchase and
holding of such Certificate is exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to PTCE 95-60.
EACH PLAN FIDUCIARY (AND EACH FIDUCIARY FOR A GOVERNMENTAL OR CHURCH PLAN
SUBJECT TO RULES SIMILAR TO THOSE IMPOSED ON PLANS UNDER ERISA) SHOULD CONSULT
WITH ITS LEGAL ADVISOR CONCERNING AN INVESTMENT IN ANY OF THE CERTIFICATES.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated June 9, 1997 (the "Underwriting Agreement") among AWA, GPA, a U.S.
domiciled subsidiary of GPA and Morgan Stanley & Co. Incorporated (the
"Underwriter"), the Underwriter has agreed to purchase from the Trusts, at the
price set forth on the cover page of this Prospectus, Class A Certificates,
Class B Certificates, Class C Certificates and Class D Certificates in the
initial aggregate principal amounts of $45,936,000, $17,226,000, $17,226,000 and
$13,500,000, respectively.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Certificates is subject to the approval of
certain legal matters by its counsel and to certain other conditions. The
Underwriter is obligated to take and pay for all of the Certificates to be
purchased by it if any are taken.
The Underwriter initially proposes to offer all or part of the Certificates
directly to the public at the public offering price indicated on the cover page
of this Prospectus, and may offer a portion of the Certificates to dealers at a
price which represents a concession not in excess of the amounts set forth below
for the respective designations of the Certificates. The Underwriter may allow
to certain dealers, and such dealers may reallow, a concession not in excess of
the amounts set forth below for the respective designations of the Certificates.
After the initial public offering of the Certificates, the public offering
prices, such concessions and other selling terms may from time to time be varied
by the Underwriter.
<TABLE>
<CAPTION>
PASS THROUGH CONCESSION REALLOWANCE
CERTIFICATE DESIGNATIONS TO DEALERS CONCESSION
- ------------------------ ---------- -----------
<S> <C> <C>
Class A 0.450% 0.250%
Class B 0.500 0.250
Class C 0.550 0.250
Class D 0.250 0.125
</TABLE>
In connection with the sale of Certificates, the Underwriter may be deemed
to have received compensation from AWA or GPA in the form of commissions and may
also receive commissions from purchasers of Certificates for whom they may act
as agent. When the Underwriter sells the Certificates to or through dealers,
such dealers may receive commissions from the Underwriter and/or commissions
(which may be changed from time to time) from the purchasers for whom it acts as
agent.
Underwriters, dealers and agents participating in the distribution of the
Certificates may be deemed to be underwriters, and any discounts and commissions
received by them and any profit realized by them on resale of the Certificates
may be deemed to be underwriting discounts and commissions under the Securities
Act.
The Underwriting Agreement provides that AWA, on the one hand, and GPA and
a GPA subsidiary party thereto, on the other hand, will, severally and not
jointly, indemnify the Underwriter against certain liabilities, including
liabilities under applicable securities laws or will contribute to payments the
Underwriter may be required to make in respect thereof. In addition GPA and such
subsidiary will reimburse the Underwriter for certain of its expenses incurred
in connection with the offering of the Certificates, including certain fees and
expenses of counsel for the Underwriter.
The Certificates are new securities for which there currently is no market.
AWA does not intend to apply for listing of the Certificates on a national
securities exchange, but has been advised by the Underwriter that it currently
intends to make a market in the Certificates. The Underwriter is not obligated,
however, to make a market in the Certificates, and any such market-making may be
discontinued at any time at the sole discretion of the Underwriter. Accordingly,
no assurance can be given as to the development or liquidity of any market for
the Certificates.
The Underwriter and its affiliates have provided or are currently providing
investment banking and other advisory or financial services to AWA and GPA and
certain of their respective affiliates for which they receive customary
compensation, and may continue to provide such services in the future.
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<PAGE> 107
It is expected that delivery of the Certificates will be made against
payment therefor on or about the Closing Date, which will be the sixth business
day following the date of pricing of the Certificates (such settlement cycle
being herein referred to as "T+6"). Under Rule 15c6-1 under the Exchange Act,
trades in the secondary market generally are required to settle in three
business days, unless the parties to any such trade expressly agree otherwise.
Accordingly, purchasers who wish to trade Certificates on any day prior to the
third business day before the Closing Date will be required, by virtue of the
fact that the Certificates initially will settle in T+6, to specify an alternate
settlement cycle at the time of any such trade to prevent a failed settlement.
Purchasers of Certificates who wish to trade Certificates on any day prior to
the third business day before the Closing Date should consult their own advisor.
In order to facilitate the offering of the Certificates, the Underwriter
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Certificates. Specifically, the Underwriter may overallot in
connection with the offering, creating a short position in the Certificates for
its own account. In addition, to cover overallotments or to stabilize the price
of the Certificates, the Underwriter may bid for, and purchase, the Certificates
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the
Certificates in the offering, if the syndicate repurchases previously
distributed Certificates in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Certificates above independent market
levels. The Underwriter is not required to engage in these activities, and may
end any of these activities at any time.
LEGAL MATTERS
The validity of the Certificates offered hereby will be passed upon for AWA
by Andrews & Kurth L.L.P., Houston, Texas, and for the Underwriter by Milbank,
Tweed, Hadley & McCloy, New York, New York. Certain federal income tax matters
with respect to the Trust and Certificateholders will be passed upon by Andrews
& Kurth L.L.P., special tax counsel to AWA. The respective counsel for AWA and
the Underwriter may rely upon Shipman & Goodwin LLP, counsel to the Trustee, as
to certain matters relating to the authorization, execution and delivery of the
Basic Agreement, each Trust Supplement and the issuance of the Certificates.
EXPERTS
The financial statements and financial statement schedule of AWA as of and
for the years ended December 31, 1996 and 1995, the period August 26, 1994
through December 31, 1994, and the period January 1, 1994 through August 25,
1994, have been included and incorporated by reference herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The reports of KPMG Peat Marwick LLP as of and for the years ended December
31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the
period January 1, 1994 through August 25, 1994 contain an explanatory paragraph
that states the financial statements of the Reorganized Company reflect the
impact of adjustments to reflect the fair value of assets and liabilities under
fresh start reporting. As a result, the financial statements of the Reorganized
Company are presented on a different basis than those of the Predecessor Company
and therefore, are not comparable in all respects.
The references to BK, AISI, and MBA, and to their respective appraisal
reports, dated as of March 26, 1997 in the case of BK, March 19, 1997 in the
case of AISI and March 31, 1997 in the case of MBA, are included herein in
reliance upon the authority of each such firm as an expert with respect to the
matters contained in its appraisal report.
107
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 1997
Condensed Balance Sheets as of March 31, 1997 (Unaudited)
and December 31, 1996..................................... F-2
Condensed Statements of Income for the three months ended
March 31, 1997 and 1996 (Unaudited)....................... F-3
Condensed Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (Unaudited)................. F-4
Notes to Condensed Financial Statements..................... F-5
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996
Independent Auditors' Report................................ F-7
Balance Sheets as of December 31, 1996 and 1995............. F-8
Statements of Income for the years ended December 31, 1996
and 1995, the period August 26, 1994 through December 31,
1994, and the period January 1, 1994 through August 25,
1994...................................................... F-9
Statements of Cash Flows for the years ended December 31,
1996 and 1995, the period August 26, 1994 through December
31, 1994, and the period January 1, 1994 through August
25, 1994.................................................. F-10
Statements of Stockholder's Equity for the years ended
December 31, 1996 and 1995, the period August 26, 1994
through December 31, 1994, and the period January 1, 1994
through
August 25, 1994........................................... F-11
Notes to Financial Statements............................... F-12
</TABLE>
F-1
<PAGE> 109
AMERICA WEST AIRLINES, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 136,323 $ 137,499
Short-term investments.................................... 29,385 39,131
Accounts receivable, less allowance for doubtful accounts
of $3,056 in 1997 and $3,091 in 1996................... 95,019 106,215
Expendable spare parts and supplies, less allowance for
obsolescence of $1,911 in 1997 and $1,713 in 1996...... 21,735 21,423
Prepaid expenses.......................................... 56,917 47,545
---------- ----------
Total current assets.............................. 339,379 351,813
---------- ----------
Property and equipment:
Flight equipment.......................................... 704,346 669,654
Other property and equipment.............................. 112,749 107,993
Equipment purchase deposits............................... 68,355 56,665
---------- ----------
885,450 834,312
Less accumulated depreciation and amortization............ 189,265 163,718
---------- ----------
Total property and equipment...................... 696,185 670,594
---------- ----------
Other assets:
Restricted cash........................................... 28,638 26,433
Reorganization value in excess of amounts allocable to
identifiable assets, net............................... 435,789 447,044
Deferred income taxes..................................... 74,700 74,700
Other assets, net......................................... 27,391 27,093
---------- ----------
Total other assets................................ 566,518 575,270
---------- ----------
$1,602,082 $1,597,677
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 44,211 $ 46,238
Accounts payable.......................................... 132,621 115,458
Air traffic liability..................................... 232,984 214,056
Accrued compensation and vacation benefits................ 26,269 30,085
Accrued taxes............................................. 46,470 72,047
Other accrued liabilities................................. 45,307 44,836
---------- ----------
Total current liabilities......................... 527,862 522,720
---------- ----------
Long-term debt, less current maturities..................... 333,685 330,148
Deferred credits and other liabilities...................... 117,153 122,029
Commitments and contingencies
Stockholder's equity:
Common Stock $.01 par value. Authorized, issued and
outstanding; 1,000 shares.............................. -- --
Additional paid-in capital................................ 539,301 552,643
Retained earnings......................................... 84,081 70,137
---------- ----------
Total stockholder's equity........................ 623,382 622,780
---------- ----------
$1,602,082 $1,597,677
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE> 110
AMERICA WEST AIRLINES, INC.
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Operating revenues:
Passenger................................................. $435,540 $387,802
Cargo..................................................... 12,756 10,757
Other..................................................... 13,891 14,591
-------- --------
Total operating revenues.......................... 462,187 413,150
-------- --------
Operating expenses:
Salaries and related costs................................ 101,017 94,702
Aircraft rents............................................ 54,932 47,272
Other rents and landing fees.............................. 30,816 26,567
Aircraft fuel............................................. 69,116 49,176
Agency commissions........................................ 38,312 32,599
Aircraft maintenance materials and repairs................ 31,312 27,025
Depreciation and amortization............................. 12,077 13,232
Amortization of excess reorganization value............... 6,255 6,549
Other..................................................... 84,887 81,710
-------- --------
Total operating expenses.......................... 428,724 378,832
-------- --------
Operating income............................................ 33,463 34,318
-------- --------
Nonoperating income (expenses):
Interest income........................................... 4,240 3,170
Interest expense.......................................... (12,081) (12,268)
Other, net................................................ 296 200
-------- --------
Total nonoperating expenses, net.................. (7,545) (8,898)
-------- --------
Income before income taxes.................................. 25,918 25,420
-------- --------
Income taxes................................................ 11,974 11,693
-------- --------
Net income.................................................. $ 13,944 $ 13,727
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE> 111
AMERICA WEST AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 13,944 $ 13,727
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 12,077 13,232
Amortization of capitalized maintenance................ 14,434 6,602
Amortization of excess reorganization value............ 6,255 6,549
Amortization of deferred credits....................... (2,793) (2,901)
Other.................................................. 1,131 520
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net........... 11,196 (29,622)
Decrease (increase) in spare parts and supplies, net...... (312) 244
Increase in prepaid expenses.............................. (9,372) (4,852)
Decrease (increase) in other assets, net.................. 2,497 (2,341)
Increase in accounts payable.............................. 17,163 11,004
Increase in air traffic liability......................... 18,928 67,936
Decrease in accrued compensation and vacation benefits.... (3,816) (19,570)
Decrease in accrued taxes................................. (25,577) (430)
Increase in other accrued liabilities..................... 471 121
Decrease in other liabilities............................. (2,564) (1,542)
-------- --------
Net cash provided by operating activities......... 53,662 58,677
Cash flows from investing activities:
Purchases of property and equipment....................... (41,062) (32,795)
Decrease in short-term investments........................ 9,746
Other..................................................... 91 (69)
-------- --------
Net cash used in investing activities............. (31,225) (32,864)
Cash flows from financing activities:
Repayment of debt......................................... (10,271) (15,812)
Repurchase of warrants.................................... (13,342) --
Issuance of common stock.................................. -- 2,174
-------- --------
Net cash used in financing activities............. (23,613) (13,638)
-------- --------
Net increase (decrease) in cash and cash equivalents........ (1,176) 12,175
-------- --------
Cash and cash equivalents at beginning of period............ 137,499 224,367
-------- --------
Cash and cash equivalents at end of period.................. $136,323 $236,542
======== ========
Cash, cash equivalents, and short-term investments at end of
period.................................................... $165,708 $236,542
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE> 112
AMERICA WEST AIRLINES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
1. BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared by America West Airlines, Inc., ("AWA" or the "Company"), a
wholly-owned subsidiary of America West Holdings Corporation ("Holdings"),
pursuant to the rules and regulations of the Securities and Exchange Commission
but do not include all information and footnotes required by generally accepted
accounting principles. In the opinion of management, the condensed financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation. Certain prior year amounts have been
reclassified to conform with current year presentation. The accompanying
condensed financial statements should be read in conjunction with the financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
2. INCOME TAXES
The Company recorded income tax expense as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current taxes:
Federal................................................... $ 544 $ 364
State..................................................... 488 326
------- -------
1,032 690
Deferred taxes.............................................. -- --
Income tax expense allocable to reorganization items........ 10,942 11,003
------- -------
Income tax expense.......................................... $11,974 $11,693
======= =======
</TABLE>
As reflected in the above table, for the three months ended March 31, 1997
and 1996, income tax expense pertains both to income from operations as well as
to certain adjustments necessitated by the Company's emergence from bankruptcy
in 1994 and the resultant fresh start adjustments to the Company's financial
statements. The Company's reorganization gave rise to significant items of
expense for financial reporting purposes that are not deductible for income tax
purposes. In large measure, it is these nondeductible (for income tax purposes)
expenses that result in income tax expense (for financial reporting purposes)
significantly greater than taxes computed at the current U.S. corporate
statutory rate of 35 percent. Nevertheless, the Company's actual cash income tax
liability (i.e., income taxes payable) is considerably lower than income tax
expense shown for financial reporting purposes.
