<PAGE>
AS FILED WITH THE SECURITIES AND COMMISSSION ON JULY 16, 1996
Registration No. 333-4335
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
--------------------------
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
USAIR, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
4512
(Primary Standard Industrial Classification Code Number)
-------------------------
53-0218143
(I.R.S. Employer Identification Number)
2345 Crystal Drive
Arlington, Virginia 22227
(703) 418-7000
(Address, including zip code and telephone number, including
area code, of Registrants' principal executive office)
-------------------------
copies to:
John W. Harper Lawrence M. Nagin
Senior Vice President-Finance Executive Vice President-Corporate
and Chief Financial Officer Affairs and General Counsel
USAir, Inc. USAir, Inc.
2345 Crystal Drive 2345 Crystal Drive
Arlington, Virginia 22227 Arlington, Virginia 22227
(703) 418-7000 (703) 418-7000
<PAGE>
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration Statement
becomes effective.
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, check the following box. [x]
<PAGE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
CROSS REFERENCE SHEET
---------------------
Item Item Caption Location or Heading
in Prospectus
A. INFORMATION ABOUT THE TRANSACTION
---------------------------------
1. Forepart of the Regis-
tration Statement and
Outside Front Cover
Page of Prospectus........ Facing Page; Cross
Reference Sheet; Outside
Front Cover Page of the
Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front Cover Page
of Prospectus
3. Risk Factors; Ratio of
Earnings to Fixed Charges
and Other Information..... "Prospectus Summary";
"Risk Factors";
"Business";
"Selected Consolidated
Financial and Operating
Data"
4. Terms of the Transaction... "Prospectus Summary";
"Risk Factors"; "The
"The Exchange Offer";
"Description of the
Notes"; "United States
Federal Income Tax
Consequences"; "Plan of
Distribution"
5. Pro Forma Financial
Information................ *
6. Material Contacts With the
Company Being Acquired..... *
<PAGE>
7. Additional Information
Required for Reoffering
by Persons and Parties
Deemed to be Underwriters.. *
8. Interests of Named
Experts and Counsel........ "Independent Auditors";
"Experts"; "Legal
Matters"
9. Disclosure of Commission
Position on Indemnifi-
cation for Securities
Act Liabilities............ *
B. INFORMATION ABOUT THE REGISTRANT
--------------------------------
10. Information With Respect
to S-3 Registrants......... *
11. Incorporation of Certain
Information by Reference... *
12. Information With Respect
to S-2 or S-3 Registrants.. *
13. Incorporation of Certain
Information by Reference... *
14. Information With Respect
to Registrants Other Than
S-2 or S-3 Registrants..... Cover Page of Regis-
tration Statement;
"Prospectus Summary";
"Risk Factors";
"Business"; "Use
of Proceeds"; "Selected
Consolidated Financial
and Operating Data";
"Management's Discussion
and Analysis of Financial
Condition and Results of
Operations";
"Management";
"Security Ownership of
Certain Beneficial Owners
and Management".
<PAGE>
15. Information With Respect
S-3 Companies.............. *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
--------------------------------------------
16. Information With Respect *
to S-2 or S-3 Companies....
17. Information With Respect
to Companies Other Than
S-2 or S-3 Companies....... *
18. Information if Proxies,
Consents or Authorizations
are to be Solicited........ *
D. VOTING AND MANAGEMENT INFORMATION
---------------------------------
19. Information if Proxies,
Consents or Authorizations
are not to be Solicited
or in an Exchange Offer "Management"; "Security
Ownership of Certain
Beneficial Owners and
Management"
____________________
*Not Applicable
<PAGE>
$263,000,000
[LOGO OF USAIR APPEARS HERE]
OFFER TO EXCHANGE 6.76% CLASS A ENHANCED EQUIPMENT NOTES,
7.50% CLASS B ENHANCED EQUIPMENT NOTES AND
8.93% CLASS C ENHANCED EQUIPMENT NOTES FOR ANY AND ALL
OUTSTANDING 6.76% CLASS A ENHANCED EQUIPMENT NOTES,
7.50% CLASS B ENHANCED EQUIPMENT NOTES AND
8.93% CLASS C ENHANCED EQUIPMENT NOTES
---------------
USAir, Inc. ("USAir" or the "Company") hereby offers to exchange (the
"Exchange Offer") (a) up to $142,400,000 in aggregate principal amount of new
6.76% Class A Enhanced Equipment Notes (the "New Class A Notes") for up to
$142,400,000 in aggregate principal amount of outstanding Class A Enhanced
Equipment Notes (the "Old Class A Notes"), (b) up to $54,800,000 in aggregate
principal amount of new 7.50% Class B Enhanced Equipment Notes (the "New Class
B Notes") for up to $54,800,000 in aggregate principal amount of outstanding
Class B Enhanced Equipment Notes (the "Old Class B Notes") and (c) up to
$65,800,000 in aggregate principal amount of new 8.93% Class C Enhanced
Equipment Notes (the "New Class C Notes") for up to $65,800,000 in aggregate
principal amount of outstanding Class C Enhanced Equipment Notes (the "Old
Class C Notes"; the New Class A Notes, the New Class B Notes and the New Class
C Notes are sometimes collectively referred to as the "New Notes"; the Old
Class A Notes, the Old Class B Notes and the Old Class C Notes are sometimes
collectively referred to as the "Old Notes"; the New Notes and the Old Notes,
collectively, the "Notes").
The Old Notes were issued pursuant to three separate indentures (each, an
"Indenture") dated as of February 15, 1996 between USAir and Wilmington Trust
Company, as Indenture Trustee. The terms of the New Notes are identical in all
respects (including principal amount, interest rate and maturity) to the terms
of the Old Notes for which they may be exchanged in the Exchange Offer, except
that the New Notes are freely transferable by holders thereof and are issued
free from any covenant regarding registration. The New Notes will evidence the
same debt as the Old Notes and contain terms which are identical to the terms
of the Old Notes that are to be exchanged therefor. For a complete description
of the terms of the New Notes, see "Description of the Notes." There will be
no cash proceeds to USAir from the Exchange Offer.
The Old Notes were issued and sold on February 16, 1996 in transactions not
registered under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon the exemption provided in Section 4(2) of the
Securities Act (the "Private Offering"). Accordingly, the Old Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The New Notes
are being offered hereunder in order to satisfy the obligations of USAir under
a registration rights agreement (the "Registration Rights Agreement") dated as
of February 15, 1996 between Morgan Stanley & Co. Incorporated, Salomon
Brothers Inc., Chase Securities, Inc. and Lehman Brothers Inc. (collectively,
the "Initial Purchasers") on the one hand and USAir on the other, relating to
the Old Notes. See "The Exchange Offer--Purpose of the Exchange Offer." New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by holders thereof (other
than any holder which is an "affiliate" of USAir within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangements with any person to participate in the
distribution of such New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The
"Letter of Transmittal" relating to the Exchange Offer states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. USAir will, for a period of 90 days after the Expiration Date (as
defined herein), make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
The Notes constitute securities for which there is no established trading
market. Any Old Notes not tendered and accepted in the Exchange Offer will
remain outstanding. USAir does not currently intend to list the New Notes on
any securities exchange. To the extent that any Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered Old
Notes could be adversely affected. No assurance can be given as to the
liquidity of the trading market for the Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on August , 1996, unless extended
(the "Expiration Date"). The date of acceptance for exchange of the Old Notes
(the "Exchange Date") will be the first business day following the Expiration
Date. Old Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date, otherwise such tenders will be
irrevocable. USAir will pay all expenses incident to the Exchange Offer.
---------------
See "Risk Factors" commencing on page 17 for a discussion of certain factors
that should be considered by prospective investors in evaluating the New
Notes.
---------------
The date of this Prospectus is July , 1996
<PAGE>
AVAILABLE INFORMATION
USAir has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Exchange Offer
Registration Statement") under the Securities Act with respect to the New
Notes offered hereby. This Prospectus does not contain all the information set
forth in the Exchange Offer 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 document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. USAir is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports
with the Commission. Such reports and other information concerning USAir may
be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
Room 1228; The Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and 75 Park Avenue, New York, New York
10007, 14th Floor. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Such material may also be inspected and
copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER MADE BY THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, 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 THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 17
Use of Proceeds.......................................................... 25
Description of the Aircraft and the Appraisals........................... 26
Selected Financial and Operating Information............................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 42
Management............................................................... 69
Beneficial Security Ownership............................................ 79
The Exchange Offer....................................................... 82
Description of the Notes................................................. 88
Plan of Distribution..................................................... 104
United States Federal Income Tax Consequences............................ 104
Legal Matters............................................................ 105
Independent Auditors..................................................... 105
Experts.................................................................. 105
Consolidated Financial Statements........................................ F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in its
entirety by the detailed information contained elsewhere in this Prospectus.
Capitalized terms used in this summary and not defined herein shall have the
meanings assigned to them elsewhere in this Prospectus.
THE COMPANY
USAir, a certificated air carrier engaged primarily in the business of
transporting passengers, property and mail, is a wholly-owned subsidiary of
USAir Group, Inc. ("USAir Group"). USAir accounted for approximately 93% of
USAir Group's operating revenues for the fiscal year ended December 31, 1995
and 92% of USAir Group's operating revenues for the first quarter of 1996.
USAir is USAir Group's principal operating subsidiary. USAir enplaned more than
57 million passengers in 1995 and was the fifth largest United States air
carrier ranked by revenue passenger miles ("RPMs") in 1995. As of December 31,
1995, USAir provided regularly scheduled jet service through 108 airports to
approximately 143 cities in the continental United States, Canada, Mexico,
France, Germany and the Caribbean. USAir added service to Italy and Spain in
1996. USAir's executive offices are located at 2345 Crystal Drive, Arlington,
Virginia 22227 (telephone number (703) 418-7000) and its primary connecting
hubs are located at the principal airports in Pittsburgh, Pennsylvania,
Charlotte, North Carolina, Philadelphia, Pennsylvania, and Baltimore/Washington
International Airport ("BWI"). USAir also maintains significant operations at
major airports in the large east coast population centers of Boston, New York
City (LaGuardia Airport ("LaGuardia")) and Washington, D.C. (National Airport
("Washington National")). When measured by departures, USAir is the largest or
second largest airline at each of the foregoing airports and is the predominant
air carrier in many smaller eastern cities, such as Albany, Buffalo, Hartford,
Providence, Richmond, Rochester and Syracuse. In addition, USAir is the leading
airline from the Northeast to Florida. As discussed below in "Business--
Significant Impact of Low Cost, Low Fare Competition," a substantial portion of
USAir's RPMs are flown within or to and from the eastern United States. For
fiscal year 1995, approximately 36% of all scheduled flights on the east coast
of the United States were USAir flights. Approximately 64% of USAir's current
flights and 44% of its available seat miles ("ASMs") are represented by intra-
east coast flying.
USAir has an important international alliance with British Airways Plc
("BA"), a major investor in USAir Group. As of December 31, 1995, USAir and BA
had implemented code sharing from 70 of the 138 airports currently authorized
by the United States Department of Transportation ("DOT"). The USAir/BA
alliance also extends to the sharing of ground services at certain airports and
joint cooperation in areas such as product branding, cargo services, jet fuel
purchasing, frequent traveler programs and maintenance services. As discussed
further below in "Risk Factors--Proposed Alliance Between British Airways and
American" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Proposed Alliance Between British Airways and American",
on June 11, 1996, American Airlines, Inc. ("American") and BA announced a
proposed alliance to jointly market, price and manage their North Atlantic
airline services, effective April 1, 1997, subject to United States and
international approvals. The joint services would carry the designator codes of
both airlines, and each would code-share behind/beyond the other's gateways.
The two airlines also intend to act cooperatively in other areas, such as
marketing, sales, facilities use and cargo. The BA/American alliance, as
proposed, does not prevent American or BA from entering into or continuing
commercial arrangements with other airlines, including USAir. Certain
competition authorities in the United States and Europe have made inquiries
into the proposed alliance and several airlines serving the North Atlantic have
raised strong objections to the proposed alliance. USAir has stated that the
proposed alliance "provides positive opportunities" and that "USAir will act in
the best interests of its shareholders, employees and communities served". At
present, USAir is reviewing the proposed alliance and is unable to predict how,
if approved, the BA/American alliance would affect USAir and its relationship
with BA.
3
<PAGE>
USAir also code-shares with eleven regional airlines which operate under the
"USAir Express" trade name. The USAir Express network feeds traffic into
USAir's route system at several points, including its major hub operations at
Pittsburgh, Charlotte, Philadelphia and BWI. At December 31, 1995, USAir
Express carriers enplaned approximately 9.6 million passengers, over half of
whom connected to USAir flights. USAir also has a management agreement and code
shares with Shuttle, Inc. which operates under the name "USAir Shuttle." The
USAir Shuttle operates frequent service between LaGuardia and Boston and
between LaGuardia and Washington National.
3--1
<PAGE>
In January 1996, Stephen M. Wolf was appointed Chairman and Chief Executive
Officer of USAir and of USAir Group. Mr. Wolf succeeded Seth E. Schofield, who
retired after 38 years with USAir. Mr. Wolf has been a senior executive at
United Airlines, Inc. ("United"), The Flying Tiger Line Inc. ("Flying Tigers"),
Republic Airlines, Inc. ("Republic"), Continental Airlines, Inc.
("Continental"), Pan American World Airways ("Pan Am") and American. In
addition, in February 1996, USAir appointed Rakesh Gangwal as President and
Chief Operating Officer of USAir and USAir Group and Lawrence M. Nagin as
Executive Vice President--Corporate Affairs and General Counsel of USAir and
USAir Group. Mr. Gangwal has been a senior officer at Air France and United and
Mr. Nagin has held senior positions at United and Flying Tigers.
RECENT OPERATING RESULTS
USAir recorded a net loss of $54.9 million for the three months ended March
31, 1996 compared to a net loss of $101.8 million for the three months ended
March 31, 1995. USAir recorded net income of $33.0 million and operating income
of $234.7 million for the fiscal year ended December 31, 1995 compared with a
net loss of $716.2 million and an operating loss of $517.0 million for the
fiscal year ended December 31, 1994. The year-over-year improvement reflects a
$406.3 million revenue increase coupled with a decrease in operating expenses
of $345.3 million. USAir's 1995 and 1994 results include $34.5 million and
$26.5 million, respectively, of income attributible to equity investments in
certain partnerships that provide computerized reservation services. From 1989
through 1994, USAir incurred substantial losses. Its results of operations have
been adversely affected by, among other factors, the growth of low cost, low
fare competition, particularly in 1994, and its unit costs, which are the
highest of major United States air carriers.
STRATEGY
USAir has been striving to improve its profitability and respond to the
competitive environment that characterizes the United States airline industry
by:
--Rationalizing the level and geographic distribution of its capacity;
--Building brand loyalty by improving its product and its delivery; and
--Reducing its operating costs and aircraft commitments.
Most recently, Stephen M. Wolf, Chairman of the Board of Directors and Chief
Executive Officer of both USAir Group and USAir, and Rakesh Gangwal, President
and Chief Operating Officer of both companies, have held a series of employee
meetings where they presented their assessment of USAir's competitive position.
The focal point of these meetings was to communicate senior management's belief
that USAir must lower its personnel costs, increase employee productivity,
increase the quality of USAir's service and customer satisfaction and grow in
size to ensure long-term viability. The Chairman made a similar presentation at
USAir Group's annual stockholders meeting in May 1996. USAir remains committed
to reducing USAir's personnel costs and improving employee productivity. With
regard to the growth of USAir, USAir believes that internal growth is
preferable but has not excluded other alternatives.