3. SUPPLEMENTAL INFORMATION TO CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash paid for interest and income taxes:
Interest, net of amounts capitalized ($606 in 1996)....... $10,612 $13,312
Income taxes.............................................. 40 16
Non-cash financing activities:
Notes payable issued for equipment purchase deposits...... 11,690 7,814
</TABLE>
F-5
<PAGE> 113
4. WARRANTS
In March 1997, the Company repurchased 1.91 million of its publicly traded
warrants from TPG Partners, L.P. and certain of its affiliates for approximately
$13.3 million.
5. COMMITMENTS AND CONTINGENCIES
(a) Leases
In February 1997, the Company entered into an agreement to lease one A320
aircraft for a term of 50 months with rents payable monthly.
(b) Contingent Legal Obligations
Certain administrative and priority tax claims are pending against the
Company which, if ultimately allowed by the bankruptcy court, would represent
general obligations of the Company. Such claims include claims of various state
and local tax authorities and certain potential contractual indemnification
obligations. The Company is also a defendant in various lawsuits. Management
cannot reasonably predict the outcome of the pending lawsuits and administrative
and priority tax claims. However, management believes, after considering a
number of factors, including the advice of outside counsel, the nature of the
contingencies to which the Company is subject and its prior experience, that
although the outcome of those matters could adversely affect future operating
results, the resolution of these actions will not have a material adverse effect
on the Company's financial condition.
F-6
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
America West Airlines, Inc.:
We have audited the accompanying balance sheets of America West Airlines,
Inc. as of December 31, 1996 and 1995, and the related statements of income,
cash flows and stockholder's equity for the years ended December 31, 1996 and
1995, the period August 26, 1994 through December 31, 1994, and the period
January 1, 1994 through August 25, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of America West Airlines, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995, the period August 26, 1994
through December 31, 1994, and the period January 1, 1994 through August 25,
1994, in conformity with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, on August 25, 1994,
America West Airlines, Inc. emerged from bankruptcy. The financial statements of
the Reorganized Company reflect the impact of adjustments to reflect the fair
value of assets and liabilities under fresh start reporting. As a result, the
financial statements of the Reorganized Company are presented on a different
basis of accounting than those of the Predecessor Company and, therefore, are
not comparable in all respects.
/s/ KPMG Peat Marwick LLP
Phoenix, Arizona
February 28, 1997
F-7
<PAGE> 115
AMERICA WEST AIRLINES, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 137,499 $ 224,367
Short-term investments.................................... 39,131 --
Accounts receivable, less allowance for doubtful accounts
of $3,091 in 1996 and $2,515 in 1995.................... 106,215 69,094
Expendable spare parts and supplies, less allowance for
obsolescence of $1,713 in 1996 and $2,115 in 1995....... 21,423 28,643
Prepaid expenses.......................................... 47,545 43,315
---------- ----------
Total current assets............................... 351,813 365,419
---------- ----------
Property and equipment:
Flight equipment.......................................... 669,654 546,591
Other property and equipment.............................. 107,993 104,106
Equipment purchase deposits............................... 56,665 27,489
---------- ----------
834,312 678,186
Less accumulated depreciation and amortization............ 163,718 76,123
---------- ----------
670,594 602,063
---------- ----------
Other assets:
Restricted cash........................................... 26,433 31,694
Reorganization value in excess of amounts allocable to
identifiable assets, net................................ 447,044 489,045
Deferred income taxes..................................... 74,700 74,700
Other assets, net......................................... 27,093 25,788
---------- ----------
575,270 621,227
---------- ----------
$1,597,677 $1,588,709
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 46,238 $ 54,157
Accounts payable.......................................... 115,458 89,157
Air traffic liability..................................... 214,056 191,744
Accrued compensation and vacation benefits................ 30,085 41,616
Accrued taxes............................................. 72,047 34,359
Other accrued liabilities................................. 44,836 24,802
---------- ----------
Total current liabilities.......................... 522,720 435,835
---------- ----------
Long-term debt, less current maturities..................... 330,148 373,964
Deferred credits and other liabilities...................... 122,029 129,438
Commitments and contingencies
Stockholder's equity:
Preferred stock, $.01 par value. Authorized 48,800,000
shares; no shares issued................................ -- --
Class A common stock, $.01 par value. Authorized 1,200,000
shares; issued and outstanding 1,200,000 shares in
1995.................................................... -- 12
Class B common stock, $.01 par value. Authorized 1,000
shares; issued and outstanding 1,000 shares in 1996;
Authorized 100,000,000 shares; issued and outstanding
44,141,330 shares in 1995............................... -- 441
Additional paid-in capital................................ 552,643 588,927
Retained earnings......................................... 70,137 61,632
---------- ----------
622,780 651,012
Less: cost of Class B common stock in treasury, 112,000
shares in 1995.......................................... -- (1,540)
---------- ----------
Total stockholder's equity......................... 622,780 649,472
---------- ----------
$1,597,677 $1,588,709
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 116
AMERICA WEST AIRLINES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
REORGANIZED COMPANY ------------
-------------------------------------- PERIOD
PERIOD FROM FROM
YEAR ENDED DECEMBER 31, AUGUST 26 TO JANUARY 1 TO
----------------------- DECEMBER 31, AUGUST 25,
1996 1995 1994 1994
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger.................................. $1,637,762 $1,452,261 $437,775 $ 882,140
Cargo...................................... 46,519 44,425 16,648 27,645
Other...................................... 55,245 53,956 15,343 29,243
---------- ---------- -------- ---------
Total operating revenues........... 1,739,526 1,550,642 469,766 939,028
---------- ---------- -------- ---------
Operating expenses:
Salaries and related costs................. 385,840 382,032 117,562 213,722
Aircraft rents............................. 202,237 173,571 54,983 105,547
Other rents and landing fees............... 111,947 108,264 35,839 68,163
Aircraft fuel.............................. 233,522 174,195 58,165 100,646
Agency commissions......................... 133,015 124,146 37,265 78,988
Aircraft maintenance materials and
repairs................................. 125,768 65,925 17,590 28,109
Depreciation and amortization.............. 52,937 49,083 15,538 56,694
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets..................... 25,263 31,958 11,145 --
Restructuring and other nonrecurring
special charges......................... 65,098 10,500 -- --
Other...................................... 335,233 276,236 82,808 179,653
---------- ---------- -------- ---------
Total operating expenses........... 1,670,860 1,395,910 430,895 831,522
---------- ---------- -------- ---------
Operating income............................. 68,666 154,732 38,871 107,506
---------- ---------- -------- ---------
Nonoperating income (expenses):
Interest income............................ 12,861 15,045 3,834 470
Interest expense (contractual interest of
$44,747 for the period ended August 25,
1994)................................... (46,866) (58,598) (22,636) (33,998)
Gain (loss) on disposition of property and
equipment............................... 1,288 (2,734) (398) (1,659)
Reorganization expense, net................ -- -- -- (273,659)
Other, net................................. (1,456) (67) 65 131
---------- ---------- -------- ---------
Total nonoperating expenses, net... (34,173) (46,354) (19,135) (308,715)
---------- ---------- -------- ---------
Income (loss) before income taxes
and extraordinary items.......... 34,493 108,378 19,736 (201,209)
Income taxes................................. 24,883 53,608 11,890 2,059
---------- ---------- -------- ---------
Income (loss) before extraordinary
items............................ 9,610 54,770 7,846 (203,268)
Extraordinary items, net of tax.............. (1,105) (984) -- 257,660
---------- ---------- -------- ---------
Net income......................... $ 8,505 $ 53,786 $ 7,846 $ 54,392
========== ========== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE> 117
AMERICA WEST AIRLINES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
---------------------------------------- ------------
PERIOD PERIOD
FROM FROM
AUGUST 26 JANUARY 1
YEAR ENDED DECEMBER 31, TO TO
------------------------ DECEMBER 31, AUGUST 25,
1996 1995 1994 1994
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 8,505 $ 53,786 $ 7,846 $ 54,392
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 52,937 49,083 15,538 56,694
Amortization of capitalized maintenance.......... 39,679 11,934 356 --
Amortization of reorganization value............. 25,263 31,958 11,145 --
Income taxes attributable to reorganization items
and other...................................... 23,091 52,913 11,854 --
Amortization of deferred credits................. (11,563) (10,952) (3,961) (2,966)
Nonrecurring special charge...................... 65,098 -- -- --
Reorganization items............................. -- -- -- 185,226
Extraordinary items.............................. 1,105 984 -- (257,660)
Other............................................ 2,099 7,199 1,576 1,276
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net.... (37,121) (11,172) 27,439 (18,769)
Decrease (increase) in expendable spare parts and
supplies, net.................................... (3,793) (4,819) 1,165 397
Decrease (increase) in prepaid expenses............ (1,467) (14,031) 4,371 1,284
Decrease (increase) in other assets, net........... (3,173) (7,312) (10,635) 12,971
Increase (decrease) in accounts payable............ 26,301 10,308 (17,289) (15,557)
Increase (decrease) in air traffic liability....... 22,312 64,388 (26,452) 30,510
Increase (decrease) in accrued compensation and
vacation benefits................................ (11,531) 25,840 (11,667) 15,739
Increase (decrease) in accrued taxes............... 37,688 7,298 (2,104) 25,999
Increase (decrease) in other accrued liabilities... 8,315 (663) (13,785) 67,429
Increase (decrease) in other liabilities........... (13,411) (6,314) 2,521 (14,749)
--------- --------- -------- ---------
Net cash provided by (used in) operating
activities................................ 230,334 260,428 (2,082) 142,216
--------- --------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment................ (155,742) (107,387) (14,658) (61,271)
Increase in short-term investments................. (39,131) -- -- --
Other.............................................. (4,082) (9) 600 334
--------- --------- -------- ---------
Net cash used in investing activities....... (198,955) (107,396) (14,058) (60,937)
--------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt..................... -- 29,300 -- 100,000
Repayment of debt.................................. (79,216) (137,421) (23,355) (173,699)
Issuance of common stock........................... 3,074 1,545 3 114,862
Debt issuance cost................................. -- (3,130) -- --
Acquisition of treasury stock...................... (23,964) (1,540) -- --
Acquisition of warrants............................ (18,141) -- -- --
--------- --------- -------- ---------
Net cash provided by (used in) financing
activities................................ (118,247) (111,246) (23,352) 41,163
--------- --------- -------- ---------
Net increase (decrease) in cash and cash
equivalents............................... (86,868) 41,786 (39,492) 122,442
--------- --------- -------- ---------
Cash and cash equivalents at beginning of period..... 224,367 182,581 222,073 99,631
--------- --------- -------- ---------
Cash and cash equivalents at end of period........... $ 137,499 $ 224,367 $182,581 $ 222,073
========= ========= ======== =========
Cash, cash equivalents and short-term investments at
end of period...................................... $ 176,630 $ 224,367 $182,581 $ 222,073
========= ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE> 118
AMERICA WEST AIRLINES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE PERIOD AUGUST 26 THROUGH
DECEMBER 31, 1994,
AND THE PERIOD JANUARY 1 THROUGH AUGUST 25, 1994
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
AND NOTES
RECEIVABLE --
CONVERTIBLE CLASS A CLASS B ADDITIONAL RETAINED CLASS B EMPLOYEE
PREFERRED COMMON COMMON COMMON PAID-IN EARNINGS/ TREASURY STOCK
STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) STOCK PURCHASE PLANS
----------- ------- ------- ------ ---------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994.......... $ 18 $ -- $ -- $6,323 $197,010 $(438,626) $ -- $(18,987)
---- ---- ----- ------ -------- --------- -------- --------
Issuance of 336,277 shares of common
stock pursuant to convertible
preferred stock dividends......... -- -- -- 84 2,932 -- -- --
Employee stock purchase plan:
Cancellation of 7,678 shares of
common stock at:
$1.19-$4.03 per share........... -- -- -- (2) (49) -- -- 43
Deferred compensation........... -- -- -- -- (1) -- -- 606
Issuance of 108,825 shares of common
stock pursuant to exercise of
stock options..................... -- -- -- 27 166 -- -- --
Net income.......................... -- -- -- -- -- 54,392 -- --
Eliminate predecessor equity
accounts in connection with fresh
start............................. (18) -- -- (6,432) (200,058) 206,508 -- --
Eliminate employee stock
receivable........................ -- -- -- -- -- (18,338) -- 18,338
Record excess of reorganization
value over identifiable assets.... -- -- -- -- -- 668,702 -- --
Sale of 1,200,000 shares of Class A
common stock and 14,000,000 shares
of Class B common stock........... -- 12 140 -- 114,710 -- -- --
Issuance of 29,925,000 shares of new
Class B common stock.............. -- -- 299 -- 472,339 (472,638) -- --
---- ---- ----- ------ -------- --------- -------- --------
BALANCE AT AUGUST 25, 1994.......... -- 12 439 -- 587,049 -- -- --
---- ---- ----- ------ -------- --------- -------- --------
Issuance of common stock............ -- -- -- -- 100 -- -- --
Net income.......................... -- -- -- -- -- 7,846 -- --
---- ---- ----- ------ -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1994........ -- 12 439 -- 587,149 7,846 -- --
---- ---- ----- ------ -------- --------- -------- --------
Issuance of 4,057 shares and 170,667
shares of common stock pursuant to
the exercise of stock warrants and
stock options..................... -- -- 2 -- 1,543 -- -- --
Issuance of 30,334 shares of
restricted stock.................. -- -- -- -- 235 -- -- --
Acquisition of 112,000 shares of
treasury stock at:
$13.63-$14.00 per share........... -- -- -- -- -- -- (1,540) --
Net income.......................... -- -- -- -- -- 53,786 -- --
---- ---- ----- ------ -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1995........ -- 12 441 -- 588,927 61,632 (1,540) --
---- ---- ----- ------ -------- --------- -------- --------
Issuance of 12,725 shares and
314,001 shares of common stock
pursuant to the exercise of stock
warrants and stock options........ -- -- 3 -- 3,071 -- -- --
Issuance of 158,000 shares of
restricted stock.................. -- -- 2 -- 2,761 -- -- --
Acquisition and issuance of treasury
stock at:
$13.63-$21.88 per share........... -- -- -- -- 649 -- (23,569) --
Repurchase of 2,187,475 warrants at
$8.29 per warrant................. -- -- -- -- (18,141) -- -- --
Net income.......................... -- -- -- -- -- 8,505 -- --
Purchase of stock option from
Holdings.......................... -- -- -- -- (62,373) -- -- --
Contribution of capital by
Holdings.......................... -- -- -- -- 62,400 -- -- --
Reorganization as wholly-owned
subsidiary of Holdings............ -- (12) (446) -- (24,651) -- 25,109 --
---- ---- ----- ------ -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1996........ $ -- $ -- $ -- $ -- $552,643 $ 70,137 $ -- $ --
==== ==== ===== ====== ======== ========= ======== ========
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE AT JANUARY 1, 1994.......... $(254,262)
---------
Issuance of 336,277 shares of common
stock pursuant to convertible
preferred stock dividends......... 3,016
Employee stock purchase plan:
Cancellation of 7,678 shares of
common stock at:
$1.19-$4.03 per share........... (8)
Deferred compensation........... 605
Issuance of 108,825 shares of common
stock pursuant to exercise of
stock options..................... 193
Net income.......................... 54,392
Eliminate predecessor equity
accounts in connection with fresh
start............................. --
Eliminate employee stock
receivable........................ --
Record excess of reorganization
value over identifiable assets.... 668,702
Sale of 1,200,000 shares of Class A
common stock and 14,000,000 shares
of Class B common stock........... 114,862
Issuance of 29,925,000 shares of new
Class B common stock.............. --
---------
BALANCE AT AUGUST 25, 1994.......... 587,500
---------
Issuance of common stock............ 100
Net income.......................... 7,846
---------
BALANCE AT DECEMBER 31, 1994........ 595,446
---------
Issuance of 4,057 shares and 170,667
shares of common stock pursuant to
the exercise of stock warrants and
stock options..................... 1,545
Issuance of 30,334 shares of
restricted stock.................. 235
Acquisition of 112,000 shares of
treasury stock at:
$13.63-$14.00 per share........... (1,540)
Net income.......................... 53,786
---------
BALANCE AT DECEMBER 31, 1995........ 649,472
---------
Issuance of 12,725 shares and
314,001 shares of common stock
pursuant to the exercise of stock
warrants and stock options........ 3,074
Issuance of 158,000 shares of
restricted stock.................. 2,763
Acquisition and issuance of treasury
stock at:
$13.63-$21.88 per share........... (22,920)
Repurchase of 2,187,475 warrants at
$8.29 per warrant................. (18,141)
Net income.......................... 8,505
Purchase of stock option from
Holdings.......................... (62,373)
Contribution of capital by
Holdings.......................... 62,400
Reorganization as wholly-owned
subsidiary of Holdings............ --
---------
BALANCE AT DECEMBER 31, 1996........ $ 622,780
=========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE> 119
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
America West Holdings Corporation ("Holdings"), a Delaware corporation,
became the holding company for America West Airlines, Inc. ("AWA" or the
"Company"), effective midnight, December 31, 1996. Holdings' primary business
activity is ownership of all the capital stock of AWA, the ninth largest
commercial airline carrier in the United States serving more than 90
destinations in the U.S., Canada and Mexico.
(a) Basis of Presentation
The accompanying financial statements include the accounts of America West
Airlines, Inc., a wholly-owned subsidiary of Holdings. America West Airlines,
Inc., D.I.P. (the "Predecessor Company") filed a voluntary petition on June 27,
1991, to reorganize under Chapter 11 of the Federal Bankruptcy Code. On August
10, 1994, the Plan of Reorganization ("Plan"), filed by the Predecessor Company,
was confirmed and became effective on August 25, 1994 (the "Effective Date"). On
August 25, 1994, AWA, (the "Reorganized Company") adopted fresh start reporting
in accordance with Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code" ("SOP 90-7") of the American
Institute of Certified Public Accountants. Accordingly, the Company's
post-reorganization balance sheet and statements of income have not been
prepared on a consistent basis with such pre-reorganization financial statements
and are not comparable in all respects to financial statements prior to
reorganization. For accounting purposes, the inception date of the Reorganized
Company is deemed to be August 26, 1994. A vertical black line is shown in the
financial statements to separate the Reorganized Company from the Predecessor
Company since they have not been prepared on a consistent basis of accounting.
(b) Cash and Cash Equivalents
Cash equivalents consist of all highly liquid debt instruments purchased
with original maturities of three months or less. The debt instruments are
classified as held-to-maturity and are carried at amortized cost which
approximates fair value. (See Note 8, "Investments in Debt Securities.")
(c) Short-term Investments
Short-term investments consist of cash invested in certain debt securities
with original maturities greater than 90 days. The debt securities are
classified as held to maturity and are carried at amortized cost which
approximates fair value. (See Note 8, "Investments in Debt Securities.")
(d) Expendable Spare Parts and Supplies
Flight equipment expendable spare parts and supplies are valued at average
cost. Allowances for obsolescence are provided, over the estimated useful life
of the related aircraft and engines, for spare parts expected to be on hand at
the date the aircraft are retired from service.
(e) Property and Equipment
Property and equipment are recorded at cost. Interest capitalized on
advance payments for aircraft acquisitions and on expenditures for aircraft
improvements are part of these costs. No interest was capitalized in the year
ended December 31, 1996 due to the pending restructuring of the aircraft
purchase agreement with AVSA S.A.R.L., an affiliate of Airbus Industrie ("AVSA")
(See Note 10, "Commitments and Contingencies"). Interest capitalized for the
year ended December 31, 1995 was $2.7 million. Property and equipment is
depreciated and amortized to residual values over the estimated useful lives or
the lease term, whichever is less, using the straight-line method.
F-12
<PAGE> 120
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The estimated useful lives for the Company's ground property and equipment
range from three to 12 years for owned property and equipment and to 30 years
for the reservation and training center and technical support facilities. The
estimated useful lives of the Company's owned aircraft, jet engines, flight
equipment and rotable parts range from 11 to 22 years. Leasehold improvements
relating to flight equipment and other property on operating leases are
amortized over the life of the lease or the life of the asset, whichever is
shorter.
(f) Restricted Cash
Restricted cash includes cash deposits securing certain letters of credit.
(g) Aircraft Maintenance and Repairs
Routine maintenance and repairs are charged to expense as incurred. The
cost of major scheduled airframe, engine and certain component overhauls are
capitalized and amortized over the periods benefited and are included in
aircraft maintenance materials and repairs expense for the Reorganized Company
as part of fresh start reporting and in depreciation and amortization expense
for the Predecessor Company. The balance of capitalized maintenance relating to
aircraft and engines was reduced as part of the revaluation of property and
equipment and operating leases under fresh start reporting.
Additionally, a provision for the estimated cost of scheduled airframe and
engine overhauls required to be performed on leased aircraft prior to their
return to the lessors has been recorded.
(h) Reorganization Value in Excess of Amounts Allocable to Identifiable Assets
Reorganization value in excess of amounts allocable to identifiable assets
is amortized on a straight line basis over 20 years. Accumulated amortization at
December 31, 1996 and 1995 was $68.4 million and $43.1 million, respectively.
During the years ended December 31, 1996 and 1995, reductions in reorganization
value of $16.7 million and $50 million were recorded as a result of the
utilization of the Predecessor Company tax attributes including net operating
loss carryforwards. Additionally, in 1995 the Company established a deferred tax
asset, which reduced reorganization value by $74.7 million. The Company assesses
the recoverability of this asset based upon expected future undiscounted cash
flows and other relevant information.
(i) Frequent Flyer Awards
The Company maintains a frequent travel award program known as "FlightFund"
that provides a variety of awards to program members based on accumulated
mileage. The estimated cost of providing the free travel, using the incremental
cost method as adjusted for estimated redemption rates, is recognized as a
liability and charged to operations as program members accumulate mileage.
(j) Deferred Credit-Operating Leases
Operating leases were adjusted to fair market value at the Effective Date.
The net present value of the difference between the stated lease rates and the
fair market rates has been recorded as a deferred credit in the accompanying
balance sheets. The deferred credit will be increased through charges to
interest expense and decreased on a straight-line basis as a reduction in rent
expense over the applicable lease periods. At December 31, 1996 and 1995, the
unamortized balance of the deferred credit was $95.6 million and $107.2 million,
respectively.
(k) Passenger Revenue
Passenger revenue is recognized when the transportation is provided. Ticket
sales for transportation which has not yet been provided are recorded as air
traffic liability. Passenger traffic commissions and related fees are
F-13
<PAGE> 121
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expensed when the related revenue is recognized. Passenger traffic commissions
and related fees not yet recognized are included as a prepaid expense.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(m) Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(n) Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1996, 1995 and for the combined period
ending December 31, 1994 was $26.6 million, $25.2 million and $23.8 million,
respectively.
(o) Reclassification
Certain reclassifications have been made in the prior year's financial
statements to conform them to the current presentation.
F-14
<PAGE> 122
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
SECURED
Notes payable, primarily fixed interest rates of 9.53% to
10.79%, averaging 10.32%, installments due 1999 through
2008...................................................... $234,494 $274,751
Borrowings under lines of credit, floating interest rates of
Prime +1% to three months LIBOR +4%, averaging 9.42%,
installments due through 1999. No available borrowings
remain.................................................... 8,277 14,794
Industrial development revenue bonds, variable interest rate
of 2.9% to 5.6%, averaging 3.83%, due 2016(a)............. 29,300 29,300
-------- --------
272,071 318,845
-------- --------
UNSECURED
10 3/4% Senior Notes, face amount of $50 million, interest
only payment until due in 2005(b)......................... 48,197 71,984
Notes payable, interest rates of 8% to 90-day LIBOR +3%,
averaging 8.39%, installments due through 2000............ 55,910 36,708
Other....................................................... 208 584
-------- --------
104,315 109,276
-------- --------
Total long-term debt.............................. 376,386 428,121
Less: current maturities.................................... 46,238 54,157
-------- --------
$330,148 $373,964
======== ========
</TABLE>
- ---------------
(a) The industrial development revenue bonds are backed by an irrevocable direct
pay letter of credit issued by the Industrial Bank of Japan, Limited, Los
Angeles Agency; the letter of credit is secured by the Company's maintenance
facility and related improvements, seventeen spare engines and a flight
simulator with a combined net book value of $42.1 million and a pledge of
$3.2 million in cash.