CAPACITY AND ROUTE RATIONALIZATION
Beginning in the spring of 1995, USAir instituted a significant
rationalization of its capacity and routes with the goals of reducing less
profitable non-hub (point-to-point) flying, emphasizing the quality of
departures versus quantity of flights, reducing excess capacity in strong
markets and replacing low demand jet service with modern turboprop aircraft
operated by USAir Express. USAir has also been seeking to broaden its route
portfolio by leveraging its strong east coast franchise into expanded
transcontinental and international service from the eastern United States. By
diversifying its route structure in this way, USAir can enhance its long-haul
service and increase its average length of haul. Increasing its length of haul
will enable USAir to increase the average value of tickets sold and reduce the
unit cost of serving each passenger.
Internationally, USAir has expanded service to the Caribbean and has re-
aligned its international routes in an effort to further develop Philadelphia
and Boston as transatlantic gateways. USAir has recently commenced
4
<PAGE>
service to Munich, Germany, Madrid, Spain and Rome, Italy to complement its
European service to Frankfurt and Paris. In July 1996, USAir began code-sharing
with German airline Deutsche BA on flights to Berlin and Dusseldorf from
Munich. USAir estimates that its transatlantic capacity in 1996 (as measured by
ASMs) will increase by approximately 54% compared to 1995. USAir believes that
the further development of international service from Philadelphia and Boston
will enable it to achieve a competitive advantage by leveraging USAir's
existing domestic network with the strong local transatlantic demand and the
favorable geographic position of these cities.
USAir's reduction in jet aircraft and its continuing efforts to reduce costs
and enhance revenue by eliminating less profitable routes have resulted in the
cessation of or reduction in jet flying between certain city pairs. In some
cases, existing or former jet routes have been turned over to USAir Express
with the goal of maintaining portions of the revenue base (particularly the hub
connecting traffic) with lower cost operations.
ENHANCED CUSTOMER SERVICE, PERFORMANCE AND RELIABILITY
USAir has undertaken a number of initiatives to build brand loyalty among its
customers with the goal of maintaining and enhancing its traditional unit
revenue premiums over its competitors. USAir hopes to increase its market share
of business travelers and long-haul customers. The initiatives include
enhancements appealing to business travelers, investments in technology and new
facilities, improvements in service levels and an emphasis on safety.
COST REDUCTIONS
Although USAir has recently demonstrated significantly improved financial
performance, USAir believes that it must continue to lower its costs (including
personnel costs) in order to compete effectively in a low fare environment.
USAir, whose operating costs are the highest among the major United States
airlines, is actively pursuing several initiatives in an effort to further
reduce its cost structure. USAir is working to achieve additional substantial
cost savings through a combination of organizational and structural changes,
reengineering and other initiatives including: centralization of its purchasing
functions; realignment of customer services; improvements in operations
performance to increase crew productivity; outsourcing of cargo and
communications; and reengineering its maintenance operations, finance,
reservations, purchasing, accounts payable, payroll and human resources
functions.
In February 1995, USAir and several other major U.S. carriers, including
Delta Airlines, Inc. ("Delta"), American, Northwest Airlines, Inc.
("Northwest") and United, imposed limits on the base commissions they pay
travel agents for domestic air fares. See "Business--Industry Restructuring and
Cost-Cutting." The new limits on commissions are designed to reduce one of the
airlines' largest expenses. USAir has experienced cost savings due to the new
commission limits.
In March 1994, in an attempt to reduce its annual labor personnel costs by
approximately $500 million through concession agreements involving wage and
benefit reductions, improved productivity and other cost savings, USAir Group
began negotiating with the unions that represent certain of USAir's employees.
USAir's wages and benefits are the largest single component of its operating
costs (approximately 41% for 1995). In late July 1995, USAir Group announced
that it was ending discussions with the unions on a wage concession and
restructuring package and that it would concentrate on reducing USAir's labor
costs through traditional collective bargaining. See "Business--Employees."
USAir remains committed to obtaining labor cost reductions.
In order to decrease aircraft ownership costs, facilitate its capacity
rationalization plan and reduce its fleet size and number of fleet types, USAir
has deferred new aircraft deliveries, pursued the sale or lease of certain jet
aircraft and declined to renew leases for certain other aircraft upon lease
expiry. USAir has no current plans to add new aircraft to its fleet until
January 1998. In May 1994, USAir reached an agreement with The Boeing Company
("Boeing") to reschedule the delivery of 40 737-300 series aircraft from the
1997 through 2000 time
5
<PAGE>
period to the years 2003 through 2005. In June 1995, USAir reached agreements
with Boeing and Rolls-Royce plc ("Rolls-Royce") to reschedule the delivery
dates for eight 757-200 aircraft from 1996 to 1998. As a result of these recent
agreements, USAir's capital commitments have been substantially reduced for the
1996 to 2000 time period. In addition, USAir has committed financing for a
substantial portion of the purchase price of each of the scheduled 1998
deliveries.
TRANSACTION OVERVIEW
On February 16, 1996 (the "Closing Date"), USAir issued the Old Notes, the
proceeds of which were used as part of the funds necessary to repay in full the
indebtedness incurred by USAir in connection with its acquisition of nine
Boeing 757-200 aircraft (each an "Aircraft" and collectively, the "Aircraft").
USAir took delivery of two of the Aircraft from Boeing in the fourth quarter of
1994 and seven during 1995. Each of the Aircraft is equipped with two Rolls-
Royce model RB211-535E4 aircraft engines.
The Old Class A Notes, the Old Class B Notes and the Old Class C Notes were
issued in principal amounts not exceeding 32.5%, 45% and 60%, respectively, on
a cumulative basis, of $438,120,000--the "Initial Aggregate Appraised Value."
"Appraised Value" for an Aircraft is defined as the lower of the average and
median of the appraisals for such Aircraft as of December 31, 1995 from the
following three independent aircraft appraisal and consulting firms
commissioned by USAir: AirClaims Limited ("AirClaims"), Aircraft Information
Services, Inc. ("AISI") and BK Associates, Inc. ("BK"). The Initial Aggregate
Appraised Value of $438,120,000 was the sum of the nine Appraised Values. See
"Risk Factors--Limitations Regarding Aircraft Collateral--Appraisals of
Aircraft; Realizable Value" and "Description of the Aircraft and the
Appraisals."
The Old Notes are and the New Notes will be secured by a security interest
in, among other things, the Aircraft, granted on the Closing Date by USAir to
Wilmington Trust Company, as collateral agent (the "Collateral Agent") under a
Collateral Agency Agreement (the "Collateral Agency Agreement") entered into by
USAir, the Indenture Trustees, the Liquidity Providers (as defined herein) and
the Collateral Agent. Payments of interest on the Notes will be supported by
three separate Liquidity Facilities (as defined herein), being provided
initially by Westdeutsche Landesbank Girozentrale, acting through its New York
branch ("WestLB New York"), each in an amount sufficient to pay interest on
(but not principal of or premium on) the respective Class of Notes at the
applicable interest rate on three successive semi-annual Interest Payment Dates
(as defined herein).
USAir will make semi-annual payments of interest on, and is expected to make
semi-annual payments of principal of, the Notes directly to the Collateral
Agent. From these payments (as well as from other payments described herein
required to be made by USAir under the Collateral Agency Agreement and the
Liquidity Agreements (as defined herein)), the Collateral Agent will first
reimburse the Liquidity Providers for amounts owing to such Liquidity Providers
and then pay to the applicable Indenture Trustee for each Class of Notes
interest on and principal of the Notes. The expected final principal payment
date of the Notes is April 15, 2008. Failure to make an expected payment of
principal of the Notes before the Legal Maturity Date (as defined below) is not
an Event of Default (as defined herein) under the applicable Indenture.
6
<PAGE>
SUMMARY OF TERMS OF THE NOTES
<TABLE>
<CAPTION>
CLASS A NOTES CLASS B NOTES CLASS C NOTES
------------- ------------- -------------
<S> <C> <C> <C>
Aggregate Principal Amount....... $142,400,000 $54,800,000 $65,800,000
Ratings of Old Notes on February
16, 1996:
Moody's........................ A2 Baa1 Ba2
S&P............................ A+ A- BBB-
Initial Loan to Aircraft Value
(cumulative).................... 32.5% 45.0% 60.0%
Expected Average Life Date....... 02/20/2006 02/20/2006 02/20/2006
Initial Average Life (in years).. 10.0 10.0 10.0
Interest Payment Dates........... 04/15 & 10/15 04/15 & 10/15 04/15 & 10/15
Expected Principal Payment
Dates........................... 04/15 & 10/15 04/15 & 10/15 04/15 & 10/15
Final Expected Payment Dates..... 04/15/2008 04/15/2008 04/15/2008
Legal Maturity Date.............. 10/15/2009 10/15/2009 10/15/2009
Minimum Denomination............. $ 100,000 $ 100,000 $ 100,000
Section 1110 Protection(1)....... yes yes yes
Liquidity Provider Ratings....... A-1+/P-1 A-1+/P-1 A-1+/P-1
Liquidity Facility Coverage...... 3 semi-annual 3 semi-annual 3 semi-annual
int. pymts. int. pymts. int. pymts.
Initial Liquidity Facility
Amounts(2)...................... $ 14,439,360 $ 6,165,000 $ 8,813,910
</TABLE>
- --------
(1) The benefits of Section 1110 of the Bankruptcy Code are available to the
Collateral Agent.
(2) The initial available amount of each of the Liquidity Facilities is
sufficient to cover three times the amount of interest to accrue on the
relevant Class of Notes during the first semi-annual interest period. The
aggregate initial amount of the Liquidity Facilities is $29,418,270.
AIRCRAFT SECURING THE NOTES
The following table sets forth the registration number, type, in-service date
and Appraised Value of each of the Aircraft:
<TABLE>
<CAPTION>
AIRCRAFT AIRCRAFT
REGISTRATION IN-SERVICE APPRAISED
NUMBER AIRCRAFT TYPE DATE VALUES(1)
------------ -------------- ------------- ------------
<S> <C> <C> <C>
N625VJ........................ Boeing 757-200 November 1994 $ 47,710,000
N626AU........................ Boeing 757-200 November 1994 47,920,000
N627AU........................ Boeing 757-200 February 1995 48,330,000
N628AU........................ Boeing 757-200 February 1995 48,330,000
N629AU........................ Boeing 757-200 March 1995 48,740,000
N630AU........................ Boeing 757-200 April 1995 48,750,000
N631AU........................ Boeing 757-200 May 1995 49,170,000
N632AU........................ Boeing 757-200 June 1995 49,380,000
N633AU........................ Boeing 757-200 July 1995 49,790,000
------------
$438,120,000
============
</TABLE>
- --------
(1) Appraised Value for each Aircraft means the lower of the average and median
of the appraisals for such Aircraft commissioned by USAir from AirClaims,
AISI and BK as of December 31, 1995. The median appraisal was used in each
case. As further described in "Risk Factors--Limitations Regarding Aircraft
Collateral--Appraisals of Aircraft; Realizable Value" and "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 current market value of an
Aircraft may be less than its Appraised Value. Each of the appraisals has
been filed with the Commission and each is subject to qualifications,
limitations and assumptions that should be considered by prospective
holders of the New Notes.
7
<PAGE>
LOAN TO VALUE RATIOS
The following table sets forth loan to value ratios ("LTVs") for each Class
of Notes as of the date specified. The LTV for any Class of Notes is equal to
the outstanding principal amount of such Class, together in each case with the
outstanding principal amount of the Notes of all Classes senior to such Class,
divided by the "Assumed Aggregate Appraised Value." USAir does not generally
disclose projections of future values. USAir has no obligation, and does not
intend, to prepare updated projections of the LTVs set forth below.
The table is based on the assumption that the value of each Aircraft included
in the aggregate pool set forth below depreciates by 2% per year from the
Initial Aggregate Appraised Value. Other rates or methods of depreciation would
result in materially different LTVs and no assurance can be given (i) that the
depreciation rates and method assumed for the purpose of the table are those
most likely to occur or (ii) as to the actual future value of any Aircraft. The
Note balances are calculated on the assumption that USAir makes all payments of
principal when expected to be made. Thus, the table should not be considered a
forecast or prediction of expected or likely LTVs but simply a mathematical
calculation based on one set of assumptions.
CLASS A
<TABLE>
<CAPTION>
ASSUMED
AGGREGATE
APPRAISED CLASS A CLASS A
PAYMENT DATE VALUE(1) BALANCE LTV
------------ ------------ ------------ -------
<S> <C> <C> <C>
Apr. 15, 1996............................ $438,120,000 $142,400,000 32.5%
Oct. 15, 1996............................ 438,120,000 138,703,000 31.7%
Apr. 15, 1997............................ 429,357,600 137,011,500 31.9%
Oct. 15, 1997............................ 429,357,600 135,320,000 31.5%
Apr. 15, 1998............................ 420,595,200 133,797,650 31.8%
Oct. 15, 1998............................ 420,595,200 132,275,300 31.4%
Apr. 15, 1999............................ 411,832,800 130,895,410 31.8%
Oct. 15, 1999............................ 411,832,800 129,515,520 31.4%
Apr. 15, 2000............................ 403,070,400 128,503,680 31.9%
Oct. 15, 2000............................ 403,070,400 127,491,840 31.6%
Apr. 15, 2001............................ 394,308,000 126,657,177 32.1%
Oct. 15, 2001............................ 394,308,000 124,996,877 31.7%
Apr. 15, 2002............................ 385,545,600 123,842,573 32.1%
Oct. 15, 2002............................ 385,545,600 122,980,798 31.9%
Apr. 15, 2003............................ 376,783,200 120,627,040 32.0%
Oct. 15, 2003............................ 376,783,200 119,285,600 31.7%
Apr. 15, 2004............................ 368,020,800 113,635,200 30.9%
Oct. 15, 2004............................ 368,020,800 110,353,800 30.0%
Apr. 15, 2005............................ 359,258,400 103,923,520 28.9%
Oct. 15, 2005............................ 359,258,400 96,807,604 26.9%
Apr. 15, 2006............................ 350,496,000 88,857,600 25.4%
Oct. 15, 2006............................ 350,496,000 79,804,800 22.8%
Apr. 15, 2007............................ 341,733,600 73,154,400 21.4%
Oct. 15, 2007............................ 341,733,600 63,648,000 18.6%
Apr. 15, 2008............................ 332,971,200 0 0.0%
</TABLE>
- --------
(1) The Assumed Aggregate Appraised Value set forth opposite April 15, 1996
(but not the Assumed Aggregate Appraised Values for subsequent periods) is
the Initial Aggregate Appraised Value (see "Description of the Aircraft and
the Appraisals"). No assurance can be given that such value represents the
realizable value of the Aircraft; the proceeds realized upon the sale of
any Aircraft may be less than the Appraised Value
8
<PAGE>
thereof. In addition, the current market value of an Aircraft may be less
than its Appraised Value. Each of the appraisals has been filed with the
Commission and each is subject to qualifications, limitations and
assumptions that should be considered by prospective holders of the New
Notes. See "Risk Factors--Limitations Regarding Aircraft Collateral--
Appraisals of Aircraft; Realizable Value" and "Description of the Aircraft
and the Appraisals."
CLASS B
<TABLE>
<CAPTION>
ASSUMED
AGGREGATE
APPRAISED CLASS B CLASS B
PAYMENT DATE VALUE(1) BALANCE LTV
------------ ------------ ----------- -------
<S> <C> <C> <C>
Apr. 15, 1996............................. $438,120,000 $54,800,000 45.0%
Oct. 15, 1996............................. 438,120,000 53,377,278 43.8%
Apr. 15, 1997............................. 429,357,600 52,726,336 44.2%
Oct. 15, 1997............................. 429,357,600 52,075,393 43.6%
Apr. 15, 1998............................. 420,595,200 51,489,545 44.1%
Oct. 15, 1998............................. 420,595,200 50,903,697 43.6%
Apr. 15, 1999............................. 411,832,800 50,372,672 44.0%
Oct. 15, 1999............................. 411,832,800 49,841,647 43.6%
Apr. 15, 2000............................. 403,070,400 49,452,259 44.2%
Oct. 15, 2000............................. 403,070,400 49,062,871 43.8%
Apr. 15, 2001............................. 394,308,000 48,741,666 44.5%
Oct. 15, 2001............................. 394,308,000 48,102,731 43.9%
Apr. 15, 2002............................. 385,545,600 47,658,518 44.5%
Oct. 15, 2002............................. 385,545,600 47,326,880 44.2%
Apr. 15, 2003............................. 376,783,200 46,421,080 44.3%
Oct. 15, 2003............................. 376,783,200 45,904,852 43.8%
Apr. 15, 2004............................. 368,020,800 43,730,400 42.8%
Oct. 15, 2004............................. 368,020,800 42,467,614 41.5%
Apr. 15, 2005............................. 359,258,400 39,993,040 40.1%
Oct. 15, 2005............................. 359,258,400 37,254,612 37.3%
Apr. 15, 2006............................. 350,496,000 34,195,200 35.1%
Oct. 15, 2006............................. 350,496,000 30,711,398 31.5%
Apr. 15, 2007............................. 341,733,600 28,152,115 29.6%
Oct. 15, 2007............................. 341,733,600 24,493,753 25.8%
Apr. 15, 2008............................. 332,971,200 0 0.0%
</TABLE>
- -------
(1) The Assumed Aggregate Appraised Value set forth opposite April 15, 1996
(but not the Assumed Aggregate Appraised Values for subsequent periods) is
the Initial Aggregate Appraised Value (see "Description of the Aircraft
and the Appraisals"). No assurance can be given that such value represents
the realizable value of the Aircraft; the proceeds realized upon the sale
of any Aircraft may be less than the Appraised Value thereof. In addition,
the current market value of an Aircraft may be less than its Appraised
Value. Each of the appraisals has been filed with the Commission and each
is subject to qualifications, limitations and assumptions that should be
considered by prospective holders of the New Notes. See "Risk Factors--
Limitations Regarding Aircraft Collateral--Appraisals of Aircraft;
Realizable Value" and "Description of the Aircraft and the Appraisals."
9
<PAGE>
CLASS C
<TABLE>
<CAPTION>
ASSUMED
AGGREGATE
APPRAISED CLASS B CLASS B
PAYMENT DATE VALUE(1) BALANCE LTV
------------ ------------ ----------- -------
<S> <C> <C> <C>
Apr. 15, 1996............................. $438,120,000 $65,800,000 60.0%
Oct. 15, 1996............................. 438,120,000 64,091,695 58.5%
Apr. 15, 1997............................. 429,357,600 63,310,089 58.9%
Oct. 15, 1997............................. 429,357,600 62,528,483 58.2%
Apr. 15, 1998............................. 420,595,200 61,825,038 58.8%
Oct. 15, 1998............................. 420,595,200 61,121,592 58.1%
Apr. 15, 1999............................. 411,832,800 60,483,975 58.7%
Oct. 15, 1999............................. 411,832,800 59,846,357 58.1%
Apr. 15, 2000............................. 403,070,400 59,378,807 58.9%
Oct. 15, 2000............................. 403,070,400 59,911,258 58.4%
Apr. 15, 2001............................. 394,308,000 58,525,578 59.3%
Oct. 15, 2001............................. 394,308,000 58,758,388 58.5%
Apr. 15, 2002............................. 385,545,600 57,225,009 59.3%
Oct. 15, 2002............................. 385,545,600 57,826,801 58.9%
Apr. 15, 2003............................. 376,783,200 56,739,180 59.1%
Oct. 15, 2003............................. 376,783,200 55,119,329 58.5%
Apr. 15, 2004............................. 368,020,800 52,508,400 57.0%
Oct. 15, 2004............................. 368,020,800 50,992,135 55.4%
Apr. 15, 2005............................. 359,258,400 48,020,840 53.4%
Oct. 15, 2005............................. 359,258,400 44,732,727 49.8%
Apr. 15, 2006............................. 350,496,000 41,059,200 46.8%
Oct. 15, 2006............................. 350,496,000 36,876,094 42.1%
Apr. 15, 2007............................. 341,733,600 33,803,087 39.5%
Oct. 15, 2007............................. 341,733,600 29,410,382 34.4%
Apr. 15, 2008............................. 332,971,200 0 0.0%
</TABLE>
- --------
(1) The Assumed Aggregate Appraised Value set forth opposite April 15, 1996
(but not the Assumed Aggregate Appraised Values for subsequent periods) is
the Initial Aggregate Appraised Value (see "Description of the Aircraft and
the Appraisals"). No assurance can be given that such value represents the
realizable value of the Aircraft; the proceeds realized upon the sale of
any Aircraft may be less than the Appraised Value thereof. In addition, the
current market value of an Aircraft may be less than its Appraised Value.
Each of the appraisals has been filed with the Commission and each is
subject to qualifications, limitations and assumptions that should be
considered by prospective holders of the New Notes. See "Risk Factors--
Limitations Regarding Aircraft Collateral--Appraisals of Aircraft;
Realizable Value" and "Description of the Aircraft and the Appraisals."
THE EXCHANGE OFFER
EXCHANGE OFFER
USAir is offering to exchange pursuant to the Exchange Offer (a) up to
$142,400,000 in aggregate principal amount of new 6.76% Class A Enhanced
Equipment Notes for up to $142,400,000 in aggregate principal amount of
outstanding 6.76% Class A Enhanced Equipment Notes, (b) up to $54,800,000 in
aggregate principal amount of new 7.50% Class B Enhanced Equipment Notes for up
to $54,800,000 in aggregate principal amount of outstanding 7.50% Class B
Enhanced Equipment Notes and (c) up to $65,800,000 in aggregate principal
amount of new 8.93% Class C Enhanced Equipment Notes for up to $65,800,000 in
aggregate principal amount of outstanding 8.93% Class C Enhanced Equipment
Notes. The terms of the New Notes are identical in all respects (including
principal amount, interest rate and maturity) to the terms of the Old Notes for
which they may be exchanged pursuant to the Exchange Offer, except that the New
Notes are freely transferable by holders thereof,
10
<PAGE>
and are not subject to any covenant regarding registration under the Securities
Act. See "The Exchange Offer--Terms of the Exchange" and "--Terms and
Conditions of the Letter of Transmittal."
INTEREST PAYMENTS
Interest on the New Notes will accrue from the last Interest Payment Date
(defined below) on which interest was paid on the Old Notes so surrendered.
MINIMUM CONDITION
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
EXPIRATION DATE
The Exchange Offer will expire at 5:00 p.m., New York City time, on the
Expiration Date.
EXCHANGE DATE
The date of acceptance for exchange of the Old Notes will be the first
business day following the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
USAir's obligation to consummate the Exchange Offer will be subject to
certain conditions. See "The Exchange Offer--Conditions to the Exchange Offer."
USAir reserves the right to terminate or amend the Exchange Offer at any time
prior the Expiration Date upon the occurrence of any such condition.
WITHDRAWAL RIGHTS
Tenders may be withdrawn at any time prior to the Expiration Date; otherwise,
all tenders will be irrevocable.
PROCEDURES FOR TENDERING NOTES
See "The Exchange Offer--How to Tender."
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for New Notes should not be a taxable exchange for
federal income tax purposes. See "United States Federal Income Tax
Consequences."
EFFECT ON HOLDERS OF OLD NOTES
As a result of the making of, and upon acceptance for exchange of all validly
tendered Old Notes pursuant to the terms of, this Exchange Offer, USAir will
have fulfilled a covenant contained in the Registration Rights Agreement, and
accordingly the holders of the Old Notes will have no further registration or
other rights under the Registration Rights Agreement. Holders of the Old Notes
who do not tender their Old Notes in the Exchange Offer will continue to hold
such Old Notes and will be entitled to all the rights and limitations
applicable thereto under the applicable Indenture, except for any such rights
under the Registration Rights Agreement which by their terms terminate or cease
to have further effectiveness as a result of the making of, and the acceptance
for exchange of all validly tendered Notes pursuant to, the Exchange Offer. All
untendered Old Notes will continue
11
<PAGE>
to be subject to the restrictions on transfer provided for in the Old Notes and
in the applicable Indenture. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered Old Notes
could be adversely affected.
USE OF PROCEEDS
There will be no cash proceeds to USAir from the exchange pursuant to the
Exchange Offer.
TERMS OF THE NOTES
NEW NOTES OFFERED
The form and terms of the New Notes are identical in all respects (including
principal amount, interest rate and maturity) to the Old Notes except that the
New Notes have been registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof and are not subject to any
covenant regarding registration under the Securities Act. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indentures. See "Description of the Notes".
CLASS A NOTES
$142,400,000 aggregate principal amount of Class A Enhanced Equipment Notes.
CLASS B NOTES
$54,800,000 aggregate principal amount of Class B Enhanced Equipment Notes.
CLASS C NOTES
$65,800,000 aggregate principal amount of Class C Enhanced Equipment Notes.
INTEREST PAYMENTS
Interest Payment Dates
Each April 15 and October 15, commencing April 15, 1996, except that, if any
such date shall not be a Business Day (as defined in the Indentures), the
Interest Payment Date shall be the next Business Day.
Interest
Interest will be paid on each Class of Notes on each Interest Payment Date at
the following interest rates: 6.76% for the New Class A Notes, 7.50% for the
New Class B Notes and 8.93% for the New Class C Notes. Interest will be
calculated assuming a 360-day year of twelve 30-day months.
PRINCIPAL PAYMENTS
Principal Payment Dates
The principal amount of the Notes is due and payable on the Legal Maturity
Date. It is expected that a portion of the principal amount of each Note will
be paid each April 15 and October 15, commencing October 15, 1996 (each, a
"Principal Payment Date" and, together with the Interest Payment Dates, the
"Payment Dates"). Failure to make an expected payment of principal before the
Legal Maturity Date is not an Event of Default under the Indentures.
12
<PAGE>
Expected Average Life Date
The initial expected average life date with respect to the amortization of
each Class of Notes will be February 20, 2006.
Final Expected Payment Date
It is expected that the final principal payment on the Notes will be made on
April 15, 2008.
Legal Maturity Date
October 15, 2009 for each Class of Notes (the "Legal Maturity Date").
REDEMPTION OF THE NOTES
Optional Redemption
Any Class of Notes may be redeemed in whole or from time to time in part at
the option of USAir, so long as no Collateral Access Event (as defined herein)
has occurred and is continuing, at a redemption price equal to the outstanding
principal amount of the Notes to be redeemed, together with accrued interest
and, if any of the Notes are redeemed prior to February 20, 2006, a Make Whole
Premium (as defined herein). See "Description of the Notes--Redemption." In
calculating the Make Whole Premium, expected payments of principal and interest
will be discounted at the applicable Treasury Yield (as defined herein).
The Notes may be redeemed at par on or after February 20, 2006. Prior to any
such redemption, all amounts (if any) then owing to the Liquidity Providers
shall be paid in full.
Mandatory Redemption
Following an Event of Loss (as defined herein), Notes of every Class shall be
redeemed, so long as no Collateral Access Event has occurred and is continuing,
at par plus accrued interest, in a pro rata amount (based upon the ratio borne
by the initial Appraised Value of the Aircraft subject to such Event of Loss to
the Initial Aggregate Appraised Value). All amounts paid in connection with any
such redemption shall be applied (i) to the Notes within each Class pro rata in
accordance with the then outstanding principal amount thereof and (ii) pro rata
to each of the unpaid installments of principal of such Notes expected to be
paid on each Principal Payment Date. Prior to any such redemption, all amounts
(if any) then owing to the Liquidity Providers shall be paid in full. See
"Description of the Notes--Redemption--Collateral Agency Agreement--Events of
Loss."
MINIMUM DENOMINATIONS
$100,000 and integral multiples of $1,000 in excess thereof.
COLLATERAL
All amounts payable in respect of the Notes will be secured pursuant to the
Collateral Agency Agreement by a security interest in, among other things, the
Aircraft (collectively, the "Collateral"). See "Risk Factors--Limitations
Regarding Aircraft Collateral," "Description of the Aircraft and the
Appraisals" and "Description of the Notes--Collateral."
EVENTS OF DEFAULT
The following constitute Events of Default under each Indenture: the failure
to pay within 15 days of the due date thereof (i) the outstanding principal
amount of the applicable Class of Notes on the Legal Maturity
13
<PAGE>
Date for such Class or (ii) interest due on any Note on any Interest Payment
Date (unless the Collateral Agent shall have made an Interest Advance with
respect thereto).
COLLATERAL ACCESS EVENTS
Each Indenture provides that, upon the occurrence and during the continuance
of a Collateral Access Event, the applicable Indenture Trustee may, subject to
notice requirements and grace periods, accelerate the Notes and, at (but only
at) the direction of the Controlling Party (as defined herein), exercise
remedies against USAir and the Collateral. "Collateral Access Events" under
each Indenture include (subject to notice requirements and grace periods): (i)
the failure by USAir to pay principal of the applicable Notes when expected,
(ii) the failure by USAir to pay interest or premium on the applicable Notes
when due, (iii) the failure to procure or maintain insurance as provided in the
Collateral Agency Agreement, (iv) the failure to perform certain covenants
under the Collateral Agency Agreement, (v) the falsity of representations and
warranties in the Operative Documents (as defined in the Collateral Agency
Agreement) in any material respect, (vi) certain bankruptcy, insolvency or
reorganization events of USAir and (vii) the occurrence of a Collateral Access
Event under any other Indenture. In addition, each Indenture provides that the
acceleration of one Class of Notes will result in the acceleration of all of
the Notes. The Controlling Party shall have the exclusive right to cause and
direct the exercise of remedies following an acceleration of Notes. See
"Description of the Notes--Collateral Agency Agreement--Collateral Access
Events" and "--Collateral Agency Agreement--Remedies."
PURCHASE RIGHTS OF NOTEHOLDERS
Upon acceleration of the Notes, the holders of each junior Class of Notes
shall have the right to purchase all, but not less than all, of the Notes of
all senior Classes at a purchase price equal to par plus accrued interest. See
"Description of the Notes--Purchase Rights of Noteholders."
LIQUIDITY FACILITIES
With respect to each Class of Notes, USAir has entered into a Liquidity
Agreement (collectively, the "Liquidity Agreements") with the Liquidity
Provider for such Class of Notes pursuant to which such Liquidity Provider has
agreed to make advances to the Collateral Agent (each such advance, an
"Interest Advance") to pay interest on (but not principal of or premium on) the
Notes of such Class in an amount equal, at any time, to three times the
interest payable on such Notes on the next Interest Payment Date (collectively,
the "Liquidity Facilities") to the extent that payments made by USAir to the
Collateral Agent on or prior to the fifth day after such Interest Payment Date
are not sufficient to pay interest due on such Interest Payment Date on the
Notes to which such Liquidity Facility relates. On the Closing Date, the
amounts available under the Class A Liquidity Facility, the Class B Liquidity
Facility and the Class C Liquidity Facility were $14,439,360, $6,165,000 and
$8,813,910, respectively. The Liquidity Facilities do not provide for any
payment in respect of principal of or premium on any Class of Notes.