The interest rate varies weekly and from January 1, 1996 to December 31,
1996 ranged from 2.9% to 5.6%. The bondholders have the right to put the
bonds back to the Company on a weekly basis if the bonds bear interest at
the weekly rate or monthly if the bonds bear interest at a monthly rate. If
the bonds are put back to the Company, the remarketing agent or the transfer
agent will, at the direction of the Company, remarket such bonds. Any bonds
not remarketed will be retired utilizing the $29.9 million letter of credit
which represents the principal plus 60 days of interest at a maximum rate of
12%. The letter of credit was extended in November 1996 for one year and is
subject to mandatory redemption under certain circumstances. The estimated
annual cost for the letter of credit is approximately $1.1 million.
(b) In June 1996, the Company prepaid $25 million in principal of the 10 3/4%
Senior Notes. The 10 3/4% Senior Notes mature on September 1, 2005 and
interest is payable in arrears semi-annually commencing on March 1, 1996.
The 10 3/4% Senior Notes may be redeemed at the option of the Company on or
after September 1, 2001 at any time in whole or from time to time in part,
at a redemption price equal to the
F-15
<PAGE> 123
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
following percentage of principal redeemed, plus accrued and unpaid interest
to the date of redemption, if redeemed during the 12-month period beginning:
<TABLE>
<CAPTION>
SEPTEMBER 1, PERCENTAGE
------------ ----------
<S> <C>
2000............................................................. 105.375%
2001............................................................. 103.583%
2002............................................................. 101.792%
2003 and thereafter.............................................. 100.000%
</TABLE>
Secured financings totaling $272.1 million are collateralized by assets,
primarily aircraft and engines, with a net book value of $388.5 million at
December 31, 1996.
At December 31, 1996, the estimated maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997........................................................ $ 46,238
1998........................................................ 43,210
1999........................................................ 70,430
2000........................................................ 28,000
2001........................................................ 20,720
Thereafter.................................................. 167,788
--------
$376,386
========
</TABLE>
Certain of the Company's long-term debt agreements contain minimum cash
balance requirements, leverage ratios, coverage ratios, limitations on
investments and restricted payments including cash dividends, and other
financial covenants with which the Company was in compliance at December 31,
1996.
3. CAPITAL STOCK
Effective midnight, December 31, 1996, AWA became a wholly owned subsidiary
of Holdings and each share of AWA Class A and Class B Common Stock and options
to purchase Class B Common Stock were exchanged for one share of Holdings Class
A or Class B Common Stock and options to purchase Class B Common Stock.
Holdings' Class B Common Stock is listed on the New York Stock Exchange.
On August 25, 1994, AWA issued approximately 10.4 million warrants to
purchase Class B Common Stock with an exercise price of $12.74 per share. The
warrants are exercisable by the holders any time before August 25, 1999 and 10.4
million shares of Class B Common Stock have been reserved for the exercise of
these warrants. In May 1996, approximately 2.2 million warrants were repurchased
by AWA for approximately $18 million. As of December 31, 1996, 17,054 warrants
have been exercised at $12.74 per share. Pursuant to their terms, as part of the
holding company formation transaction the AWA warrants became rights to acquire
shares of Holdings Class B Common Stock. AWA has made arrangements for the
issuance of Holdings Class B Common Stock upon the exercise of such warrants by
purchasing an option from Holdings to acquire such stock. AWA issued a $62.4
million note payable due December 31, 2005 with an interest rate of 11%.
Subsequently, Holdings made a capital contribution to AWA issuing a note
payable to AWA for $62.4 million due December 31, 2045 with an interest rate of
10 7/8%. AWA has the right on December 31, 2005 to repay all or a portion of the
then outstanding principal balance of its note payable by offsetting by an equal
amount the then outstanding principal balance of its note receivable and thus,
these notes have been offset in the accompanying financial statements in
accordance with applicable accounting standards.
F-16
<PAGE> 124
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan, covering essentially
all employees of the Company. Participants may contribute from 1 to 15% of their
pretax earnings to a maximum of $9,500 in 1996. The Company's matching
contribution is 50% of a participant's contributions up to 6% of the
participant's annual pretax earnings or 25% of a participant's contributions,
whichever is greater. The Company's contribution expense to the plan totaled
$5.9 million, $5.9 million and $3.8 million in 1996, 1995 and the combined 1994
period, respectively.
5. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
(a) Fair Value of Financial Instruments
Cash Equivalents and Short-term Investments
The carrying amount approximates fair value because of the short-term
maturity of these instruments.
Long-term Debt
At December 31, 1996 and 1995, the fair value of long-term debt was
approximately $379 million and $431 million, respectively, based on quoted
market prices for the same or similar debt including debt of comparable
remaining maturities.
(b) Fuel Price Risk Management
The Company is exposed to risk from fluctuating jet fuel prices. To manage
this risk, the Company implemented a fuel hedging program in late 1996.
Oversight of this program is the responsibility of the Fuel Hedge Committee
("FHC"), a group of the Company's senior officers, which sets acceptable levels
of risk and reviews hedging activities. Under the program, the Company may enter
into certain cap and swap transactions with approved counterparties for a period
not to exceed twelve months. Gains and losses on such transactions are recorded
as adjustments to fuel expense when the underlying fuel being hedged is used. As
of December 31, 1996, there were no transactions outstanding.
The Company is exposed to credit risks in the event any counterparty fails
to meet its obligations. The Company does not anticipate such non-performance as
counterparties are selected based on credit ratings, exposure to any one
counterparty is limited based on formal guidelines and the relative market
positions with such counterparty are monitored by the FHC.
(c) Concentration of Credit Risk
The Company does not believe it is subject to any significant concentration
of credit risk. Most of the Company's receivables result from tickets sold to
individual passengers through the use of major credit cards or to tickets sold
by other airlines and used by passengers on AWA. These receivables are
short-term, generally being settled shortly after the sale.
F-17
<PAGE> 125
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The Company recorded income tax expense for the periods shown below
(exclusive of extraordinary items) as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
REORGANIZED COMPANY ------------
-------------------------------------- PERIOD
PERIOD FROM FROM
YEAR ENDED DECEMBER 31, AUGUST 26 TO JANUARY 1 TO
----------------------- DECEMBER 31, AUGUST 25,
1996 1995 1994 1994
--------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Taxes:
Federal............................... $ 943 $ 505 $ -- $1,869
State................................. 849 190 36 190
------- ------- ------- ------
Total current taxes........... 1,792 695 36 2,059
------- ------- ------- ------
Deferred taxes.......................... -- -- -- --
------- ------- ------- ------
Income taxes attributable to
reorganization items and other........ 23,091 52,913 11,854 --
------- ------- ------- ------
Total income tax expense...... $24,883 $53,608 $11,890 $2,059
======= ======= ======= ======
</TABLE>
With respect to the years ended December 31, 1996 and 1995 and the period
August 26, 1994 through December 31, 1994, income tax expense pertains both to
income before extraordinary items as well as certain adjustments necessitated by
the effectiveness of the Plan and the resultant fresh start adjustments to the
Company's financial statements. The Company's reorganization and the associated
implementation of fresh start reporting gave rise to significant items of
expense for financial reporting purposes that are not deductible for income tax
purposes. In large measure, it is these nondeductible (for income tax purposes)
expenses that result in an effective tax rate (for financial reporting purposes)
significantly greater than the current U.S. corporate statutory rate of 35%.
Nevertheless, the Company's actual cash income tax liability (i.e., income taxes
payable) is considerably lower than income tax expense shown for financial
reporting purposes. This difference in financial expense compared to actual
income tax liability is in part attributable to the utilization of certain tax
attributes of the Predecessor Company that serve to reduce the Company's actual
income tax liability. The excess of financial expense over the Company's actual
income tax liability ($16.7 million for 1996) is applied to reduce the carrying
balance of the Company's reorganization value in excess of amounts allocable to
identifiable assets.
For the years ended December 31, 1996 and 1995, the Company recognized
income tax benefit of $918,000 and $984,000, respectively, arising from
extraordinary charges. For the periods January 1, 1994 through August 25, 1994
and August 26 through December 31, 1994, income tax expense pertains solely to
income before extraordinary item. No income tax expense was recognized with
respect to the extraordinary gain resulting from the cancellation of
indebtedness that occurred in connection with the effectiveness of the Plan as
such gain is not subject to income taxation.
F-18
<PAGE> 126
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense, exclusive of extraordinary items, recorded for the
periods shown below, differs from amounts computed at the federal statutory
income tax rate as follows:
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
---------------------------------------- ------------
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 31, AUGUST 26 TO JANUARY 1 TO
------------------------ DECEMBER 31, AUGUST 25,
1996 1995 1994 1994
---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income tax expense at U.S.
statutory rate................. $12,073 $37,932 $ 6,908 $19,758
State income taxes, net of
federal income tax benefit..... 1,984 4,505 1,663 190
Nondeductible amortization of
reorganization value in excess
of amounts allocable to
identifiable assets............ 8,842 11,188 3,901 --
Benefit of loss carryforwards.... -- -- -- (17,889)
Other, net....................... 1,984 (17) (582) --
------- ------- ------- -------
Total.................. $24,883 $53,608 $11,890 $ 2,059
======= ======= ======= =======
</TABLE>
As of December 31, 1996, the Company has available net operating loss,
business tax credit and alternative minimum tax credit carryforwards for Federal
income tax purposes of approximately $498.7 million, $12.7 million and $1.2
million, respectively. The net operating loss carryforwards expire during the
years 1999 through 2009 while the business credit carryforwards expire during
the years 1997 through 2006. However, such carryforwards are not fully available
to offset federal (and in certain circumstances, state) alternative minimum
taxable income. Further, as a result of a statutory "ownership change" (as
defined for purposes of Section 382 of the Internal Revenue Code) that occurred
as a result of the effectiveness of the Company's Plan of Reorganization, the
Company's ability to utilize its net operating loss and business tax credit
carryforwards may be restricted. The alternative minimum tax credit may be
carried forward without expiration and is available to offset future income tax
payable.
F-19
<PAGE> 127
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Composition of Deferred Tax Items:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of December 31, the
significant components of the Company's deferred tax assets and liabilities are
a result of the temporary differences related to the items described as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment, principally depreciation and
"fresh start" differences............................. $(111,989) $ (89,766)
Deferred tax assets:
Aircraft leases.......................................... 32,789 39,812
Reorganization expenses.................................. 21,356 23,591
Net operating loss carryforwards......................... 190,548 203,879
Tax credit carryforwards................................. 13,861 13,777
Other.................................................... 16,568 14,240
--------- ---------
Total deferred tax assets........................ 275,122 295,299
--------- ---------
Valuation allowance........................................ (88,433) (130,833)
--------- ---------
Net deferred tax asset........................... $ 74,700 $ 74,700
========= =========
</TABLE>
SFAS 109 requires a "more likely than not" criterion be applied when
evaluating the realizability of a deferred tax asset. In 1996 the Company
reduced the valuation allowance by $42.4 million from its 1995 balance
principally for the portion of its net operating loss carryforwards (a
Predecessor Company tax attribute) that it anticipates will, more likely than
not, be utilized. The remaining valuation allowance of $88.4 million is
necessary as at this time, the Company has not determined it is more likely than
not that the balance of the deferred tax assets will be realized. The Company
continues to monitor the valuation allowance and will make adjustments as
appropriate. If in future tax periods, the Company were to recognize additional
tax benefits related to items attributable to the Predecessor Company such as
net operating loss and other carryforwards, such benefits would be applied to
further reduce reorganization value in excess of amounts allocable to
identifiable assets.
F-20
<PAGE> 128
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information and non-cash investing and
financing activities were as follows:
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
---------------------------------------- ------------
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 31, AUGUST 26 TO JANUARY 1 TO
------------------------ DECEMBER 31, AUGUST 25,
1996 1995 1994 1994
---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-cash transactions:
Notes payable issued to
seller...................... $26,112 $ 5,723 $ -- $ --
Accrued interest reclassified
to long-term debt......... -- 65 -- 5,563
Issuance of stock as success
bonus....................... -- -- -- 1,224
Equipment acquired through
capital leases.............. -- -- -- 138
Cash transactions:
Interest paid, net of amounts
capitalized.................... 37,555 50,293 11,262 29,253
Income taxes paid.............. 498 795 425 1,253
</TABLE>
Cash flows from reorganization items in connection with the Chapter 11
proceedings included interest received on cash accumulations of $3.7 million and
professional fees paid for services rendered of $23.6 million.
8. INVESTMENTS IN DEBT SECURITIES
Cash equivalents and short-term investments consist of highly liquid debt
instruments with original maturities of three months or less while short-term
investments consists of highly liquid debt instruments with original maturities
in excess of three months. The highly liquid debt instruments as of December 31
are classified as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Held to Maturity:
Debt securities issued by the U.S. Treasury and other U.S.
government agencies.................................. $ 36,973 $129,288
Bankers acceptances....................................... 49,141 37,686
Corporate debt securities................................. 90,418 20,466
Other debt securities..................................... 98 1,341
-------- --------
176,630 188,781
Cash...................................................... -- 35,586
-------- --------
Total cash, cash equivalents and short-term
investments..................................... $176,630 $224,367
======== ========
</TABLE>
9. EXTRAORDINARY GAINS AND LOSSES
In June 1996, the Company had an extraordinary loss of $1.1 million net of
an income tax benefit of $918,000 for the write-off of debt issuance cost
relating to the prepayment of $25 million of its 10 3/4% Senior Notes. In August
1995, the Company had an extraordinary loss of $984,000, net of a tax benefit of
$984,000 for the write-off of debt issuance cost, relating to the prepayment of
$48 million of its $123 million 11 1/4%
F-21
<PAGE> 129
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Senior Notes and the exchange of the remaining $75 million of such notes for $75
million of 10 3/4% Senior Notes.
The extraordinary gain recorded in the period January 1 through August 25,
1994 includes $257.7 million from the discharge of indebtedness pursuant to the
consummation of the Plan of Reorganization. No income tax expense was recognized
with respect to the extraordinary gain resulting from the cancellation of
indebtedness that occurred in connection with the effectiveness of the Plan as
such gain is not subject to income taxation.
10. COMMITMENTS AND CONTINGENCIES
(a) Leases
As of December 31, 1996, the Company had 82 aircraft under operating leases
with remaining terms ranging from five months to approximately 22 years. The
Company has options to purchase certain of the aircraft at fair market values at
the end of the lease terms. Certain of the Company's aircraft lessors have the
option to call their respective aircraft. Usually, if such call options are
exercised, the Company has the right of first refusal to retain the aircraft.
None of these options have been exercised and the last of these call options
expires in July 1997. The Company does not believe that the possible exercise of
any or all of these options will have a material effect on its operations.
Certain of the agreements require security deposits, minimum return provisions
and maintenance reserve payments and provide the aircraft lessor the option to
reset their respective rentals to the greater of the existing rentals being paid
under the leases or the then current fair market rates. The Company also leases
certain terminal space, ground facilities and computer and other equipment under
noncancelable operating leases.
At December 31, 1996, the scheduled future minimum cash rental payments
under noncancelable operating leases with initial terms of more than one year
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................ $ 237,545
1998........................................................ 201,575
1999........................................................ 188,575
2000........................................................ 176,186
2001........................................................ 154,127
Thereafter.................................................. 920,002
----------
$1,878,010
==========
</TABLE>
Rent expense (excluding landing fees) was approximately $281 million, $251
million, $81 million and $154 million for the years ended December 31, 1996 and
1995, for the period August 26 through December 31, 1994, and the period January
1 through August 25, 1994, respectively.
Collectively, the operating lease agreements require security deposits with
lessors of $9.7 million and bank letters of credit of $17.6 million. The letters
of credit are collateralized by $17.6 million of restricted cash as of December
31, 1996 and 1995.
(b) Revenue Bonds
Special facility revenue bonds issued by a municipality have been used to
fund the acquisition of leasehold improvements at the Phoenix Sky Harbor airport
which have been leased by the Company. Under the operating lease agreements, the
Company is required to make rental payments sufficient to pay principal and
interest when due on the bonds.
F-22
<PAGE> 130
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the agreement, payment of principal and interest at 8.3% on the
Series 1994A Bonds ends on January 1, 2006 while payment of principal and
interest at 8.2% on the Series 1994B Bonds ends on January 1, 1999. At December
31, 1996, the outstanding balance of Series 1994 Bonds was $16.1 million.
(c) Aircraft Acquisitions
In September 1996, the Company and AVSA signed a term sheet (the "AVSA Term
Sheet"), which, subject to the satisfaction of a number of conditions provides
for the restructuring of the Company's arrangements with AVSA, and specifically
that (i) the number of aircraft ordered by the Company would be increased from
22 to 34 (including 24 A320 aircraft and 10 A319 aircraft), (ii) the orders
subject to cancellation would be increased from five to 12 (resulting in the
Company being committed to purchase 12 A320s and 10 A319s), (iii) AVSA and the
manufacturer of the engines for the aircraft would agree to provide certain
financing support for 16 of the 22 firm orders, and (iv) the financing terms and
conditions under which aircraft would be purchased would be improved from the
Company's perspective. There can be no assurance that the conditions to the
restructuring of the Company's arrangements with AVSA will be satisfied or that
a final agreement will be reached or finalized in the form described above.
At December 31, 1996, the Company had commitments to AVSA, for a total of
22 Airbus A320-200 aircraft with delivery dates that fall in the years 1999
through 2001. The aggregate net cost of such aircraft is based on formulae that
include certain price indices (including indices for various aircraft components
such as metal products) for periods preceding the various delivery dates. Based
on an assumed 5% annual price escalation, the Company estimates such aggregate
net cost to be approximately $1.1 billion. The Company has the option to cancel
without cause up to five of these aircraft. If the Company exercised its
existing rights to cancel five aircraft under the AVSA agreement, the aggregate
net cost (based upon the assumptions described above) of commitments under such
agreement would be reduced to approximately $850 million.
In December 1994, the Company entered into a support contract with
International Aero Engines ("IAE") which provides for the purchase by the
Company of six new V2500-A5 spare engines scheduled for delivery beginning in
1998 through 2000 for use on certain of the A320 fleet. Such engines have an
estimated aggregate cost of $42 million.
The following table reflects estimated cash payments under the aircraft and
engine purchase contracts. Actual payments may vary due to inflation factor
adjustments and changes in the delivery schedule of the equipment. The estimated
cash payments include the progress payments that will be made in cash, as
opposed to being financed under an existing progress payment financing facility.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................ $ 63,134
1998........................................................ 106,218
1999........................................................ 264,707
2000........................................................ 297,368
2001........................................................ 328,207
----------
$1,059,634
==========
</TABLE>
At December 31, 1996, the Company has significant capital commitments for a
number of aircraft, as discussed above. Although the Company has arranged for
financing for up to one-half of such commitment, the Company will require
substantial capital from external sources to meet the remaining financial
commitments. The Company intends to seek additional financing (which may include
public debt financing or private financing) in the future when and as
appropriate. There can be no assurance that sufficient financing will be
obtained for all aircraft and other capital requirements. A default by the
Company under any such commitment could have a material adverse effect on the
Company.
F-23
<PAGE> 131
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In November 1996, the America West Airlines 1996-1 Pass Through Trusts
issued $218.6 million of Pass Through Certificates, representing fractional
undivided interests in such trusts. The certificates were issued in connection
with the refinancing of eight Airbus A320 aircraft and three IAE V2500 spare jet
engines. The combined effective interest rate on the financing was 7.05%. The
proceeds of the transaction were used to refinance the indebtedness incurred by
the owners of the aircraft and engines leased to the Company. Under the
arrangements, the financial benefits of the transactions are shared among the
Company, the equity investors in leverage leases covering the aircraft and U.S.
subsidiaries of GPA Group plc ("GPA"), the original lessees under the
restructured leases. Benefit to the Company include the agreed termination of
arrangements with GPA pursuant to which GPA could cause the Company to lease up
to four aircraft under a put agreement over the balance of the decade and a
reduction in rental expense approximating $500,000 per year.
The Pass Through Certificates were issued by separate pass through trusts.
The equipment notes are secured by a security interest in the aircraft and
engines and an assignment of the Company's leases. Neither the equipment notes
nor the pass through certificates are direct obligations of, or guaranteed by,
the Company, and the corresponding debt and interest expense are not included in
the Company's consolidated financial statements.
(d) Contingent Legal Obligations
Certain administrative and priority tax claims are pending against the
Company which, if ultimately allowed by the Bankruptcy Court, would represent
general obligations of the Company. Such claims include claims of various state
and local tax authorities and certain contractual indemnification obligations.
The Company is also a defendant in various lawsuits. Management cannot
reasonably predict the outcome of the pending lawsuits and administrative and
priority tax claims. However, management believes, after considering a number of
factors, including the advice of outside counsel, the nature of the
contingencies to which the Company is subject and its prior experience, that
although the outcome of these matters could adversely affect future operating
results, the resolution of these actions will not have a material adverse effect
on the Company's financial condition. As discussed in Note 13, "Restructuring
and Other Non-recurring Special Charges," the Company has recorded a liability
for loss contingencies in accordance with generally accepted accounting
principles.
11. RELATED PARTY TRANSACTIONS
In exchange for certain concessions principally arising from cancellation
of the right of GPA to lease to America West 10 Airbus A320 aircraft at
specified rates, GPA received on August 25, 1994, (i) 900,000 shares of Class B
Common Stock; (ii) 1,384,615 warrants to purchase shares of Class B Common Stock
at an exercise price of $12.74 per share; (iii) a cash payment of approximately
$30.5 million and (iv) the rights to require the Company to lease up to eight
aircraft of types operated by the Company, which was terminated in September
1996. During 1996, GPA sold 900,000 shares of Class B Common Stock, and the
Company repurchased all of the outstanding warrants (discussed in (ii) above)
from GPA as part of the buy back program authorized by the Board of Directors.
In February 1996, certain stockholders of the Company who hold shares of
Class B Common Stock registered under the Company's shelf registration statement
sold 7.2 million of such shares pursuant to an underwritten public offering. The
selling stockholders were affiliates of TPG Partners, L.P. ("TPG"), Mesa Air
Group ("Mesa"), Continental Airlines, Inc. (" Continental") and Lehman Brothers,
Inc. ("Lehman"). The shares offered were purchased by the selling stockholders
in connection with AWA's emergence from bankruptcy in August 1994.
The Company has entered into various aircraft acquisitions and leasing
arrangements with GPA at terms comparable to those obtained from third parties
for similar transactions. The Company currently leases eight
F-24
<PAGE> 132
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
aircraft from GPA and the rental payments for such leases and the eight aircraft
refinanced under the America West Airlines 1996-1 Pass Through Trusts amount to
$62.4 million, $68 million, and $63.3 million for the twelve months ended
December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, the
Company was obligated to pay approximately $500 million under the GPA leases
which expire at various times through the year 2013.
As part of the Reorganization, both Continental and Mesa made an investment
in the Company, and the Company entered into Alliance agreements with
Continental and Mesa. Pursuant to a code-sharing agreement entered into with
Mesa in December 1992, the Company collects a per-passenger charge for
facilities, reservations and other services from Mesa for enplanements in
Phoenix on the Mesa system. Such payments by Mesa to the Company totaled $3.5
million, $2.9 million and $2.5 million for the twelve months ended December 31,
1996, 1995 and 1994, respectively. In addition, the Company maintains agreements
with Continental related to code-sharing arrangements and ground handling
operations. The Company paid Continental approximately $21.7 million, $14
million and $2 million and also received approximately $13 million, $11 million
and $1 million in 1996, 1995 and 1994, respectively, from Continental for such
services.
12. RESTRUCTURING AND OTHER NONRECURRING SPECIAL CHARGES
During the third quarter of 1996, the Company recorded a nonrecurring
special charge of approximately $65.1 million. Approximately $49.7 million of
the charge was associated with the Company's renegotiation of an aircraft
purchase agreement with AVSA (See Note 10, "Commitments and Contingencies"), the
re-evaluation of its facilities, and completing its plan for the disposition of
certain aircraft inventories and equipment. The charge includes $18.8 million
for cancellation penalty payments, write-off of capitalized interest on advance
payments; a provision for maintenance costs on certain leased aircraft currently
scheduled to be returned due to accelerated deliveries under the new agreement;
$7.5 million to reduce the carrying value to estimated fair value of certain
under-utilized facilities and $23.4 million to write-down certain aircraft
related inventories and equipment to estimated fair value.
The remaining $15.4 million of the charge represents loss contingencies
based on estimated settlements of pending and threatened litigation. The $65.1
million represents the Company's best estimate of the expected charge. However,
the actual charge may be different from the amount estimated.
In December 1995, the Company recorded a $10.5 million restructuring
charge. The amount includes severance costs of approximately $9.5 million for
approximately 500 employees, and $1.0 million for other costs related to the
outsourcing of the heavy aircraft maintenance work.