In the event of an acceleration of any Class of Notes the Liquidity Provider
for such Class of Notes shall advance the entire available amount under such
Liquidity Agreement (an "Acceleration Advance"). The proceeds of each
Acceleration Advance will be deposited into a cash collateral account (each, a
"Cash Collateral Account") maintained at the offices of the Collateral Agent
and used for the same purposes and under the same circumstances as Interest
Advances under the Liquidity Facility are to be used. See "Description of the
Notes--Liquidity Facilities."
If at any time the short-term unsecured debt obligations of a Liquidity
Provider are rated lower than A-1 by Standard and Poor's Ratings Services
("S&P") or lower than P-1 by Moody's Investors Service, Inc. ("Moody's"), the
Collateral Agency Agreement will provide for replacement of the applicable
Liquidity Facility. If a Liquidity Facility is not replaced in connection with
such a downgrade by S&P or Moody's, a
14
<PAGE>
borrowing in an amount equal to the entire available amount will be made under
such Liquidity Facility (a "Downgrade Advance") and the proceeds will be
deposited into the Cash Collateral Account and used for the same purposes and
under the same circumstances as Interest Advances under the Liquidity Facility
are to be used. See "Description of the Notes--Liquidity Facilities."
In addition, the Collateral Agency Agreement will provide for the replacement
of a Liquidity Facility (other than a Liquidity Facility that expires no
earlier than 15 days after the Legal Maturity Date of the applicable Class of
Notes) in the event that it is not extended by the date that is 30 days prior
to the then scheduled expiration date thereof. In such event, a borrowing in an
amount equal to the entire available amount under such Liquidity Facility will
be made (the "Non-Extension Advance") and the proceeds will be deposited in a
Cash Collateral Account and used for the same purposes and under the same
circumstances as Interest Advances under such Liquidity Facility are to be
used. The initial Liquidity Facilities are scheduled to expire on February 14,
1997.
Upon an advance of any kind under a Liquidity Facility, USAir will be
obligated to repay to the Liquidity Provider the amount of such advance
together with accrued interest thereon at the rates and in the manner described
herein. Such repayment obligation and any other amounts payable by USAir under
the Liquidity Agreements will be secured by the Collateral and will rank senior
in right of distribution to all amounts payable to Noteholders, other than
distributions to Noteholders of amounts advanced in respect of Interest
Advances under the respective Liquidity Facilities.
LIQUIDITY PROVIDER
WestLB New York is serving as the initial Liquidity Provider for each Class
of Old Notes and will serve as Liquidity Provider for each Class of New Notes.
As of July 10, 1996, the short-term, unsecured debt ratings of the Liquidity
Providers were A-1+ from S&P and P-1 from Moody's.
SUBORDINATION OF DISTRIBUTIONS
The Class B Notes are subordinated to the Class A Notes in right of payment
and the Class C Notes are subordinated to the Class A Notes and the Class B
Notes in right of payment. On each Payment Date, all payments of interest on
and principal of the Class A Notes will be made prior to payments of interest
on and principal of the Class B Notes and payments of interest on and principal
of the Class A Notes and the Class B Notes will be made prior to payments of
interest on and principal of the Class C Notes. Upon acceleration of the Notes,
no payment will be made on the Class B Notes until all amounts outstanding on
or in respect of the Class A Notes have been paid in full and no payment will
be made on the Class C Notes until all amounts outstanding on or in respect of
the Class A Notes and the Class B Notes have been paid in full.
Both before and after an acceleration of the Notes, payments of amounts owing
to the Liquidity Providers under the Liquidity Facilities are payable before
any payments may be made to Noteholders of any Class, except that the
Noteholders of each Class will be entitled to receive and retain amounts
available in respect of Interest Advances under the Liquidity Facility for such
Class of Notes. See "Description of the Notes--Priority of Distributions."
INTERCREDITOR RIGHTS
At any given time, except as set forth below, only one of the Class A
Indenture Trustee, the Class B Indenture Trustee and the Class C Indenture
Trustee may direct and control the exercise of remedies in respect of the
Collateral (the party so entitled to act, the "Controlling Party"). Such
control will include the ability to direct the Collateral Agent or applicable
Indenture Trustee as to when, and in what manner, to exercise remedies under
the applicable Indenture.
15
<PAGE>
Except as set forth below, the Class A Indenture Trustee will be the
Controlling Party until all amounts outstanding on or in respect of the Class A
Notes have been paid in full, in which case the Class B Indenture Trustee will
be the Controlling Party until all amounts outstanding on or in respect of the
Class B Notes have been paid in full, in which case the Class C Indenture
Trustee will be the Controlling Party. Notwithstanding the foregoing, if none
of the Indenture Trustees acting as Controlling Party has taken action to
exercise remedies in respect of the Collateral within 24 months following the
earlier of the acceleration of the Notes and the unreimbursed utilization of
the entire available amount under any of the Liquidity Facilities, the
Liquidity Provider for the Class A Notes shall thereupon become the Controlling
Party for all purposes under the Collateral Agency Agreement until all amounts
outstanding in respect of the Liquidity Facility for the Class A Notes shall
have been paid in full, whereupon the Liquidity Provider for the Class B Notes
shall become the Controlling Party until all amounts outstanding in respect of
the Liquidity Facility for the Class B Notes shall have been paid in full,
whereupon the Liquidity Provider for the Class C Notes shall become the
Controlling Party until all amounts outstanding in respect of the Liquidity
Facility for the Class C Notes shall have been paid in full, whereupon the
Controlling Party shall be the appropriate Indenture Trustee.
For a period of nine months after the acceleration of the Notes, without the
consent of a majority in principal amount of Notes of each Class, if the
Indenture Trustee for such Class of Notes is not the Controlling Party, no
Aircraft may be sold if the net proceeds from such sale would be less than the
Minimum Sale Price for such Aircraft. "Minimum Sale Price" means, with respect
to any Aircraft, the lesser of (i) 75% of the value of such Aircraft based upon
a then-current appraisal and (ii) a pro rata amount of the total amount then
owed by USAir to the Noteholders and the Liquidity Providers (the allocation
for any such Aircraft shall be based upon the ratio borne by the initial
Appraised Value thereof to the Initial Aggregate Appraised Value.) See
"Description of the Notes--Intercreditor Rights."
SECTION 1110
The Collateral Agent received, on the Closing Date, an opinion from Fulbright
& Jaworski, L.L.P. (special counsel to USAir) that the Collateral Agent will be
entitled to the benefits of Section 1110 of the Bankruptcy Code ("Section 1110
of the Bankruptcy Code") with respect to the Aircraft. See "Description of the
Notes--Remedies" for a description of Section 1110 of the Bankruptcy Code.
INDENTURE TRUSTEES
Wilmington Trust Company, Wilmington, Delaware, is acting as Indenture
Trustee, Paying Agent and Registrar for each Class of Notes.
COLLATERAL AGENT
Wilmington Trust Company, Wilmington, Delaware.
EXCHANGE AGENT
Wilmington Trust Company, Wilmington, Delaware.
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RISK FACTORS
In deciding whether to accept the Exchange Offer, holders of the Old Notes
should consider carefully the following specific risk factors, as well as the
other information set forth in this Prospectus.
COMPANY RELATED CONSIDERATIONS
SUBSTANTIAL LEVERAGE; LIMITED ACCESS TO NEW CAPITAL; LIQUIDITY
USAir is highly leveraged and, as of March 31, 1996, had long-term debt and
capital lease obligations of approximately $2.7 billion. In addition, as of
December 31, 1995, USAir's minimum lease payment obligations under
noncancelable operating leases totaled approximately $3.4 billion for the
years 1996 through 2000 and $6.6 billion thereafter. The ability of USAir to
fulfill these payment obligations will depend upon a variety of factors,
including favorable domestic and international pricing environments, the
absence of adverse general economic conditions, the absence of adverse
regulatory changes, continued operating cost reductions and the ability of
USAir to attract new capital. However, there can be no assurances that any of
these factors will produce an outcome favorable to USAir. For USAir, continued
cost reductions (particularly in personnel costs) are especially critical in
order to enable USAir to become more competitive with airlines with lower
operating costs and those with greater financial strength.
At March 31, 1996, USAir's unrestricted cash, cash equivalents and short-
term investments totaled approximately $828 million. Factors beyond USAir's
control, such as a downturn in the economy, adverse regulatory changes,
intensified industry fare wars, substantial increases in jet fuel prices or
fuel taxes, adverse weather conditions, negative public perception regarding
safety or further incursions by low cost, low fare carriers into USAir's
markets, could have a material adverse effect on USAir's prospects, liquidity,
financial condition and results of operations. Because USAir is highly
leveraged and currently has no bank credit or receivables facilities in place
and has limited access to public debt and equity markets, it is more
vulnerable to these factors than are financially stronger competitors or those
with standby funding sources or better access to such markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources." In addition, because of the two
aircraft accidents involving USAir in 1994 and the negative publicity
associated with these accidents and other incidents in recent years, should
any other aircraft accident or incident involving USAir or its code-share
partners occur in the near future, USAir may be particularly susceptible to
adverse passenger reactions, and its ability to procure sufficient amounts of
insurance on commercially reasonable terms may be materially impaired.
LOSS HISTORY
Although USAir recorded net income of $33.0 million for 1995, it recorded
net losses in excess of $3 billion on revenues of approximately $36 billion
from 1989 through 1994. USAir recorded a net loss of $54.9 million in the
first three months of 1996.
USAir's cumulative losses through 1994 and in the first quarter of 1996 have
resulted in a common stockholder's deficit as of March 31, 1996 of $366.1
million. There may be investors and lenders who have policies that limit or
preclude their investment in or lending to companies with a common
stockholder's deficit and therefore USAir's common stockholder's deficit may
affect its ability to obtain additional financing in the future.
DEFERRAL OF DIVIDENDS BY USAIR GROUP
On September 29, 1994, USAir Group announced that it was deferring the
quarterly dividend payment due September 30, 1994 on the 358,000 outstanding
shares of its 9 1/4% Series A Cumulative Convertible Preferred Stock ("Series
A Preferred Stock"). The Series A Preferred Stock is owned by affiliates of
Berkshire Hathaway Inc. ("Berkshire"). USAir Group has also deferred quarterly
dividend payments on all its other outstanding
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series of preferred stock, including the Series F Cumulative Convertible
Senior Preferred Stock (the "Series F Preferred Stock") and Series T-1 and T-2
Cumulative Convertible Exchangeable Senior Preferred Stock (the "Series T
Preferred Stock"), both of which are owned by BA, as well as on the publicly
held $437.50 Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock"). On March 13, 1995, Berkshire announced that it had recorded
a pre-tax charge of $268.5 million to recognize a decline in the value of its
investment in the Series A Preferred Stock that had an original cost of $358
million. On May 22, 1995, BA announced that it had made a $200 million
provision against its $400 million investment in preferred stock of USAir
Group. USAir Group has not paid a dividend on its common stock, par value
$1.00 per share (the "Common Stock"), since the second quarter of 1990. As of
July 10, 1996, the board of directors of USAir Group had not authorized the
resumption of any dividends on USAir Group's preferred stock or Common Stock
and there can be no assurance when or if such dividend payments will resume.
Under the terms of the Series A Preferred Stock, Berkshire has the right to
elect two additional directors to the board of directors of USAir Group after
a scheduled dividend payment has not been paid for thirty days. Berkshire has
informed USAir Group that it does not intend to exercise this right at this
time. Berkshire's Chairman Warren E. Buffett and Vice Chairman Charles T.
Munger served as directors on USAir Group's and USAir's boards of directors
from January 27, 1993 until November 28, 1995. They did not stand for re-
election as directors in November 1995. Under the terms of the Series B
Preferred Stock, the holders of that security have the right to elect two
additional directors to the board of directors of USAir Group if six quarterly
dividends are not paid. That right became effective on February 15, 1996. In
May 1996, Berkshire offered to sell the Series A Preferred Stock to USAir
Group. Berkshire has advised that if USAir Group does not buy back the shares
from Berkshire, Berkshire may sell the Series A Preferred Stock to third
parties but Berkshire has stated it will not knowingly sell the shares to any
person who would own 3% or more of a voting stake in USAir Group as a result
of the purchase. As of July 10, 1996, USAir believes that USAir Group was
legally prohibited from paying dividends on or redeeming its capital stock in
accordance with Section 170 of the Delaware General Corporation Law. A
requisite percentage of Series B Preferred Stockholders have informed USAir
Group that they would be pursuing the right to elect two additional directors
to USAir Group's board of directors and they have provided the name of one
such nominee to USAir Group. If Berkshire were to exercise its right to elect
directors and upon the election of the Series B directors, BA would have the
right to designate an additional nominee for election as director to the board
of directors of USAir Group pursuant to the January 21, 1993 Investment
Agreement between USAir Group and BA (as amended, the "Investment Agreement").
HIGH PERSONNEL COSTS
USAir's wages and benefits are the largest single component of its operating
costs (approximately 41% for the year ended December 31, 1995). USAir's
operating costs, and particularly its personnel costs, are generally higher
than those of its competitors. USAir believes that it must reduce its
operating costs substantially if it is to achieve sustained improved financial
performance. USAir Group began negotiating with the unions that represent
certain of USAir's employees in March 1994 toward its goal of reducing USAir's
annual personnel costs by $500 million through concession agreements involving
wage and benefit reductions, improved productivity and other cost savings.
After reaching agreements in principle with its unions during the spring of
1995, USAir Group in July 1995 terminated discussions with the unions on
tentative wage concession and restructuring packages, which had included
equity participation in USAir Group and representation on USAir Group's board
of directors for USAir's employees, because the Air Line Pilots Association
("ALPA") covering USAir's pilots had made significant additional demands which
were unacceptable. USAir had stated that it intends to concentrate on reducing
its labor costs through traditional collective bargaining. See "Business--Cost
Reductions and Revenue Enhancement Initiatives." It is not possible to predict
whether USAir will be successful in achieving its desired personnel cost
savings. The contract with the International Association of Machinists (the
"IAM"), covering USAir's mechanics and related employees, became open for
negotiation on October 1, 1995. Talks between USAir and the IAMs advisory
counsel began in late 1995 and continued during the first two quarters of
1996. USAir's contract with ALPA became open for negotiations on April 30,
1996 and collective bargaining talks have begun. USAir cannot predict the
outcome of these negotiations at this time or if USAir will be able to
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secure meaningful wage and benefit concessions and productivity improvements
from its unionized employee groups.
POSSIBILITY OF FURTHER UNIONIZATION
The Railway Labor Act ("RLA") governs, and the National Mediation Board (the
"NMB") has jurisdiction over, campaigns to unionize workers. Approximately 65%
of USAir's employees are covered by collective bargaining agreements with
various labor unions, or will be covered by a collective bargaining agreement
for which initial negotiations are in progress. Certain unions are engaged in
efforts to unionize USAir's passenger service employees. Under the RLA, the
NMB could order an election among a class or craft of eligible employees if a
union submitted an application to the NMB supported by the authorization cards
from at least 35% of the applicable class or craft of employees. If the NMB
ordered an election and a majority of the eligible employees voted for
representation, USAir would be required to negotiate a collective bargaining
agreement with the union that wins the election. On April 24 and 25, 1996,
respectively, the IAM workers and the Communications Workers of America filed
applications with the NMB requesting that an election be held among USAir's
passenger service workers. The NMB is in the process of determining whether
these applications are supported by sufficient authorization cards to warrant
an election. USAir cannot predict whether an election will be held among the
passenger service class or craft and the outcome of the election, if held.