13. CHAPTER 11 REORGANIZATION AND FRESH START REPORTING
Chapter 11 Reorganization
Upon the Company's emerging from bankruptcy on August 25, 1994, the
partners of AmWest Partners, L.P., a limited partnership which includes TPG;
Continental; and Mesa; together with Lehman and Fidelity Investments
("Fidelity"), as assignees of AmWest, invested $205.3 million in consideration
for the issuance of securities by the Reorganized Company, consisting of (i)
1,200,000 shares of Class A Common Stock at a price of $7.467 per share; (ii)
12,981,636 shares of Class B Common Stock, consisting of 12,259,821 shares at a
price of $7.467 per share and 721,815 shares at $8.889 per share (representing
shares acquired as a result of cash elections made by unsecured creditors);
(iii) 2,769,231 warrants to purchase shares of Class B Common Stock at an
exercise price of $12.74 per share and (iv) $100 million principal amount of
11 1/4% Senior Unsecured Notes, due September 1, 2001.
The Plan of Reorganization also provided for many other matters, including
the satisfaction of certain other prepetition claims in accordance with
negotiated settlement agreements, the disposition of the various
F-25
<PAGE> 133
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
types of claims asserted against the Company, the adherence to the Company's
aircraft lease agreements, the amendment of the Company's aircraft purchase
agreements and the release of the Company's employees from all obligations
arising under the Company's stock purchase plan in consideration for the
cancellation of the shares of Predecessor Company stock securing such
obligations.
As of December 31, 1996, distributions on $307.9 million of allowed general
unsecured claims have been made. Approximately 25.6 million shares of the
Company's Class B Common Stock and cash proceeds equivalent to an additional
783,936 shares have been distributed in settlement. The remaining shares will be
distributed as the remaining general unsecured claims are allowed. To the extent
that the total allowed amount of claims is less than the $312 million reserve
set by the Bankruptcy Court, the holders of such claims will receive a
supplemental distribution.
Reorganization expense recorded by the Predecessor Company consisted of the
following:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO
AUGUST 25, 1994
---------------
(IN THOUSANDS)
<S> <C>
Professional fees and other expenses directly related to the
Chapter 11 proceedings.................................... $ 31,959
Adjustments of assets and liabilities to fair value......... 166,829
Provisions for settlement of claims......................... 66,626
Reorganization success bonuses.............................. 11,956
Interest income............................................. (3,711)
---------
$ 273,659
=========
</TABLE>
Fresh Start Reporting
In connection with its emergence from bankruptcy, the Company adopted fresh
start reporting in accordance with SOP 90-7. The fresh start reporting common
equity value of $587.5 million was determined by the Company with the assistance
of its financial advisors. The significant factors used in the determination of
this value were analyses of industry, economic and overall market conditions and
the historical and estimated performance of the Company as well as of the
airline industry, discussions with various potential investors and certain other
financial analyses.
Under fresh start reporting, the reorganization value of the entity has
been allocated to the Company's assets and liabilities on a basis substantially
consistent with purchase accounting. The portion of reorganization value not
attributable to specific tangible assets has been recorded as "Reorganization
Value in Excess of Amounts Allocable to Identifiable Assets" in the accompanying
balance sheet. The fresh start reporting adjustments, primarily related to the
adjustment of the Company's assets and liabilities to fair market values, will
have a significant effect on the Company's future statements of income. The more
significant of these adjustments relate to reduced depreciation expense on
property and equipment, increased amortization expense relating to
reorganization value in excess of amounts allocable to identifiable assets and
increased interest expense.
F-26
<PAGE> 134
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The effects of the Plan and fresh start reporting on the balance sheet at
the Effective Date are as follows:
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZED
COMPANY COMPANY
----------- (B) --------------
(A) ISSUE OF (C)
AUGUST 25, DEBT DEBT AND FRESH START AUGUST 25,
1994 DISCHARGE STOCK ADJUSTMENTS 1994
----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 156,401 $ (140,284) $ 205,956 $ -- $ 222,073
Accounts receivable, net.................. 77,682 -- 6,831 -- 84,513
Expendable spare parts and supplies....... 27,715 -- -- (2,371) 25,344
Prepaid expenses.......................... 34,540 -- -- (885) 33,655
---------- ---------- ---------- ---------- ----------
Total current assets............... 296,338 (140,284) 212,787 (3,256) 365,585
Property and equipment, net................. 702,442 -- -- (138,830) 563,612
Restricted cash............................. 30,503 -- -- -- 30,503
Reorganization value in excess of amounts
allocable to identifiable assets.......... -- -- -- 668,702 668,702
Other assets, net........................... 24,497 -- 1,575 (2,449) 23,623
---------- ---------- ---------- ---------- ----------
Total assets....................... $1,053,780 $ (140,284) $ 214,362 $ 524,167 $1,652,025
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt...... $ 119,185 $ (65,014) $ -- $ -- $ 54,171
Accounts payable.......................... 98,080 6,500 -- 969 105,549
Air traffic liability..................... 153,808 -- -- -- 153,808
Accrued compensation and vacation
benefits................................ 27,443 -- -- -- 27,443
Accrued interest.......................... 5,620 -- -- -- 5,620
Accrued taxes............................. 26,613 14,405 -- -- 41,018
Other accrued liabilities................. 29,161 -- -- -- 29,161
---------- ---------- ---------- ---------- ----------
Total current liabilities.......... 459,910 (44,109) -- 969 416,770
Estimated liabilities subject to Chapter 11
proceedings............................... 382,769 (382,769) -- -- --
Long-term debt, less current maturities..... 368,939 28,934 100,000 -- 497,873
Manufacturers' and deferred credits......... 70,625 -- -- 51,530 122,155
Other liabilities........................... 57,932 -- -- (30,205) 27,727
Stockholder's equity (deficiency)
Preferred stock........................... 18 -- -- (18) --
Common stock, Predecessor Company......... 6,432 -- -- (6,432) --
Common stock, Reorganized Company......... -- -- 152 299 451
Additional paid in capital................ 200,058 -- 114,710 272,281 587,049
Accumulated deficit....................... (474,565) 257,660 (500) 217,405 --
---------- ---------- ---------- ---------- ----------
(268,057) 257,660 114,362 483,535 587,500
Deferred compensation and notes
receivable -- employee stock purchase
plans................................... 18,338 -- -- (18,338) --
---------- ---------- ---------- ---------- ----------
Total stockholder's equity
(deficiency)..................... (286,395) 257,660 114,362 501,873 587,500
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholder's
equity (deficiency).............. $1,053,780 $ (140,284) $ 214,362 $ 524,167 $1,652,025
========== ========== ========== ========== ==========
</TABLE>
- ---------------
(a) To record the discharge or reclassification of prepetition obligations
pursuant to the Plan of Reorganization, as well as the repayment in cash of
$77.6 million of D.I.P. financing and a $62.7 million priority term loan.
(b) To record proceeds received from the issuance of new debt and equity
securities and to record the preferred stock settlement payment of $500,000
and the receipt of approximately $1.1 million for the purchase of Class B
Common Stock.
(c) To record adjustments to reflect assets and liabilities at fair market
values and to record reorganization value in excess of amounts allocable to
identifiable assets.
F-27
<PAGE> 135
AMERICA WEST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the reorganization period, pursuant to SOP 90-7, prepetition
liabilities were reported in the basis of the expected amounts of such allowed
claims, as opposed to the amounts for which those allowed claims may be settled
and were classified as "Estimated liabilities subject to Chapter 11
proceedings." The accrual for interest on such unsecured or undersecured
liabilities was discontinued from the period June 27, 1991 to August 25, 1994,
the Effective Date of the Plan.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Total operating revenues (a).................. $413,150 $463,949 $422,518 $439,909
Operating income (loss) (b)................... 34,318 62,083 (53,143) 25,408
Nonoperating expense, net..................... (8,898) (8,293) (8,377) (8,605)
Income tax (expense) benefit.................. (11,693) (24,268) 15,813 (4,735)
Net income (loss)................... 13,727 28,417 (45,707) 12,068
1995
Total operating revenues...................... $345,790 $399,916 $408,627 $396,309
Operating income (c).......................... 24,895 52,957 54,160 22,720
Nonoperating expense, net..................... (13,927) (11,760) (11,047) (9,620)
Income tax expense............................ (5,758) (20,324) (20,414) (7,112)
Net income.......................... 5,210 20,873 21,715 5,988
</TABLE>
- ---------------
(a) During the second quarter of 1996, operating revenues include an $8 million
adjustment arising from the reconciliation of estimated passenger revenues.
(b) During the third quarter of 1996, the Company recorded a nonrecurring
special charge of $65.1 million.
(c) During the fourth quarter of 1995, the Company recorded restructuring
charges of $10.5 million. See note 13 for more information.
F-28
<PAGE> 136
APPENDIX I -- INDEX OF CERTAIN DEFINED TERMS
The following is an index showing the page in this Prospectus where certain
terms are defined.
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------ ----
<S> <C>
10 3/4% Notes........................ 60
11 1/4% Notes........................ 60
Adjusted Expected Distributions...... 20
Administration Expenses.............. 80
ADs.................................. 53
Aggregate LTV Collateral Amount...... 20
Aircraft............................. 2
Airframe............................. 98
Air Partners......................... 27
AISI................................. 10
Alliance Agreements.................. 60
America West......................... 6
America West Vacations............... 6
Appraisals........................... 29
Appraised Current Market Value....... 20
Appraisers........................... 10
ASM.................................. 6
Assumed Aggregate Aircraft Value..... 10
Assumed Aircraft Value............... 87
Average Life Date.................... 85
Aviation Safety Commission........... 28
AVSA................................. 44
AWA.................................. Cover
AWArd Pay............................ 49
Bankruptcy Code...................... 16
Base Rate............................ 77
Basic Agreement...................... Cover
Basic Law............................ 32
Basic Rent........................... 98
Basic Term........................... 98
BK................................... 10
Cash Collateral Account.............. 18
CASM................................. 38
Cede................................. 72
Certain Taxes and Fees............... 81
Certificate Account.................. 65
Certificate Owner.................... 72
Certificated Air Carrier............. 98
Certificateholders................... 14
Certificates......................... Cover
Class A Certificates................. Cover
Class A Trust........................ Cover
Class B Certificates................. Cover
Class B Trust........................ Cover
Class C Certificates................. Cover
Class C Trust........................ Cover
Class D Certificates................. Cover
Class D Trust........................ Cover
Class Exemptions..................... 104
Closing Date......................... 2
Code................................. 23
Commission........................... 3
</TABLE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------ ----
<S> <C>
Company.............................. 6
Continental.......................... 6
Controlling Party.................... 21
Convention........................... 86
Cross-Border Lease................... 99
Cross-Border Lessee.................. 99
Cross-Border Lessor.................. 99
Current Distribution Date............ 19
Definitive Certificates.............. 73
Distribution Date.................... 14
DOT.................................. 45
Downgrade Drawing.................... 18
DTC.................................. 72
DTC Participants..................... 73
Engine............................... 98
Equipment............................ 60
Equipment Notes...................... 2
Exculpated Person.................... 92
ERISA................................ 23
ERISA Plans.......................... 104
Event of Loss........................ 96
Exchange Act......................... 3
Expected Distributions............... 19
FAA.................................. 27
Federal Aviation Act................. 70
Fidelity............................. 60
Final Distributions.................. 22
Final Drawing........................ 77
Final Expected Distribution Date..... 13
Final Legal Distribution Date........ 14
Financial Institution................ 102
Global Certificates.................. 72
GPA.................................. 32
GPA Subs............................. 60
Holdings............................. 6
IAE.................................. 44
IBT.................................. 50
Indenture............................ 13
Indenture Event of Default........... 68
Indenture Trustee.................... 13
Indirect Participants................ 73
Intercreditor Agreement.............. 19
Interest Drawings.................... 17
Interest Period...................... 77
IRS.................................. 101
Lease................................ 2
Lease Default........................ 98
Lease Event of Default............... 68
Lease Payment Dates.................. 98
Lehman............................... 60
LIBOR................................ 77
Liquidity Event of Default........... 77
</TABLE>
I-1
<PAGE> 137
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------ ----
<S> <C>
Liquidity Expenses................... 80
Liquidity Facility................... 17
Liquidity Obligations................ 17
Liquidity Provider................... Cover
Long Settlement...................... 2
LTV Appraisal........................ 21
LTV Collateral Amount................ 21
LTV Ratio............................ 10
Make-Whole Amount.................... 85
MBA.................................. 10
Mesa................................. 6
Minimum Sale Price................... 22
Moody's.............................. 18
Newbridge............................ 56
NMB.................................. 50
NOL.................................. 44
Non-Performing Equipment Notes....... 18
Non-U.S. Certificateholder........... 102
Order................................ 55
Original Lessee...................... 34
Owner Participant.................... 15
Owner Trust.......................... 2
Owner Trust Agreement................ 83
Owner Trustee........................ 2
Pass Through Trust Agreements........ Cover
Performing Equipment Notes........... 18
Performing Note Deficiency........... 18
Permitted Sublessee.................. 98
PFCs................................. 52
Plan Asset Regulation................ 104
Plans................................ 23
Pool Balance......................... 66
Pool Factor.......................... 66
Prior Subleases...................... 61
PTC Event of Default................. 14
PTCE................................. 23
Put Termination Agreement............ 60
RASM................................. 40
Rating Agencies...................... 18
Record Date.......................... 14
Refunding Agreement.................. 13
Registration Statement............... 3
Regular Distribution Dates........... 64
Remaining Weighted Average Life...... 85
Renewal Rent......................... 99
Renewal Term......................... 99
</TABLE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------ ----
<S> <C>
Reorganization Plan.................. 54
Replacement Facility................. 76
Required Amount...................... 17
Review Commission.................... 27
RLA.................................. 55
Rules................................ 73
Scheduled Payments................... 64
Section 1110 Period.................. 18
Section 382 Limitation............... 44
Securities Act....................... 3
Series A Equipment Notes............. 2
Series B Equipment Notes............. 2
Series C Equipment Notes............. 2
Series D Equipment Notes............. 2
Shortfall Amounts.................... 102
SOP 90-7............................. 39
Special Distribution Date............ 65
Special Payment...................... 65
Special Payments Account............. 65
Standard & Poor's.................... 18
Stated Interest Rates................ 17
Subordinated Certificateholders...... 102
Subordinated Certificates............ 102
Subordinated Trusts.................. 102
Subordination Agent.................. 13
Supplemental Rent.................... 99
Term................................. 99
Threshold Rating..................... 24
TPG.................................. 27
TPG Partners......................... 27
TPG Parallel......................... 27
Treasury Yield....................... 85
Triggering Event..................... 15
Trust Company........................ 86
Trust Indenture Estate............... 84
Trust Property....................... 13
Trust Supplement..................... Cover
Trustee.............................. Cover
Trusts............................... Cover
TWU.................................. 50
UDC.................................. 58
U.S. Certificateholders.............. 101
U.S. Persons......................... 101
Underwriting Agreement............... 106
Underwriter.......................... 106
Underwriters Exemption............... 105
</TABLE>
I-2
<PAGE> 138
APPENDIX II -- AIRCRAFT APPRAISALS
[AISI LETTERHEAD]
19 March 1997
Mr. Declan Treacy
GPA Group plc
GPA House
Shannon, Co. Clare
IRELAND
Subject: AISI Report No. A7D036BA2
AISA Short Form Sight Unseen Base Value Appraisal
Four A320-200 Aircraft
Reference: Morgan Stanley Fax Message dated 18 March 1997
Dear Mr. Treacy:
As requested, Aircraft Information Services, Inc. (AISI) is pleased to
offer GPA Group plc our opinion of the sight unseen half-life base value of your
four A320-200 aircraft as identified in Table I of this report.