LIKELIHOOD OF NO FUTURE INVESTMENTS BY BRITISH AIRWAYS
As described in greater detail in "Business--British Airways Investment
Agreement," on January 21, 1993, USAir Group and BA entered into the
Investment Agreement. BA invested approximately $400 million in certain
preferred stock of USAir Group in accordance with the Investment Agreement.
USAir Group has deferred quarterly dividend payments on all outstanding series
of preferred stock beginning with payments due September 30, 1994. See "--
Deferral of Dividends by USAir Group." The deadline for BA's election to
purchase a certain series of preferred stock of USAir Group and therefore, to
elect to make any further investment in USAir Group pursuant to the Investment
Agreement, was January 21, 1996 (except that, if the DOT shall approve all of
the transactions contemplated by the Investment Agreement on or before January
21, 1998, BA may make additional investments in USAir Group under certain
circumstances). BA declined to make any further investment on or before the
January 21, 1996 deadline. BA stated publicly that it was precluded from
making additional investments under existing DOT policy and that it did not
expect DOT approval to be forthcoming. Pursuant to the Investment Agreement,
BA has the right to maintain its proportionate ownership of USAir Group's
securities under certain circumstances by purchasing additional shares of
certain series. British Airways has advised USAir Group that it would not
exercise the right (triggered by the issuances of USAir Group Common Stock
pursuant to certain USAir Group benefit plans during the nine months ended
March 31, 1996) to buy additional shares of Series T Convertible Exchangeable
Senior Preferred Stock. See "Business--British Airways Investment Agreement--
Provisions Regarding Additional BA Investments; BA Announcement Regarding No
Additional Investment in USAir Group and "--Miscellaneous."
PROPOSED ALLIANCE BETWEEN BRITISH AIRWAYS AND AMERICAN
On June 11, 1996, American and BA jointly announced that they intend to
enter into an extensive alliance and code-sharing arrangement, effective April
1, 1997, subject to United States and international regulatory approvals.
American is the second largest domestic airline and a major competitor of
USAir. The following description of the proposed BA/American alliance is based
upon public statements by BA and American and other published reports. Under
the proposed alliance, American and BA would jointly market, price and manage
their North Atlantic airline services but neither airline would obtain an
equity position in the other. The joint services would carry the designator
codes of both airlines, and each airline also would code-share behind/beyond
the other's international gateways. In addition, the two airlines would
integrate their world-wide frequent flyer programs and enter into other
cooperative arrangements in other areas, such as marketing, sales, facilities
use and cargo. The BA/American alliance, as proposed, does not prevent either
American or BA from continuing or
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entering into commercial arrangements with other airlines, including USAir. The
alliance would be effective for a minimum period of five years, with either
airline able to terminate thereafter upon giving one year's notice with a
further five year wind-down period following any such termination.
The proposed alliance is conditioned upon the grant of antitrust immunity by
the DOT. The DOT also would have to approve the code-share agreements. Other
United States or international regulatory reviews and approvals might be
required, depending on the final structure of the transaction. As of July 10,
1996, USAir believed that no application for approval of any kind had been
filed by American or BA. Both United Kingdom and European Union competition
authorities have announced they are conducting investigations of the proposed
alliance. The Department of Justice is reported to have made preliminary
inquiries and issued civil investigative demands to third parties. Several
airlines serving the North Atlantic have raised strong objections to the
proposed alliance.
USAir's only public statement regarding the proposed alliance was made on the
date BA and American announced the venture at which time USAir stated: "Today's
proposal has the potential to provide USAir with the ability to pursue new and
positive opportunities. In all events, USAir will act in the best interests of
its shareholders, employees and communities served." At present, USAir is
reviewing the proposed alliance and is unable to predict how, if approved, the
BA/American alliance would affect USAir and its relationship with BA.
GEOGRAPHICAL CONCENTRATION
A substantial portion of USAir's operations are to and from or among cities
in the eastern United States. Approximately 64% of USAir's flights and 44% of
its ASMs are represented by intra-east coast flying. Accordingly, USAir is
particularly susceptible to regional factors such as severe weather,
regionalized downturns in the economy and air traffic control problems. For
example, USAir's revenues were adversely affected by approximately $55 million
as a result of the severe winter weather during January 1996 and the partial
federal government shutdowns in the first quarter of 1996.
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FOKKER AIRCRAFT
In March 1996, Fokker Aircraft N.V. ("Fokker"), a Dutch aircraft
manufacturer, was declared bankrupt under the laws of The Netherlands. In May
1996, Fokker Aircraft U.S.A., Inc. ("FAUSA"), an affiliate of Fokker, advised
USAir that it is winding down its affairs and imminently ceasing operations.
As of December 31, 1995, USAir operated 55 Fokker aircraft. Although USAir had
no outstanding aircraft purchase orders with Fokker, FAUSA has certain
warranty obligations to USAir under purchase agreements and also supplied
aircraft parts and components to USAir. Although USAir has been advised that
successor entities will supply parts and technical services to Fokker's
airline customers, a disruption in the supply of parts or components could
adversely impact USAir's operations. Moreover, an adverse market perception of
Fokker products could adversely affect market values of USAir's owned Fokker
aircraft or the ability of USAir to sell or lease retired Fokker products. As
of June 28, 1996, USAir owned 57 Fokker aircraft (20 of which were operated by
lessees of USAir).
INDUSTRY RELATED CONSIDERATIONS
GENERAL INDUSTRY CONDITIONS
Demand for air transportation historically has tended to mirror general
economic conditions. During the most recent economic recession in the United
States, the change in industry capacity failed to mirror the reduction in
demand for domestic air transportation due primarily to continued delivery of
new aircraft and, secondarily, to the operation of certain major U.S. carriers
under the protection of Chapter 11 of the Bankruptcy Code for extended
periods. While industry capacity has leveled off and the general economy has
improved, USAir expects that the airline industry will remain extremely
competitive for the foreseeable future, primarily due to the dramatic change
which has occurred in industry pricing and which has resulted in generally
lower fares. See "--Significant Impact of Low Cost, Low Fare Competition."
In 1995, the U.S. airline industry had its best year since the recession
began in July 1990, with several airlines posting profits, although many of
the major carriers continue to be burdened with large amounts of debt. Unlike
the results of some of its competitors, USAir's results did not improve in
1994. USAir experienced a pre-tax loss of $716.2 million in 1994. The entire
airline industry experienced further improved results in 1995. USAir's results
improved in 1995 as well. Nonetheless, USAir believes that for the foreseeable
future, while the demand for higher yield "business fares" will remain
essentially flat and relatively inelastic, the lower yield "leisure" market,
which is affected by the general economy, will remain highly price sensitive.
This trend will make it more difficult for the domestic airlines, including
USAir, to sustain meaningful yield increases in the long run. Therefore, USAir
believes it must reduce its cost structure substantially in order to ensure
its long-term financial stability.
SIGNIFICANT IMPACT OF LOW COST, LOW FARE COMPETITION
Most of USAir's operations are in competitive markets. USAir experiences
competition of varying degrees with other air carriers and with all forms of
surface transportation. USAir competes with at least one major airline on most
of its routes between major cities. Vigorous price competition exists in the
airline industry, and competitors have frequently offered sharply reduced
discount fares in many of these markets. Airlines, including USAir, use
discount fares and other promotions to stimulate traffic during normally slack
travel periods, to generate cash flow and to increase relative market share in
selected markets. Discount and promotional fares are often subject to various
restrictions such as minimum stay requirements, advance ticketing, limited
seating and refund penalties. USAir has often elected to match discount or
promotional fares in certain markets in order to compete in those discounted
markets.
The dramatic expansion of low fare competitive service in many of USAir's
markets in the eastern United States during 1994 and USAir's competitive
response of reducing its fares up to 70% in certain affected primary
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and secondary markets in order to preserve its market share contributed to
large losses in 1994. In particular, Continental created a high frequency, low
fare product called "Continental Lite." By late 1994, USAir competed with
Continental in primary and secondary markets from which USAir then generated
46% of its passenger revenue with fare reductions of up to 70% in certain
markets. As discussed below, in 1995 the airline industry did not generally
experience the deep level of fare discounting prevalent during the last
several years. Continental abandoned its Continental Lite strategy in 1995 and
fare levels have somewhat recovered. Nonetheless, USAir does not believe that
there has been a reduction in the public demand for generally lower air fares.
The growth of the operations of low cost, low fare carriers in USAir's
domestic markets represents an intense competitive challenge for USAir, which
has higher operating costs and fewer financial resources than many of its
competitors. For example, the expansion of Southwest Airlines, Inc.
("Southwest") into BWI, Florida and the Northeast poses a competitive
challenge for USAir. Southwest has a significant cost advantage over USAir. In
addition, Delta recently announced that its pilots' union has ratified a new
contract that allows for the creation of a low cost, low fare operation in
certain short-haul markets, principally within the eastern United States.
USAir believes that it must reduce its operating costs substantially if it is
to ensure its long-term financial stability and that low-cost incursions into
markets served by USAir have had a material and adverse affect on USAir's
financial condition and results of operations. ValuJet Airlines, Inc.
("ValuJet") has been a competitor of USAir in the eastern United States.
ValuJet was significantly harmed by adverse public reaction to a crash of a
ValuJet DC-9 in the Florida Everglades in May 1996 and the subsequent
investigation into the maintenance and operations of ValuJet by the FAA. The
investigation resulted in a suspension of ValuJet's operations pursuant to an
agreement between the Federal Aviation Administration ("FAA") and ValuJet.
That agreement contemplates the resumption of operations by ValuJet if certain
conditions are met by the airline but it will significantly curtail the scope
of ValuJet's operations if and when it flies again. Although USAir and certain
of its competitors have benefited from the suspension of ValuJet's operations,
USAir does not know whether such circumstances will have a long-term positive
effect on USAir's financial condition or results of operations.
However, other low cost carriers may enter other USAir markets. For example,
America West Airlines, Inc. ("America West") commenced service in April 1994
between Columbus, Ohio, where it operates a hub, and Philadelphia, where USAir
has a hub operation. Other carriers, including some of the larger carriers,
have also developed or indicated their intent to develop similar low fare
short-haul service, such as United's low cost, low fare operation in the
western United States. USAir has stated that it will be competitive on routes
that are important to USAir and has underscored the necessity of cutting costs
to remain competitive with insurgents on these routes.
INDUSTRY RESTRUCTURING AND COST-CUTTING
Major carriers that compete with USAir have implemented, or are in the
process of implementing, measures to reduce their operating costs. For
example, United has substantially reduced its personnel costs as part of a
recapitalization transaction completed in July 1994. United initiated its low
cost, low fare operation in the western U.S. in October 1994. Delta has
recently announced that it has reached agreement with certain of its employees
regarding concessions and has announced progress in these talks. Delta has
also recently turned over several of its former routes to Delta Connection
code-share carriers that have lower cost structures. American announced a
restructuring of its non-union workforce and is still seeking substantial
concessions and productivity gains from its pilot group. Trans World Airlines,
Inc. ("TWA") has negotiated productivity improvements with its unionized
employees and has recently emerged from bankruptcy for the second time
pursuant to a "pre-packaged" reorganization plan approved by a bankruptcy
court which reduces the carrier's debt by approximately 30%. Continental has
reduced capacity and returned non-productive aircraft to lessors. In early
1995, Southwest announced that its pilots had ratified a 10-year labor
contract that provides for no wage increases in the first five years,
providing for grants of stock options to the pilots instead. USAir expects
that the implementation of this labor contract will further enhance
Southwest's low cost advantage over USAir and other carriers. These actions by
certain of USAir's competitors illustrate the trend among the major U.S.
airlines to restructure in order to reduce their operating costs and enable
them to compete in a low fare environment. See "Prospectus Summary--Strategy"
and "--Capacity and Route Rationalization" above for a discussion of USAir's
cost reduction initiatives.
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There are recent examples of companies in the airline industry which have
obtained employee concessions in agreements that provided for the
recapitalization of the companies, including employee ownership stakes and
employee participation in corporate governance. Most recently, in July 1994,
UAL Corporation ("UAL"), parent of United, consummated the recapitalization
noted above which resulted in majority ownership and board membership for
certain employee groups in exchange for concessions. In other cases, airlines
have filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code,
and some airlines have ceased operation altogether when their operating costs
remained excessive in relation to their revenues, and their liquidity became
insufficient to sustain their operations.
In 1995, various carriers, including USAir, implemented cutbacks in service
in the eastern U.S. The "intra-east coast" area represents approximately 64%
of USAir's departures and approximately 44% of its ASMs. USAir has implemented
a plan to cut capacity throughout its system and to emphasize the strength of
its hubs in Pittsburgh, Charlotte, Philadelphia and Baltimore, as well as
other major east coast urban centers. See "Prospectus Summary--Strategy" and
"--Capacity and Route Rationalization" above. The major carriers decreased
service in the East by approximately 9.8% year-over-year. However, several
smaller carriers increased the number of departures in this region during the
same time period or have announced plans to introduce or increase service in
this region. The net result was a decrease in jet capacity in the intra-east
coast region of approximately 3.5% for the full year 1995 from 1994 levels.
JET FUEL
Because jet fuel costs represent a significant portion of USAir's operating
costs (approximately 9% for fiscal year 1995), significant increases in jet
fuel costs could materially and adversely affect USAir's results of
operations. Fuel prices continue to be susceptible to, among other factors,
political events and market factors that USAir cannot control. In the event of
a fuel supply shortage resulting from a disruption of oil imports or
otherwise, higher fuel prices or curtailment of scheduled service could
result.
In August 1993, the United States increased taxes on domestic fuel,
including aircraft fuel used on domestic routes, by 4.3 cents per gallon.
Airlines were exempt from the tax increase until October 1, 1995. Pending
legislation in Congress would continue the exemption through September 30,
1997, subject to termination of the exemption on September 30, 1996 if certain
aviation trust funds are not extended. These aviation trust funds expired on
December 31, 1995 and have not, as of June 28, 1996, been extended. There can
be no assurance that the continuation of the fuel tax exemption will be
enacted, or if enacted, the terms under and the period for which the exemption
will be effective. The additional fuel tax is currently being collected. Non-
extension of the fuel tax exemption would increase the annual operating
expenses of USAir by approximately $47 million based on projected domestic
fuel consumption for 1996.
REGULATORY MATTERS
In the last several years, the FAA has issued a number of maintenance
directives and other regulations relating to, among other things, retirement
of older aircraft, collision avoidance systems, airborne windshear avoidance
systems, noise abatement, increased inspections and maintenance procedures to
be conducted on older aircraft. See "Business--Industry Regulation and
Airport-Access." USAir expects to continue to incur expenditures relating to
compliance with noise and ageing aircraft modifications. In addition, several
airports have increased substantially the rates charged to airlines, and the
ability of airlines to contest these increases has been restricted by federal
legislation, DOT regulations and judicial decisions.
Additional laws and regulations have been proposed from time to time which
could significantly increase the cost of airline operations by, for instance,
imposing additional restrictions or requirements on operations. Laws and
regulations have also been considered from time to time that would prohibit,
restrict or tax the ownership of airline routes or takeoff and landing slots.
Also, the award and retention of international routes is governed by several
aviation treaties and agreements between the United States and foreign
governments that are amendable. In addition, proposals are being considered
that would provide that a portion of the appropriations
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for the FAA and other aviation governmental functions be funded pursuant to
additional taxes on ticket and cargo revenue or fees for use of the air
traffic control system. USAir cannot predict what laws and regulations will be
adopted, what changes to treaties may be effected or whether and how any of
the foregoing might affect USAir, and there can be no assurance that existing
or future laws or regulations will not adversely affect USAir.
TRANSACTION CONSIDERATIONS
PAYMENTS GENERALLY; SCOPE OF SUPPORT BY LIQUIDITY FACILITIES
The Old Notes represent and the New Notes will represent general payment
obligations of USAir. The ability of USAir to make its expected payments of
principal and interest will depend upon USAir's financial condition. The
Liquidity Facilities, each of which will be in an amount sufficient to pay
interest due in respect of the relevant Class of Notes on three Interest
Payment Dates, are intended to enhance the likelihood of the timely receipt of
interest by the holders of Notes ("Noteholders") in the event of the failure
by USAir to make interest payments on the Notes. None of the Liquidity
Facilities will be available to pay principal of or premium on any Class of
Notes. See "Description of the Notes--Priority of Distributions" and "--
Liquidity Facilities."
LIMITATIONS REGARDING AIRCRAFT COLLATERAL
USAir's obligations under the Notes, the Collateral Agency Agreement, the
Indentures and the Liquidity Agreements are secured by the Collateral, which
consists primarily of the Aircraft.
APPRAISALS OF AIRCRAFT; REALIZABLE VALUES
Appraisals in respect of the Aircraft were prepared by AirClaims, AISI and
BK. Based upon the appraisals of the three firms, the Aircraft had an Initial
Aggregate Appraised Value of $438,120,000 as of December 31, 1995. See
"Description of the Aircraft and the Appraisals." However, 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
more or less than its Appraised Value. In addition, the current market value
of any Aircraft at any time may be more or less than its Appraised Value. Each
of the appraisals has been filed with the Commission and each is subject to
qualifications, limitations and assumptions that should be considered by
prospective holders of the New Notes. For example, the qualifications include
statements by the appraisers to the effect that: "[t]he values stated therein
do not therefore reflect those anticipated under current (today's) market
conditions or "distress' sale conditions" (Airclaims appraisal, page 2); the
Appraised Values are based upon ". . . . a theoretical situation that assumes
a "fair market' and a hypothetical "average' airplane condition" (AISI
appraisal, page 2). The value of the Aircraft in the event of the exercise of
remedies under the Collateral Agency Agreement will depend on market and
economic conditions, demand for such Aircraft, the condition of the Aircraft
and other factors at the time. Accordingly, there can be no assurance that the
proceeds realized upon any exercise of remedies in respect of the Collateral
would be sufficient to satisfy in full payments due on the Notes. If such
proceeds were not sufficient to pay or repay all amounts due on any Class of
Notes, then holders thereof would need to pursue other remedies against USAir,
and their recovery would be limited to amounts realized in any such
proceedings. See "Description of the Notes--Priority of Distributions."
MAINTENANCE
USAir is responsible for the maintenance, service, repair and overhaul of
the Aircraft, as more fully set forth in the Collateral Agency Agreement. The
failure of USAir (or any lessee of USAir) to adequately maintain, service,
repair or overhaul any of the Aircraft may adversely affect the value of such
Aircraft and thus, upon a liquidation of the Aircraft, may reduce the proceeds
available to repay the holders of the Notes. Under the Collateral Agency
Agreement, the applicable maintenance standards may vary depending upon the
jurisdiction in which an Aircraft is registered or if an Aircraft is leased by
USAir to a lessee. Notwithstanding compliance by USAir (or any lessee of
USAir) with its obligations under the Collateral Agency Agreement to
adequately maintain, service, repair or overhaul 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 USAir of its
obligations under the Collateral Agency Agreement or give rise to the
enforcement of remedies by the Noteholders. See "Description of the Notes--
Collateral Agency Agreement."
23
<PAGE>
INSURANCE
USAir 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 Collateral Agency Agreement; all-risk aircraft hull insurance
must at all times be in an amount not less than the sum of the aggregate
outstanding principal amount of the Notes and the scheduled amount of interest
payable on the Notes on the next Interest Payment Date. The failure of USAir
to adequately insure the Aircraft, or the retention of self-insurance amounts
or deductibles, may adversely affect the proceeds which could be obtained upon
an Event of Loss and, thus, may reduce the proceeds available to repay the
holders of the Notes.
With respect to any insurance required, USAir may maintain deductibles and
self-insurance amounts to the extent permitted under the Collateral Agency
Agreement. See "Description of the Notes--Collateral Agency Agreement--
Insurance."
FORECLOSURE
The Collateral Agency Agreement does not contain any general geographic
restriction on the ability of USAir (or of any lessee of USAir) to operate the
Aircraft. Although USAir has no current intention to do so, USAir is
permitted, upon compliance with certain provisions of the Collateral Agency
Agreement, to lease the Aircraft or to register the Aircraft in foreign
jurisdictions. While the Collateral Agent's rights and remedies in the event
of a Collateral Access Event include the right to obtain possession of the
Aircraft, it may be difficult, expensive and time-consuming for the Collateral
Agent to obtain possession, particularly when an Aircraft located outside the
United States has been registered in a foreign jurisdiction or is leased to a
foreign operator. Any such exercise of the right to foreclose upon the
Aircraft may 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 political risk.
When a defaulting lessee or other permitted transferee is the subject of a
bankruptcy, insolvency or similar event, additional limitations may apply.
Furthermore, certain jurisdictions may not accord recognition to, or
recognize the priority of, the Collateral Agency Agreement or may have no
specific laws providing for the creation, recognition or registration of
mortgages over aircraft such as the Collateral Agency Agreement, or may accord
higher priority to certain other liens or other third party rights over the
Aircraft. Some or all of these factors could limit the benefits to the
Collateral Agent of the security interest in the Aircraft. See "Description of
the Notes--Collateral" and "Collateral Agency Agreement--Registration,
Possession and Leasing."
CONTROL OVER COLLATERAL
The exercise of remedies under the Collateral Agency Agreement with respect
to the Collateral will be subject to the control of the Controlling Party.
Until all principal, interest and other amounts payable to the Class A
Noteholders shall have been paid in full, the Class A Indenture Trustee will
be the Controlling Party; thereafter the Class B Indenture Trustee will be the
Controlling Party until all amounts owing to the Class B Noteholders have been
paid in full, whereupon the Class C Indenture Trustee will be the Controlling
Party. Such control by the Controlling Party will include the ability, subject
to certain limitations, to direct the Collateral Agent in the exercise of all
remedies under the Collateral Agency Agreement following the occurrence of a
Collateral Access Event. In addition, if an Indenture Trustee acting as
Controlling Party has not taken any action to exercise remedies in respect of
the Collateral within 24 months after the earlier of the acceleration of the
Notes and the unreimbursed utilization of the entire available amount under
any of the Liquidity Facilities, the Liquidity Provider for the Class A Notes
shall thereupon become the Controlling Party for all purposes under the
Collateral Agency Agreement until all amounts outstanding in respect of the
Liquidity Facility for the Class A Notes shall have been paid in full,
whereupon the Liquidity Provider for the Class B Notes shall become the
Controlling Party until all amounts outstanding in respect of the Liquidity
Facility for the Class B Notes shall have been paid in full, whereupon the
Liquidity Provider for the Class C Notes shall become the Controlling Party
until all amounts outstanding in respect of the Liquidity Facility for the
Class C Notes shall have been paid in full, whereupon the Controlling Party
shall be the appropriate Indenture Trustee. See "Description of the Notes--
Intercreditor Rights."
24
<PAGE>
PRIORITY OF DISTRIBUTIONS
In general, on each Interest Payment Date prior to the acceleration of the
Notes, amounts owing to the Liquidity Providers in respect of (x) fees under
the Liquidity Facilities, (y) interest on unreimbursed Interest Advances and
(z) reimbursement of Interest Advances are payable prior to payments to
Noteholders of expected principal of and interest due on any of the Notes
(except for payment of interest made from the proceeds of Interest Advances
(or the portion of other Advances (as defined in the Collateral Agency
Agreement) being applied as Interest Advances) under the Liquidity
Facilities), and expected principal of and interest due on the Notes are
payable in the following order of priority: expected principal of and interest
on the Class A Notes are payable prior to payments of principal of and
interest on the Class B Notes and expected principal of and interest on the
Class B Notes are payable prior to payments of principal of and interest on
the Class C Notes. Following the bankruptcy of USAir or the acceleration of
the Notes: (i) amounts owing to the Liquidity Providers are payable prior to
payments of principal of and interest on the Notes (except for payment of
interest made from the proceeds of Interest Advances (or the portion of other
Advances being applied as Interest Advances) under the Liquidity Facilities),
(ii) the total principal of and interest on the Class A Notes are payable
prior to any payments on account of the Class B Notes and (iii) the total
principal of and interest on the Class B Notes are payable prior to any
payments on account of the Class C Notes.
NO PROTECTION AGAINST HIGHLY LEVERAGED TRANSACTIONS
There are no provisions in the Indenture, Collateral Agency Agreement or
other documents that would afford the Noteholders additional 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 of control
of USAir or USAir Group.
LIMITED MARKET FOR NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were offered and sold in February 1996 to a small number of
institutional investors. Prior to the Exchange Offer, there had been no
secondary market for the Old Notes. There can be no assurance that a secondary
market will develop or, if a secondary market does develop, that it will
provide the Noteholders with liquidity of investment or that it will continue
for the life of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the offer or sale of the Old Notes pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. USAir does not currently
anticipate that it will register the Old Notes under the Securities Act. Based
on the interpretations by the staff of the Commission, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any
such holder which is an "affiliate" of USAir within the meaning of Rule 405
under the Securities Act), provided that such New Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
with any person to participate in the distribution of such New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale or such New Notes. See
"Plan of Distribution."
USE OF PROCEEDS
There will be no cash proceeds to USAir from the exchange pursuant to the
Exchange Offer.
25
<PAGE>
DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of nine Boeing 757-200 aircraft purchased by USAir from
Boeing in the fourth quarter of 1994 and during 1995. USAir's 757 fleet is
operated in its North American route system and between the continental United
States and the Caribbean. Each of USAir's 757-200s is equipped with two Rolls-
Royce RB211-535E4 engines and is in compliance with Stage 3 noise level
standards-the most restrictive regulatory standards currently in effect in the
United States for aircraft noise abatement.
The table below sets forth certain additional information for the Aircraft:
<TABLE>
<CAPTION>
APPRAISALS
-----------------------------------------------------------------------
FAA MFG. SERIAL IN SERVICE APPRAISED
REG. NO. NUMBER DATE AIRCLAIMS AISI BK VALUES(1)
-------- ----------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
N625VJ.................. 27246 11/03/94 $45,500,000 $56,610,000 $47,710,000 $ 47,710,000
N626AU.................. 27303 11/15/94 45,500,000 56,610,000 47,920,000 47,920,000
N627AU.................. 27805 02/01/95 46,400,000 57,210,000 48,330,000 48,330,000
N628AU.................. 27806 02/03/95 47,300,000 57,500,000 48,330,000 48,330,000
N629AU.................. 27807 03/04/95 47,300,000 57,810,000 48,750,000 48,740,000
N630AU.................. 27808 04/01/95 47,300,000 58,100,000 48,750,000 48,750,000
N631AU.................. 27809 05/21/95 47,300,000 58,400,000 49,170,000 49,170,000
N632AU.................. 27810 06/20/95 47,300,000 59,000,000 49,380,000 49,380,000
N633AU.................. 27811 07/16/95 47,300,000 59,000,000 49,790,000 49,790,000
------------
$438,120,000
============
</TABLE>
- --------
(1) The Initial Aggregate Appraised Value of $438,120,000 is the sum of the
lower of the median and average of the appraisals for each Aircraft
commissioned by USAir from AirClaims, AISI and BK as of December 31, 1995.
The median appraisal was used in each case.
APPRAISED VALUE
The Appraised Values set forth in the foregoing table were determined by
AirClaims, AISI and BK. Each Appraiser was asked to provide its opinion as to
the fair market value of each Aircraft as of December 31, 1995. The Aggregate
Appraised Value of the Aircraft of $438,120,000 equals the sum of the Appraised
Value for each Aircraft. The Appraised Value for each Aircraft equals the lower
of the median and the average of the three appraisals therefor. All three
appraisals involved "desk-top" analyses with no physical inspection of the
Aircraft or related records. 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 more or less than its Appraised
Value. Each of the appraisals has been filed with the Commission and each is
subject to qualifications, limitations and assumptions that should be
considered by prospective holders of the New Notes. For example, the
qualifications include statements by the appraisers to the effect that: "[t]he
values stated therein do not therefore reflect those anticipated under current
(today's) market conditions or "distress' sale conditions" (Airclaims
appraisal, page 2); the Appraised values are based upon "....a theoretical
situation that assumes a "fair market' and a hypothetical "average' airplane
condition" (AISI appraisal, page 2).
26
<PAGE>
SELECTED FINANCIAL AND OPERATING INFORMATION
SELECTED FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996*** 1995 1994 1993 1992 1991 1990
------- ------ ------ ------ ------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS:
Operating Revenues...... $1,740 $6,985 $6,579 $6,623 $ 6,236 $6,069 $6,138
Operating Expenses...... 1,749 6,750 7,096 6,772 6,621 6,285 6,680
Operating Inc. (Loss)... (9) 235 (517) (149) (385) (216) (542)
Income (Loss) before
income taxes and
accounting change...... (55) 37 (716) (375) (590) (284) (427)
Accounting change(2).... -- -- -- (44) (639) -- --
Net Income (Loss)....... (55) 33 (716) (419) (1,228) (284) (427)
CONSOLIDATED BALANCE
SHEET:
Total Assets............ 6,857 6,824 6,676 6,809 6,718 6,564 6,395
Long-Term Obliga-
tions(3)............... 3,776 3,835 3,889 3,540 3,049 1,956 1,656
Stockholder's Equity
(Deficit).............. (366) (311) (273) 408 862 2,097 2,381
Ratio of Earnings to
Fixed Charges.......... ** 1.1 * * * * *
AIRLINE OPERATING AND FINANCIAL STATISTICS
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996*** 1995 1994 1993 1992 1991 1990
------- ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SCHEDULED SERVICE
Revenue Passengers (Mil-
lions)................. 12.9 56.7 59.5 53.7 54.7 55.6 60.1
Average Passenger Jour-
ney (Miles)............ 673 664 638 656 642 614 592
Revenue Passenger Miles
(Millions)............. 8,788 37,618 37,941 35,221 35,097 34,120 35,551
Available Seat Miles
(Millions)............. 13,493 58,163 61,027 59,485 59,667 58,261 59,484
Passenger Load Factor... 64.6% 64.7% 62.2% 59.2% 58.8% 58.6% 59.8%
Yield................... 17.81c 16.66c 15.61c 17.27c 16.49c 16.67c 16.18c
Break Even Load Fac-
tor(4)................. 67.1% 64.9% 67.3% 61.7% 63.2% 62.7% 64.5%
Revenue per Available
Seat Mile.............. 12.74c 11.80c 10.59c 11.04c 10.38c 10.33c 10.19c
Cost per Available Seat
Mile(4)................ 12.81c 11.40c 11.02c 11.12c 10.85c 10.80c 10.86c
Average Stage Length
(Miles)................ 573 560 536 536 516 495 469
Gallons of Jet Fuel
Consumed (Millions).... 266 1,137 1,205 1,161 1,183 1,168 1,283
Cost of Jet Fuel per
Gallon................. 58.61c 53.23c 53.28c 58.40c 60.94c 65.90c 75.42c
Number of Employees at
End
of Period(5)........... 40,000 39,900 42,400 45,400 46,200 45,300 49,200
Operating Aircraft at
End of Period.......... 396 394 424 441 440 436 454
</TABLE>
- --------
* For the years ended December 31, 1994, 1993, 1992, 1991, and 1990, earnings
were not sufficient to cover fixed charges. Additional earnings of
approximately $721 million for the year ended December 31, 1994, $385
million for 1993, $610 million for 1992, $411 million for 1991, and $674
million for 1990 would have been required to achieve a ratio of 1.0.