1. METHODOLOGY AND DEFINITIONS
The historical standard term of reference for commercial aircraft value has
been "half-life fair market value" of an "average" aircraft. However, "fair
market value" could mean a fair value in the given market or a value in a
hypothetical "fair" or balanced market, and the two definitions are not
equivalent. Recently, the term "base value" has been created to describe the
theoretical balanced market condition and to avoid the potentially misleading
term "fair market value" which has now become synonymous with the term "current
market value" or a "fair" value in the actual current market. AISI value
definitions are consistent with those of the International Society of Transport
Aircraft Trading (ISTAT) of 01 January 1994; AISI is a member of that
organization and employs an ISTAT Certified Senior Aircraft Appraiser.
AISI defines a "base value" as that of a transaction between equally
willing and informed buyer and seller, neither under compulsion to buy or sell,
for a single unit cast transaction with no hidden value or liability, and with
supply and demand of the sale item roughly in balance. Base values are typically
given for aircraft in "new" condition, "average half-life" condition, or in a
specifically described condition unique to a single aircraft at a specific time.
An "average" aircraft is an operable airworthy aircraft in average physical
condition and with average accumulated flight hours and cycles, with clear title
and standard unrestricted certificate of airworthiness, and registered in an
authority which does not represent a penalty to aircraft value or liquidity,
with no damage history and with inventory configuration and level of
modification which is normal for its intended use and age. AISI assumes average
condition unless otherwise specified in this report. "Half-life" condition
assumes that every component or maintenance service which has a prescribed
interval that determines its service life, overhaul interval or interval between
maintenance services, is at a condition which is one-half of the total interval.
II-1
<PAGE> 139
19 March 1997
AISI File No. A7D036BA2
Page -2-
AISI defines a "current market value" or "fair market value" as that value
which reflects the real market conditions, whether at, above or below the base
value conditions. Definitions of aircraft condition, buyer/seller qualifications
and type of transaction remain unchanged from that of base value. Current market
value takes into consideration the status of the economy in which the aircraft
is used, the status of supply and demand for the particular aircraft type, the
value of recent transactions and the opinions of informed buyers and sellers.
Current market value assumes that there is no short term time constraint to buy
or sell.
AISI encourages the use of base values only to consider historical trends,
as a basis for long term future value considerations, or to consider how actual
market values vary from theoretical base values. Base values are less volatile
than current market values and tend to diminish regularly with time. Base values
are normally inappropriate to determine near term values. AISI encourages the
use of current market values to consider the probable near term value of an
aircraft.
2. VALUATION
The half-life base valuations are presented below subject to the
assumptions, definitions and disclaimers herein.
TABLE 1
<TABLE>
<CAPTION>
HALF-LIFE
AIRCRAFT/ BASE VALUE
EQUIPMENT DATE OF MTOW 1997
TYPE S/N MANUFACTURE (LBS.) ENGINES U.S. DOLLARS
--------- --- ----------- ------- -------- ------------
<S> <C> <C> <C> <C> <C>
A320-200............. 66 Jul 89 162,000 V2500-A1 $28,600,000
A320-200............. 67 Jul 89 162,000 V2500-A1 $28,600,000
A320-200............. 76 Sep 89 162,000 V2500-A1 $28,820,000
A320-200............. 81 Sep 89 162,000 V2500-A1 $28,820,000
</TABLE>
This report is offered as a fair and impartial assessment of subject
aircraft based on data supplied by others, with no physical inspection or
verification by AISI. AISI has no past, present nor contemplated future interest
in subject aircraft. This report is an opinion and is for the sole use of the
client/addressee and AISI shall not be liable to any party for damages arising
out of reliance or alleged reliance on it, or for any parties action or failure
to act as a result of reliance or alleged reliance on this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ FRED E. BEARDEN
Fred E. Bearden
President
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<PAGE> 140
[BK ASSOCIATES LETTERHEAD]
March 26, 1997
Mr. Declan Treacy
GPA Group plc
GPA House
Shannon, County Clare
Ireland
Dear Declan:
In response to your recent request, BK Associates, Inc. is pleased to
provide an opinion on the current base value (BV) of four Airbus A320-231
aircraft, each powered by International Aero Engines V2500-A1 engines
(Aircraft). The Aircraft, which are on lease to America West Airlines, are
further identified below.
Based on our knowledge of the A320-200 aircraft, its capabilities and uses
to which it is put worldwide; the current supply and demand for A320s and
competitive types; the operation of the appraised Aircraft and our knowledge of
the used commercial aircraft market; it is our opinion that the current base
value of each of the Aircraft is as shown below.
<TABLE>
<CAPTION>
REGISTRATION SERIAL DATE CURRENT BASE
NUMBER NUMBER DELIVERED VALUE
- ------------ ------ --------- ------------
<S> <C> <C> <C>
N627AW 66 11/89 $27,670,000
N628AW 67 11/89 27,670,000
N629AW 76 11/89 27,670,000
N632AW 81 12/89 28,000,000
</TABLE>
According to the International Society of Transport Aircraft Trading's
(ISTAT) definition of base value, to which BK Associates subscribes, base value
is the Appraiser's opinion of the underlying economic value of an aircraft in an
open, unrestricted, stable market environment with a reasonable balance of
supply and demand, and assumes full consideration of its "highest and best use".
An aircraft's base value is founded in the historical trend of values and in the
projection of value trends and presumes an arm's length, cash transaction
between willing, able and knowledgeable parties, acting prudently, with an
absence of duress and with a reasonable period of time available for marketing.
Ultimately, aircraft values depend almost entirely on supply and demand. A
shortage of aircraft or an unexpected increase in demand for air transportation
tends to increase values of aircraft. If the market is balanced between supply
and demand, the long term trend of the base value is determined from historical
and projected value trends, adjusted to account for factors that influence the
base value. These factors include:
- Suitability of available aircraft to the operator's requirements.
- Operating cost and purchase price.
- Regulatory factors.
- Remaining useful life.
For a new or relatively new aircraft in a balanced market, the factor that
affects base value most is the new aircraft price and the methodology relates
the current value and forecast future values to the new price or replacement
cost, adjusted to account for the estimated time and cycles used to date on the
aircraft. Considering the new price for these aircraft was about $36 million
each, allowing for the average utilization to date and allowing for inflation
suggests the current base values above.
II-3
<PAGE> 141
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation. It is not given as a recommendation, or as an inducement, for
any financial transaction and further, BK Associates, Inc. assumes no
responsibility or legal liability for any action taken or not taken by the
addressee, or any other party, with regard to the appraised equipment. By
accepting this appraisal, the addressee agrees that BK Associates, Inc. shall
bear no such responsibility or liability. This appraisal is prepared for the use
of the addressee and shall not be provided to other parties without the express
consent of the addressee.
Sincerely yours,
BK ASSOCIATES, INC.
/s/ JOHN F. KEITZ
John F. Keitz
President
ISTAT Certified Senior Appraiser
II-4
<PAGE> 142
[MORTEN BEYER LETTERHEAD]
March 31, 1997
Mr. Declan Treacy
GPA Group plc
Shannon, County Clare
Ireland
Dear Mr. Treacy:
Morten Beyer and Associates, Inc. (MBA) has been retained by GPA Group plc
(GPA) to set forth its opinion regarding the Current Base Value (CBV) of four
Airbus A320-200 series aircraft for the purposes of an upcoming transaction to
finance the four aircraft. The tail numbers and original delivery dates for the
four aircraft to be financed are: N627AW and N628AW delivered in November, 1989
and N629AW and N632AW delivered in December, 1989.
In determining the CBV of these aircraft, we did not inspect the aircraft
or their historical maintenance documentation. We made the following assumptions
regarding the specifications, condition and status of the aircraft. Such
assumptions are considered to be standard industry practice when more detailed
information is not readily available.
1. The aircraft is in good overall condition.
2. The overhaul status of the airframe, engines, landing gear and other
major components is the equivalent of mid-time/mid-life.
3. The aircraft is current as to Airworthiness Directives and Service
Bulletins.
4. The modification status of the aircraft is comparable to that most
common for an aircraft of its type and vintage.
5. There is no accident or incident damage.
6. The aircraft is in a standard airline configuration.
7. The utilization is comparable to industry averages.
8. The specifications are those that are most common for an aircraft of its
type and age.
9. The historical maintenance documentation has been maintained to
acceptable international standards.
We have also assumed that the aircraft are not encumbered by any attached
lease, tax benefit recapture or other extraneous factor that could have an
impact on their value.
II-5
<PAGE> 143
We used more detailed information when such information was available.
Based on the information set forth in this report, it is our opinion that
the CBV of the subject aircraft are as follows:
<TABLE>
<CAPTION>
REGISTRATION BUILD DATE BASE VALUE
- ------------ ---------- -----------
<S> <C> <C>
N627AW July '89 $30,280,000
N628AW July '89 30,280,000
N629AW Sept '89 30,430,000
N632AW Sept '89 30,430,000
</TABLE>
MBA uses the definitions of certain industry terms, such as CBV and Current
Market Value (CMV), as promulgated by the International Society of Transport
Aircraft Trading (ISTAT), a not-for-profit association of some five hundred
members who are generally management personnel employed by banks, airlines,
manufacturers, appraisers, leasing companies, brokers, arrangers, etc. ISTAT has
developed definitions for many terms used in the industry and has also
established Standards for Appraisal Practice for appraisers who wish to be
certified by ISTAT as aircraft appraisers. A member who wishes to be certified
must meet specified levels of education and experience in the industry and must
successfully complete rigorous written examinations.
ISTAT defines MV as the most likely trading price that may be generated for
an aircraft under market conditions that are perceived to exist at the time in
question. MV assumes that the aircraft is valued for its highest best use, that
the parties to the hypothetical sales transaction are willing, able, prudent and
knowledgeable, and under no unusual pressure for a prompt sale, and that the
transaction would be negotiated in an open and unrestricted market on an arm's
length basis for cash or equivalent consideration, and given an adequate amount
of time for effective exposure to prospective buyers.
BV has essentially the same elements as MV, but the market conditions are
always assumed to be in a reasonable state of equilibrium. Thus, BV pertains to
an idealized aircraft and market combination, but will not necessarily reflect
the actual value of the aircraft in question. BV is founded in the historical
trend of values and is generally used to analyze historic values or to project
future values.