** Ratio of earnings to fixed charges is not available for the quarter ended
March 31, 1996.
*** Three months ended March 31, 1996
(1) The selected financial information has been summarized from the financial
statements of USAir included herein and should be read in conjunction with
the notes thereto and in conjunction with the financial statements
contained elsewhere in this Prospectus. Operating statistics exclude
flights operated by USAir under a wet lease with BA. Financial statistics
for the first quarter of 1996 exclude the revenue and expenses (which
amounts net to zero) generated under the BA wet lease.
27
<PAGE>
(2) Cumulative effect of changes in method of accounting for (i) post-
employment benefits other than pensions which was effective as of January
1, 1993 and (ii) post-retirement benefits other than pensions (net of
income tax benefit of $107 million) effective as of January 1, 1992.
(3) Long-term obligations include long-term debt, capital leases and post-
retirement benefits other than pensions, non-current. Long-term debt
included $0, $68 million, $0, $105 million, $130 million and $98 million
payable to USAir Group at, March 31, 1996, December 31, 1995, 1994, 1993,
1992 and 1991, respectively. USAir fully paid its long-term obligation to
USAir Group during the fourth quarter of 1994 and during the first quarter
of 1996.
(4) Financial statistics exclude non-recurring charges as well as revenue and
expense generated under the wet lease arrangements with BA.
(5) Full-time equivalent employees.
c = cents
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion relates to the financial results and condition of
USAir. USAir is the principal subsidiary of USAir Group and accounted for
approximately 93% of USAir Group's operating revenues for fiscal year 1995 and
92% for the first three months of 1996. USAir is a major United States air
carrier whose primary business is transporting passengers, property and mail.
USAir enplaned more than 57 million passengers during 1995 and is currently
the fifth largest domestic air carrier, as measured by revenue passenger
miles. Except where noted, the following discussion is based primarily upon
USAir's financial condition, results of operations and future prospects.
USAir, whose results include USAir's wholly-owned subsidiary USAM Corp.
("USAM"), recorded net income of $33.0 million in 1995 compared to a loss of
$716.2 million for 1994. USAir recognized a net loss of $54.9 million for the
first three months of 1996 compared to a $101.8 million loss for the same
period in 1995. USAir's 1995 and 1994 results include $34.5 million and $26.5
million, respectively, of income attributable to equity in earnings of certain
partnerships that provide computerized reservation services. These investments
are held by USAM. USAM recorded income of $12.0 million for the first quarter
of 1996.
USAir's improved results in 1995 and for the first quarter of 1996 are
mainly attributable to a stable domestic economic climate, favorable capacity
trends in USAir's markets, less fare discounting and low fare competition and
the positive influence of USAir's cost-reduction and revenue enhancement
initiatives. USAir estimates that severe winter weather within the eastern
United States and the partial shutdowns of the United States government
adversely affected first quarter results by approximately $55 million. The
entire domestic airline industry has benefitted from a stable domestic
economic environment and overall favorable capacity and fare pricing factors.
However, USAir's financial condition, results of operations and future
prospects are more susceptible to an economic downturn and competitive
influences than most of its major competitors due to USAir's high cost
structure amid the growing low cost, low fare environment of the domestic
airline industry.
FACTORS CONTRIBUTING TO IMPROVED 1995 FINANCIAL RESULTS
USAir realized stronger than anticipated yields (Passenger Transportation
revenue per RPM) in 1995 due in part to a decrease in industry capacity in the
eastern United States and less intense low fare competition and fare
discounting than in recent years. The eastern U.S. is the primary operating
region for USAir and its regional airline affiliates. In 1995, several major
air carriers, including USAir, implemented reductions in capacity (as measured
by ASMs in the eastern U.S. Most notably, Continental eliminated its low fare,
"no frills" pricing and marketing strategy, "Continental Lite," in early 1995.
Continental Lite was launched in October of 1993 on certain routes in the
eastern U.S. also served by USAir and was substantially expanded during 1994
into additional markets also served by USAir. In an effort to maintain market
share, USAir responded to Continental Lite's competitive threat by selectively
lowering its fares by as much as 70% compared to the fares in effect prior to
Continental Lite's incursion. These fare reductions affected markets where
USAir had previously generated approximately 46% of its Passenger
Transportation revenues. In addition to Continental's capacity reductions,
American and United also reduced service in the intra-east coast region during
1995. Overall, during 1995, the mature, established air carriers decreased
capacity in the intra-east coast region by approximately 9.8% versus 1994
levels. However, other air carriers with low costs of operations and low fare
structures ("low cost, low fare" air carriers) increased capacity in this
region during the same period. The net result was that capacity in the intra-
east coast region decreased by approximately 3.5% year-over-year.
USAir's recent cost-reduction and revenue enhancement initiatives
contributed positively to USAir's improved 1995 results. USAir stated in 1994
and early 1995 that it sought to reduce its annual operating costs by $1
billion through a combination of labor-related and other cost reductions.
During 1995, USAir achieved its goal of reducing annual non-labor operating
expenses by approximately $500 million from otherwise expected levels. USAir
believes that these savings will approach $600 million in 1996 from otherwise
expected levels. The anticipated savings in the labor-related areas, the other
half of the targeted annual reduction in operating
29
<PAGE>
costs, have not been realized. USAir's 1995 financial results represent a
significant improvement over 1994 levels, but USAir believes that it will not
be able to achieve either its short-term or long-term goals without achieving
significant reductions in USAir's personnel costs.
RESULTS OF OPERATIONS
First Quarter of 1996 Compared with First Quarter of 1995
USAir recorded a net loss of $54.9 million for the first quarter of 1996, an
improvement of $46.9 million (or 46.1%) over its $101.8 million loss for the
first quarter of 1995.
During the first quarter of 1996, USAir reduced capacity (ASMs) by 11.4%
versus first quarter of 1995. For the same comparative periods, USAir boarded
6.0% fewer scheduled service revenue passengers and experienced a 4.1% decrease
in scheduled service revenue passenger miles (scheduled service revenue
passengers multiplied by the number of miles that they are flown or "RPMs"),
but realized an 8.8% increase in yield (revenue per RPM) and a 4.9 percentage
point increase in load factor (percentage of seats occupied by revenue
passengers). The capacity decrease reflects USAir's schedule reductions during
mid-1995 and the effects of the harsh weather experienced in the eastern United
States during the first quarter of 1996. The Company estimates that
approximately 1.5% of the quarter-over-quarter capacity decrease is due to
weather factors. USAir believes that it has been able to recapture most of the
revenues from flights eliminated as the result of its schedule reductions.
USAir's capacity (ASMs) for full-year 1996 is expected to be 2.5% less than for
full-year 1995.
The increase in yield for the first quarter of 1996 as compared to the first
quarter of 1995 was primarily driven by capacity and pricing factors that
prevailed during the first quarter of 1995, as well as select fare increases
that were put in place by USAir during the first quarter of 1996. During the
first quarter of 1995, USAir was facing considerable competitive pressure from
the low fare, "no frills" product, "Continental Lite," offered by Continental.
In response to Continental Lite, USAir selectively reduced fares in certain
markets to maintain market share. Continental eliminated its Continental Lite
operation early in the second quarter of 1995. USAir estimates that its yield
will increase marginally for the second quarter of 1996 as compared to the
second quarter of 1995, but remain relatively flat or decrease slightly as
compared to 1995 results for the remainder of 1996 due to competitive factors.
USAir's unit cost, or cost per ASM, was 12.81 cents for the first quarter of
1996, a 15.6% increase versus the first quarter of 1995. This increase is
primarily the result of relatively flat operating expenses applied over 11.4%
less capacity (ASMs). USAir estimates that its unit cost for full-year 1996
will be approximately 8% higher than for full-year 1995, reflecting slightly
higher operating expenses and less capacity year-over-year. However, this
estimate is dependent on a number of factors that are generally outside of the
Company's control, including, for example, aviation fuel prices and weather-
related factors.
OPERATING REVENUES
Passenger Transportation--USAir's Passenger Transportation revenues increased
$65.0 million, or 4.4%. USAir's increase is the result of an 8.8% increase in
yield partially offset by a 4.1% decrease in scheduled service RPMs. As
mentioned above, USAir selectively increased fares during the first quarter of
1996. In addition to other factors discussed previously, the Company's
Passenger Transportation revenues may have been stimulated by the expiration of
the 10% Federal Transportation Tax on January 1, 1996. USAir stopped collecting
this tax from customers when it lapsed. The Company cannot estimate the dollar
impact of the lapse of this tax on its Passenger Transportation revenues due to
the complexity and number of factors that contribute to the Company's
performance in this area.
Other Operating Revenues--Fees received by USAir from USAir Express carriers
(other than the fees USAir receives from USAir Group's three wholly-owned
regional air carriers) increased due to higher passenger volumes and a higher
per-passenger fee structure. In addition, USAir had increased revenues from
USAir Club
30
<PAGE>
membership renewals (a special renewal incentive program was offered during
the first quarter of 1996) and reservation cancellation fees. Revenues
received from the wet lease arrangement with British Airways decreased
approximately $6.9 million due to the phase-out of these arrangements.
Increases in this category are largely offset by increases in the Other
Operating Expenses category.
OPERATING EXPENSES
Personnel Costs--Interest rate-driven increases in pension and post-
retirement benefits expenses, contractual wage increases that USAir's pilot
and flight attendant employee groups received in January 1996 and wage
increases received by certain non-contract employees effective January 1,
1996, combined to more than offset personnel complement decreases. USAir's
pilots and flight attendants also received contractual wage increases in
January 1995 and July 1995, respectively, and USAir's mechanics received
contractual wage increases in March 1995. USAir had approximately 39,959 full-
time equivalent employees on March 31, 1996 versus 41,887 full-time equivalent
employees on March 31, 1995. The Company also recognized expenses of
approximately $10.1 million during the first quarter of 1996 related to
restricted stock grants, sign-on bonuses, severance payments and other
compensation related to recent management changes. The Company expects to
recognize additional expenses related to executive compensation during the
second quarter of 1996. The Company did not recognize expenses related to
profit sharing plans during the first quarter of 1996, but expects to record
such expenses in 1996 in the approximate amount of $123 million, subject to
the Company's actual results and the terms of the profit sharing plans.
Aviation Fuel--Consumption decreased approximately 33 million gallons, but
was offset by the effects of a 6.55 cent increase in the average cost of
aviation fuel per gallon. USAir experienced even higher aviation fuel prices
during April 1996; however, the Company cannot predict whether or not this
trend will continue. Sustained increases in the price of aviation fuel would
have a materially adverse effect on the Company's results of operations. Based
on current consumption, each one cent increase in USAir's cost of aviation
fuel per gallon translates into an increase of approximately $11 million in
USAir's annual aviation fuel expense. See Other Operating Expenses below
related to federal taxes on aviation fuel.
Commissions--Decreased primarily due to the effects of the revised rate
structure for commissions paid to travel agencies, which went into effect
during February 1995.
Other Rent and Landing Fees--Decreased due mainly to credits received by
USAir from certain airport facilities related to 1995 activity (these
facilities experienced lower operating costs than expected) and an increase in
the sublease of certain facilities to third parties. USAir also experienced a
slight decrease in landing fees expenses quarter-over-quarter due to capacity
reductions.
Aircraft Maintenance--Efficiencies gained from re-engineering efforts in
USAir maintenance areas and the effects of fewer operating aircraft in USAir's
fleet were more than offset by timing factors and an increase in the rate-per-
engine USAir pays to an outside contractor to overhaul certain jet engines.
Aircraft Rent--Increased due primarily to two leased Boeing 767-200ER
aircraft re-entering USAir's operating fleet during the first quarter of 1996.
USAir recognized expenses related to these two aircraft in the Other Operating
Expenses category while they were operated by British Airways (see also Other
Operating Revenues).
Depreciation and Amortization--Decreased due mainly to fewer owned aircraft
in USAir's operating fleet. During 1995, USAir sold 13 owned Boeing 737-300
aircraft and took delivery of 7 new Boeing 757-200 aircraft.
Other Operating Expenses--Increased primarily due to additional Federal
taxes on aviation fuel and increases in insurance, de-icing fluid and
communications-related costs. The Federal Excise Tax on Transportation Fuels,
which USAir became obligated to pay beginning October 1, 1995, totaled
approximately $10 million for the first quarter of 1996. Expenses related to
the wet lease arrangements with British Airways decreased approximately $6.9
million due to the recent termination of two of the three wet leases (see also
Other Operating Revenues and Aircraft Rent).
31
<PAGE>
OTHER INCOME (EXPENSE)
Interest Income--Increased due mainly to higher Cash and Cash Equivalents
and Short-Term Investments balances period-over-period.
Interest Expense--Decreased primarily as the result of less long-term debt
outstanding period-over-period. USAir made early debt repayments totaling
approximately $202.1 million during 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operations was $12.9 million for the first quarter of
1996. As of March 31, 1996, Cash and Cash Equivalents totaled $782.7 million
and Short-Term Investments totaled $45.5 million. USAir also had $99.0 million
deposited in trust accounts to collateralize letters of credit and worker's
compensation policies at quarter-end.
The Company is highly leveraged. USAir requires substantial working capital
in order to meet scheduled debt and lease payments and to finance day-to-day
operations. In addition, USAir currently does not have access to a short-term
credit or receivables sale facilities. However, based on current projections,
the Company expects to satisfy its liquidity requirements for the remainder of
1996 through a combination of cash on hand and cash flows from operations. In
addition, the Company expects to record expenses of approximately $123 million
in 1996 related to the profit sharing plan component of the 1992 Salary
Reduction Program. This expectation is based on the Company's earnings
forecast, as of July 10, 1996, for the remainder of 1996. If USAir achieves
its expected results, the maximum remaining payout under the profit sharing
plan would be approximately $134.3 million. USAir presently anticipates that
such amount would be paid during the first quarter of 1997. USAir has
committed financing for a significant portion of the purchase price for each
of its scheduled 1998 aircraft deliveries. The Company's expectations are
subject to revision. Changes in certain factors that are generally outside the
Company's control, such as the general economic environment, intensified
competition from low cost, low fare carriers or operations and the price of
aviation fuel, could have a materially adverse effect on the Company's
liquidity, financial condition and results of operations.
Investing activities during the first quarter of 1996 included cash outflows
of $31.4 for the acquisition of assets ($3.4 million related to progress
payments for Boeing 757-200 aircraft scheduled for delivery in 1998 and $28.0
million related to the purchase of rotables, hush kits, computer equipment and
various ground support equipment). The Company's Short-Term Investments
increased by $25.7 million during the period and the Other investing uses of
cash category includes $12.2 million related to the purchase of debt issued by
Shuttle, Inc. The net cash used by investing activities during the first
quarter of 1996 was $64.5 million.