GPA has requested that MBA set forth the values in terms of BV for each
aircraft. It is noted that MBA currently appraises the CMV to be 15 percent
higher than the CBV due to the shortage of aircraft on the market, the long
delivery queue for new orders and the A320's superior economics.
The A320 was Airbus' first all new design since the launch of the original
A300 in 1971. The program was initiated in 1983 and logged almost 400 orders
prior to the first delivery in 1988. The A320 is offered with both the CFM56 and
the IAE V-2500 engine, with the CFM version having a long head start. More than
530 A320s have been delivered and 250 more are on order. 240 of the orders and
numerous options are held by leasing companies, and may be vulnerable to the
changing fortunes of this volatile market sector. The A320 has achieved a wide
market base on all continents, with a total of 69 operators to date.
The A320 has won worldwide acceptance due to its advanced engineering,
passenger comfort and fuel efficiency. The A320's principal rivals, the Boeing
737 and MD80, are built on platforms that are more than 30 years old, while the
A320's technology is 20 years younger. The cabin is six inches wider than the
737-300, permitting roomier seats and a wider aisle. Fuel consumption per seat
is approximately 9.5 percent less than the 737-300 and 17.5 percent less than an
MD80.
The aircraft, with its V-2500 engines, is measurably quieter than either
the 737-300 or MD80 and, thus, has a lower noise footprint and is less likely to
be impacted by future tightening of noise restrictions.
The A321, a stretched version designed to directly challenge the 757-200
and bridge the gap between the A320 and the A330/340, was launched in 1989.
Seating in the A321 was increased to 186 (and more in all-coach configuration)
from a nominal 150 in the A320, and the gross weight increased by 19,200 pounds.
II-6
<PAGE> 144
A truncated version of the A321, the A319, was officially launched in late
1992. Air Canada provided a major boost to the A319 in April, 1994 with an order
for 34 aircraft.
Airbus is striving for high levels of commonality among its A310 through
A340 series aircraft, and hopes to establish an advantage over Boeing by being
able to offer the large airlines an avenue for entire fleet refurbishment.
It is obvious that the airlines will use some of their large orders to
surplus older aircraft. The advent of the A320 family is hastening the
retirement of older, far less efficient jets. The A320s currently is service are
operating at seat-mile costs as low as half of that for older aircraft. We
believe that the A320 will have a long production run and in-service useful
life, with strong residual values.
The A320 also offers the advantage of being able to carry seven LD-3 cargo
containers, a feat not even the 767 can perform. The fuselage is approximately
10 inches wider than that of the 727/737/757 series, offering wider aisles and
roomier seats.
The A320 vies with the 757 for top honors as the most efficient aircraft in
service. Good fuel efficiency, new technology design and low operating
parameters all combine to give these aircraft among the lowest seat-mile costs
of any aircraft being built or in service.
CURRENT MARKET CONDITIONS
Generally, the market for used aircraft has shown continuing strong
performance in recent times as the shortage of good narrowbody aircraft
continues and the need for additional widebody capacity develops. The
availability of good used aircraft has been reduced to the lowest levels seen in
this decade.
During the last five years there have been more than eight hundred aircraft
reported as being on the market at one time. The number now available has shrunk
dramatically to only 324 according to BACK. By any standard, the availability of
good used aircraft has been reduced to a very low level. With some 14,000 jet
aircraft in service, the float of less than two percent is extremely low.
The availability of narrowbodies has been declining for two years, and
within the last year the availability of good used widebodies has also declined
significantly. The major focus has been on late model 747-200s and DC-10-30s,
leaving only DC-10-10s, L1011s and A300s still begging.
The world economy, which is a principal driver of the need for capacity for
the carriage of passengers and property, continues to be strong, with expansion
in virtually all sectors, although at varying rates for different regions.
Airlines are generally reporting stronger earnings which have historically
triggered the booms (and excesses) of the past.
The major US carriers are reporting higher earnings, but this is in part
because they are not ordering new aircraft and expanding. By holding capacity
growth to some two percent they are forcing up load factors and yields. This
will be changing as loans reach saturation and new orders follow. There has been
strong traffic growth in the US, and Europe, the Orient and South America are
also reporting strong growth.
The recent TWA, ValuJet and Delta incidents again have focused media
attention on airline safety, especially as it relates to older aircraft and/or
smaller low-fare carriers. Some countries are refusing to register imported
aircraft more than 15 years old, and the European Union requires aircraft more
than 25 years old to meet Stage III noise standards.
Older aircraft continue to have lower overall operating costs, especially
for new operators as capital/rental costs more than offset the effects of higher
maintenance and fuel expenses inherent in older aircraft.
With proper maintenance, the lives of older aircraft are virtually
unlimited, but politicians and the media immediately seize on aircraft age or
size as a cause whenever an older or smaller aircraft goes down, while
dismissing accidents involving newer aircraft. Therefore, there is an ongoing
risk that artificial restrictions may be placed on the operation of older
aircraft by political fiat, prematurely grounding the entire fleets of small new
operators and impairing those of many established large airlines as well.
However, in the interim, the
II-7
<PAGE> 145
major carriers in the US are increasingly planning to retain their remaining
Stage II aircraft and refurbish and hushkit them to Stage III standards.
The cost of fuel is another factor that can have a dramatic impact on the
value and availability of aircraft. Fuel prices have been relatively stable
during recent years, but increasing unrest in some of the oil producing regions
of the world has the potential to disrupt supplies from these regions, thus
impacting the cost and availability of fuel. A large increase in fuel costs
would translate into higher airline operating expenses, which could result in an
increase in fares which in turn could result in a significant reduction in the
demand for lift. Such a scenario would result in a decrease in the demand for
and prices of aircraft. Fuel efficient aircraft, such as the A320, would tend to
hold their values better than the older, less fuel efficient machines. BACK
lists four A320 series aircraft as being available on the market for sale and/or
lease, all of them for lease as opposed to being for sale.
COVENANTS
This report has been prepared for the exclusive use of GPA and shall not be
provided to other parties by MBA without the express consent of GPA.
MBA certifies that this report has been independently prepared and that it
fully and accurately presents MBA's opinion of the MV of the subject aircraft as
of the date of this report. MBA further certifies that it does not have, and
does not expect to have, any financial or other interest in the subject or
similar aircraft.
This report represents the opinion of MBA regarding the subject aircraft
and is intended to be advisory only, in nature. Therefore, MBA assumes no
responsibility or legal liability for any actions taken, or not taken, by GPA or
any other party with regard to the subject aircraft. By accepting this report,
all parties agree that MBA shall bear no such responsibility or legal liability.
Sincerely,
/s/ MORTEN S. BEYER
Morten S. Beyer
President
ISTAT Certified Senior Appraiser
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<PAGE> 146
APPENDIX III -- EQUIPMENT NOTES PRINCIPAL PAYMENT SCHEDULE
SERIES A
<TABLE>
<CAPTION>
MANUFACTURER'S SERIAL NUMBER
REGULAR ------------------------------------------------------------
DISTRIBUTION DATES 66 67 76 81
- ------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
January 2, 1998..................... $ 266,056.00 $ 266,056.00 $ 268,101.00 $ 268,101.00
July 2, 1998........................ 0.00 0.00 0.00 0.00
January 2, 1999..................... 266,048.00 266,048.00 268,095.00 268,095.00
July 2, 1999........................ 0.00 0.00 0.00 0.00
January 2, 2000..................... 266,037.00 266,037.00 268,083.00 268,083.00
July 2, 2000........................ 0.00 0.00 0.00 0.00
January 2, 2001..................... 266,048.00 266,048.00 268,095.00 268,095.00
July 2, 2001........................ 0.00 0.00 0.00 0.00
January 2, 2002..................... 266,048.00 266,048.00 268,095.00 268,095.00
July 2, 2002........................ 0.00 0.00 0.00 0.00
January 2, 2003..................... 266,048.00 266,048.00 268,095.00 268,095.00
July 2, 2003........................ 0.00 0.00 0.00 0.00
January 2, 2004..................... 266,048.00 266,048.00 268,095.00 268,095.00
July 2, 2004........................ 0.00 0.00 0.00 0.00
January 2, 2005..................... 266,037.00 266,037.00 268,083.00 268,083.00
July 2, 2005........................ 600,375.00 600,375.00 698,761.00 698,761.00
January 2, 2006..................... 1,324,430.00 1,324,430.00 1,320,361.00 1,320,361.00
July 2, 2006........................ 1,372,970.00 1,372,970.00 1,368,753.00 1,368,753.00
January 2, 2007..................... 1,423,289.00 1,423,289.00 1,418,917.00 1,418,917.00
July 2, 2007........................ 1,475,453.00 1,475,453.00 1,470,921.00 1,470,921.00
January 2, 2008..................... 1,529,528.00 1,529,528.00 1,524,830.00 1,524,830.00
July 2, 2008........................ 1,585,585.00 1,585,585.00 1,580,715.00 1,580,715.00
</TABLE>
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<PAGE> 147
SERIES B
<TABLE>
<CAPTION>
MANUFACTURER'S SERIAL NUMBER
REGULAR ----------------------------------------------------------------
DISTRIBUTION DATES 66 67 76 81
- ------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
January 2, 1998................. $ 99,773.00 $ 99,773.00 $ 100,540.00 $ 100,540.00
July 2, 1998.................... 0.00 0.00 0.00 0.00
January 2, 1999................. 99,768.00 99,768.00 100,535.00 100,535.00
July 2, 1999.................... 0.00 0.00 0.00 0.00
January 2, 2000................. 99,763.00 99,763.00 100,531.00 100,531.00
July 2, 2000.................... 0.00 0.00 0.00 0.00
January 2, 2001................. 99,768.00 99,768.00 100,535.00 100,535.00
July 2, 2001.................... 0.00 0.00 0.00 0.00
January 2, 2002................. 99,768.00 99,768.00 100,535.00 100,535.00
July 2, 2002.................... 0.00 0.00 0.00 0.00
January 2, 2003................. 99,768.00 99,768.00 100,535.00 100,535.00
July 2, 2003.................... 0.00 0.00 126,629.00 126,629.00
January 2, 2004................. 860,602.00 860,602.00 874,059.00 874,059.00
July 2, 2004.................... 1,187,936.00 1,187,936.00 1,184,320.00 1,184,320.00
January 2, 2005................. 965,853.00 965,853.00 960,056.00 960,056.00
July 2, 2005.................... 677,001.00 677,001.00 574,725.00 574,725.00
</TABLE>
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<PAGE> 148
SERIES C
<TABLE>
<CAPTION>
MANUFACTURER'S SERIAL NUMBER
REGULAR ----------------------------------------------------------------
DISTRIBUTION DATES 66 67 76 81
- ------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
January 2, 1998................. $ 99,773.00 $ 99,773.00 $ 100,539.00 $ 100,539.00
July 2, 1998.................... 0.00 0.00 0.00 0.00
January 2, 1999................. 99,768.00 99,768.00 100,535.00 100,535.00
July 2, 1999.................... 0.00 0.00 0.00 0.00
January 2, 2000................. 99,763.00 99,763.00 100,531.00 100,531.00
July 2, 2000.................... 0.00 0.00 0.00 0.00
January 2, 2001................. 99,768.00 99,768.00 121,559.00 121,559.00
July 2, 2001.................... 440,966.00 440,966.00 609,417.00 609,417.00
January 2, 2002................. 602,719.00 602,719.00 601,048.00 601,048.00
July 2, 2002.................... 1,025,702.00 1,025,702.00 1,022,668.00 1,022,668.00
January 2, 2003................. 698,503.00 698,503.00 692,541.00 692,541.00
July 2, 2003.................... 1,104,061.00 1,104,061.00 974,162.00 974,162.00
January 2, 2004................. 18,977.00 18,977.00 0.00 0.00
</TABLE>
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<PAGE> 149
SERIES D
<TABLE>
<CAPTION>
MANUFACTURER'S SERIAL NUMBER
REGULAR --------------------------------------------------------
DISTRIBUTION DATES 66 67 76 81
- ------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
January 2, 1998....................... $223,021.00 $223,021.00 $219,225.00 $219,225.00
July 2, 1998.......................... 788,326.00 788,326.00 787,716.00 787,716.00
January 2, 1999....................... 354,747.00 354,747.00 350,531.00 350,531.00
July 2, 1999.......................... 851,933.00 851,933.00 851,260.00 851,260.00
January 2, 2000....................... 399,056.00 399,056.00 355,804.00 355,804.00
July 2, 2000.......................... 581,678.00 581,678.00 580,215.00 580,215.00
January 2, 2001....................... 131,296.00 131,296.00 105,249.00 105,249.00
July 2, 2001.......................... 169,943.00 169,943.00 0.00 0.00
</TABLE>
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[AMERICA WEST LOGO]