Net cash used by financing activities during the first quarter of 1996 was
$19.5 million. USAir sold the Old Notes during the first quarter of 1996
through a private placement offering under Securities and Exchange Commission
Regulation 144A. USAir used the proceeds from the offering as part of the
funds necessary to repay in full the indebtedness incurred in connection with
certain 757-200 aircraft delivered to USAir in 1994 and 1995. The transaction
is reflected on the Company's Condensed Consolidated Statements of Cash Flows
as proceeds from the issuance of debt of $103.0 million and a "non-cash"
issuance of debt of $160.0 million. The non-cash component reflects proceeds
that USAir directed to reduce debt and pay underwriter's fees at the time of
the offering. USAir used cash proceeds it received from the offering and
additional funds to make debt repayments of approximately $105.5 million
immediately following the offering. The Old Notes are secured by the Aircraft.
In addition to the sale of the Old Notes, the Company made scheduled debt
repayments of approximately $17.0 million during the first quarter of 1996.
USAir also incurred new debt of $4.6 million associated with progress payments
for Boeing 757-200 aircraft scheduled for delivery in 1998. The $4.6 million
is reflected as non-cash activity in the Company's Condensed Consolidated
Statement of Cash Flows because USAir incurred the related debt in conjunction
with the payment of the progress payments. As mentioned above, USAir has
committed financing for a significant portion of the purchase price for each
of its scheduled 1998 aircraft deliveries.
As of March 31, 1996, USAir's ratio of current assets to current liabilities
was .59 to 1 and the debt component of USAir's capitalization structure was
greater than 100% due to a net capital deficiency.
32
<PAGE>
1995 COMPARED WITH 1994
USAir recorded net income of $33.0 million for 1995 which represents an
improvement of $749.2 million over its 1994 results.
USAir's yield was 16.66 cents for 1995, a 6.7% improvement versus 1994. The
stronger than anticipated increase in yield primarily resulted from the
effects of the factors discussed in "Factors Contributing to Improved 1995
Financial Results" above. USAir's capacity (ASMs) for 1995 decreased by
approximately 4.7%. RPMs, however, decreased less than 1% and USAir's load
factor was 64.7% for 1995, a historical high. USAir's unit costs increased to
11.40 cents from 1994's 11.02 cents primarily due to the capacity reductions
that occurred in 1995. USAir's capacity (ASMs) for 1996 is expected to be
approximately 3% less than for 1995 reflecting the full-year effects of
USAir's right-sizing initiatives. USAir's unit costs are expected to increase
for 1996 mainly due to higher Personnel Costs and Aviation Fuel expenses,
partially offset by decreases in certain capacity-related expenses, applied
over less capacity on a year-over-year basis. USAir's pilot and flight
attendant employees received contractual wage increases in early 1996 and
certain USAir non-contract employees received salary increases effective
January 1, 1996.
USAir believes that for the foreseeable future, while demand for higher
yield "business fares" will remain essentially flat and relatively inelastic,
the lower yield "leisure" market will remain highly price sensitive. The
leisure market, which is affected by general economic conditions, is also the
primary target market for low cost, low fare carriers. The Company expects
that low fares offered by its airline affiliates in response to low cost, low
fare competition in their markets will increase during 1996 and such
competitive actions may have an adverse effect on the Company's results of
operations, liquidity and financial condition.
Although a competitive strength, concentration of significant operations in
the eastern U.S. leaves USAir susceptible to certain regional conditions that
may have an adverse affect on the Company's results of operations and
financial condition.
In August 1993, the United States increased taxes on domestic fuels,
including aircraft fuel used on domestic routes, by 4.3 cents per gallon.
Airlines were exempt from the tax increase until October 1, 1995. Pending
legislation in Congress would reinstate the exemption through September 30,
1997, subject to termination of the exemption on September 30, 1996 if excise
taxes relating to certain aviation trust funds are not extended. These excise
taxes expired on December 31, 1995 and have not, as of July 10, 1996, been
extended. There can be no assurance that an airline jet fuel tax exemption
will be reinstated, or if reinstated, the terms under and the period for which
the exemption will be effective. The additional fuel tax is currently being
collected. USAir's 1995 results include expenses related to this tax of
approximately $11.9 million, recognized as an operating expense, in Other
Expense, Net. The lack of an airline jet fuel tax exemption would increase
USAir's annual operating expenses by approximately $47 million based on
projected domestic fuel consumption for 1996.
33
<PAGE>
The financial results for 1994 include: (i) a $172.9 million charge related
to USAir's grounded BAe-146 fleet (see below for additional information
related to the reserve for the BAe-146 fleet) and to USAir's decision to cease
operations of its remaining Boeing 727-200 aircraft in 1995 (the last
operational 727-200 aircraft was retired from service in September 1995); (ii)
a $54.0 million charge for obsolete inventory and rotables to reflect market
values; (iii) a $25.9 million charge related to USAir's decision to reduce
substantially service between Los Angeles and San Francisco in November 1994;
and (iv) a gain of $18.6 million resulting from the accounting treatment of
the hull insurance recovery on the aircraft lost in the September 1994
accident.
<TABLE>
<CAPTION>
CALIFORNIA
LINE ITEM AIRCRAFT INVENTORY REDUCTION OTHER TOTAL
- --------- -------- --------- ---------- ----- -------
<S> <C> <C> <C> <C> <C>
Personnel Costs................. $ -- $ -- $ (0.3) $ -- $ (0.3)
Aircraft Rent................... (115.5) -- -- -- (115.5)
Aircraft Maintenance............ 3.4 -- -- -- 3.4
Depreciation/Amortization....... (21.7) (18.0) (18.2) -- (57.9)
Other Operating Expenses........ (39.1) (36.0) (7.4) -- (82.5)
------- ------ ------ ----- -------
Total Operating................. $(172.9) $(54.0) $(25.9) $ -- $(252.8)
======= ====== ====== ===== =======
Other Non-Operating............. $ -- $ -- $ -- $18.6 $ 18.6
======= ====== ====== ===== =======
</TABLE>
In addition to the above charges, USAir recorded a $50 million addition to
Passenger Transportation revenue in the fourth quarter of 1994 to adjust
estimates of traffic balances payable and unused tickets liability recorded
during the first three quarters of 1994. This adjustment represents coupons
(tickets) that USAir sold but were not presented for travel or refund before
expiry. There was no corresponding costs associated with this adjustment since
point-of-sale costs were recognized during the periods the coupons were sold
and operating costs would not apply since the coupons were never presented for
travel.
USAir recognized a $4.1 million unusual item during the fourth quarter of
1995. This amount, a reduction in Aircraft Rent expense, reflects a partial
reversal of the $132.8 million unusual item recorded in the fourth quarter of
1994. USAir presently owns one and leases seventeen BAe-146-200 aircraft. The
seventeen operating leases were entered into in 1984 and 1985 by Pacific
Southwest Airlines. Each of the leases expires in either 1999 or 2000. Pacific
Southwest Airlines was merged with and into USAir in 1987. In late 1990, USAir
determined that the BAe-146 aircraft were uneconomical to operate and decided
to remove the planes from USAir's operating fleet in May 1991 with the
intention of terminating the leases early through buy-out clauses or
subleasing the aircraft to other airlines. USAir recorded a $44 million charge
in 1990 to reflect the lease payments required to be made between May 1991 and
the early lease termination dates in 1992 and 1993 plus additional costs
expected to be incurred in terminating the leases. In 1991, USAir was
unsuccessful in its efforts to sublease the aircraft. USAir then contemplated
returning the aircraft to its operating fleet and recorded a $21 million
unusual item in 1991 in connection with estimated return-to-service expenses.
In 1992, USAir decided not to return its BAe-146 aircraft to service, and
USAir also determined that there were no imminent remarketing possibilities
and that it would be uneconomical to terminate the leases early in 1992 and
1993 as previously envisioned. However, USAir believed that the narrowbody
market might recover by 1995. Accordingly, at the end of 1992, USAir recorded
a $72 million charge equal to the unreserved 1993 and 1994 rent payments. In
addition, USAir was contingently liable for future rent payments beyond 1994
in the approximate amount of $100 million if the BAe-146-200 aircraft could
not be successfully remarketed. At the end of 1994, USAir re-examined the
likelihood of remarketing the aircraft and the economics involved in
terminating the leases. USAir determined that, in light of economic conditions
and the worldwide glut of narrowbody aircraft (and particularly the
significant number of grounded BAe-146s), it was appropriate from an
accounting perspective to take a $132.8 million charge during the fourth
quarter of 1994. This amount consisted of $102.7 million for the present value
of the remaining lease payments, $42.6 million to reduce the value of spare
parts to their estimated fair market value, a $15.5 million credit to reverse
the previously accrued early termination costs, and a $3 million write-off of
a warranty claim against the manufacturer. In the latter part of
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<PAGE>
1995 and in 1996, USAir began to witness favorable changes in market conditions
for BAe-146 aircraft. This change is attributable to, among other factors, a
shortage in certain markets of narrowbody aircraft that comply with applicable
noise regulations and the engine manufacturer recently offering maintenance
cost guarantees for the aircraft's Avco-Lycoming engines. During the first six
months of 1996, USAir delivered seven BAe-146 aircraft to other airlines and as
of July 10, 1996, has entered into sublease agreements with foreign and
domestic airlines for nine additional aircraft to be delivered in 1996. USAir's
success in remarketing the aircraft resulted in a $4.1 million reversal of the
previous accrual in the fourth quarter of 1995. USAir anticipates that it will
make additional reversals in the second, third and fourth quarters of 1996.
Operating Revenues--USAir's Passenger Transportation revenues increased
$345.5 million, (5.8%). USAir's estimates that its Passenger Transportation
revenues were adversely affected during 1994 by approximately $50 million due
to unfavorable weather during the first quarter and approximately $150 million
as the result of the two accidents that occurred during the third quarter. By
early 1995, USAir's traffic had recovered from the effects of the accidents and
approached a level more normally associated with USAir's capacity in the
marketplace. USAir's 6.7% yield improvement was sufficient to offset the
effects on revenues of a 4.7% decrease in both revenue passengers and capacity
(see related discussion in "Factors Contributing to Improved 1995 Financial
Results" above).
In March 1993, the U.S. District Court in Atlanta, Georgia entered a
settlement involving USAir and five other U.S. air carrier defendants in the
Domestic Air Transportation Antitrust Litigation class action lawsuit. The
class action suit, which was filed in July 1990, alleged that the airlines used
the Airline Tariff Publishing Company to signal and communicate air carrier
pricing intentions and otherwise limit price competition for travel to and from
numerous hub airports. Under the terms of the settlement, the six air carriers
paid $45 million in cash and issued $396.5 million in certificates valid for
purchase of domestic air travel on any of the six airlines. USAir's share of
the cash portion of the settlement, $5 million, was recorded in the results of
operations in the second quarter of 1992. Incremental cost associated with the
settlement will not be material based on the nominal equivalent free trips
associated with the settlement. The travel certificates may be applied towards
travel purchased between January 1995 and December 1998.
On October 11, 1994, USAir and seven other air carriers entered into a
settlement agreement with a group of State Attorneys General resolving similar
issues with the states. The settlement entitles passengers traveling
34--1
<PAGE>
within the United States on state government business to a 10% discount off
the published fares of each of the settling air carriers and will be available
for 18 months from August 16, 1995, or until the combined discount amount
reaches $40 million, whichever first occurs. On May 10, 1995, a U.S. federal
district court judge approved this settlement. USAir does not expect that this
settlement will have a material adverse effect on its financial condition or
results of operations.
USAir's Cargo and Freight revenue decreased $6.7 million (4.2%). The U.S.
Postal Service's increased emphasis on truck movement of mail in the
Northeastern U.S. has resulted in lower mail volumes and yields. The $67.5
million (13.6%) increase in USAir's Other Revenue is mainly attributed to an
increase in fees received from participants in USAir's frequent traveler
program and increased revenues from higher volumes and rates for cancellation
and rebooking fees. Revenues from third party aircraft lease and sublease
arrangements also increased during 1995. Overall, increases in the Other
Revenue category were largely offset by increases in related expenses
recognized as Other Expenses, Net (see below). Revenues associated with
USAir's wet lease arrangements with BA, recognized as Other Revenue, are
expected to decrease in 1996 in conjunction with the phase-out of the wet
lease program. USAir's results include certain transactions that are
eliminated at the USAir Group level.
Operating Expenses--USAir's Personnel Costs were relatively unchanged. USAir
recognized approximately $49.7 million of expense in 1995 associated with the
profit share component of the 1992 Salary Reduction Program (see further
discussion of this profit share plan in "Liquidity and Capital Resources"
below). Profit share expense during 1994 was approximately $4.1 million,
resulting from employees receiving certain guaranteed profit share payments
upon termination. Overall, profit share expense and the contractual wage
increases that USAir's pilots, flight attendants and mechanics received during
1995 were offset by lower personnel levels. USAir's workforce had
approximately 2,500 fewer employees at December 31, 1995 than at December 31,
1994. Aviation Fuel expense decreased $37.3 million, a 5.8% decrease. Year-
over-year, the average cost of fuel per gallon was relatively unchanged but
USAir's capacity (ASMs) decreased approximately 4.7%. The decreased capacity
contributed to a 5.6% reduction in fuel consumption. Jet fuel prices have
increased during the first quarter of 1996. The cost of jet fuel per gallon is
expected to be higher during 1996 than 1995, however, the price of jet fuel is
dependant on market factors generally outside of the Company's control. See
discussion above related to jet fuel tax legislation. The Company's
Commissions expense decreased $22.1 million (4.0%) despite an increase in
Passenger Transportation revenues primarily due to the effects of a change in
the rate structure for travel agency commissions that went into effect during
early 1995. USAir's Aircraft Rent decreased $123.3 million (23.7%). Excluding
the unusual items recognized during 1994 and 1995, as discussed above, USAir's
Aircraft Rent decreased $3.7 million (0.9%) mainly due to fewer leased
aircraft year-over-year. The Company's Other Rent and Landing Fees expense
decreased $33.3 million (7.9%) primarily due to USAir's capacity reductions
and credits totalling approximately $6.0 million received from various airport
authorities during 1995 related to 1994 activity. The Company's Aircraft
Maintenance decreased $40.2 million (12.0%) which resulted from fewer
operating aircraft year-over-year and the positive impact of USAir's re-
engineering efforts in the maintenance areas. Excluding the effects of the
unusual items recognized during 1994, as discussed above, USAir's Depreciation
and Amortization expense increased $7.8 million (2.4%) in 1995 compared with
1994. Excluding the effect of the unusual items recognized in 1994, as
discussed above, the Company's Other Expenses, Net increased approximately
$45.4 million (3.2%) largely due to increases in expenses associated with
increased sales activity and increased taxes on jet fuel (see discussion above
related to jet fuel tax legislation). Increased third party lease and sublease
arrangements have also contributed to the increase in this expense category
(see related discussion above in "Other Revenues"). Decreases in certain
capacity-related expenses partially offset increases in other components of
the Other Expense, Net. Expenses associated with USAir's wet lease of aircraft
to BA, recognized as Other Expenses, Net, are expected to decrease in 1996 in
conjunction with the phase-out of the wet lease program. USAir's results
include certain transactions that are eliminated at the USAir Group level.
Other Income (Expense)--The Company's Interest Income improved by $23.1
million (82.3%) mainly as a result of significantly higher cash levels during
1995. The Company's Interest Expense increased $16.1 million
35
<PAGE>
(5.6%) primarily as a result of interest incurred on debt associated with new
aircraft deliveries during 1994 and 1995. Interest Capitalized decreased $5.0
million (36.2%) mainly due to USAir's agreement with Boeing to defer the
delivery of certain 757-200 aircraft from 1996 to 1998. Equity in earnings
(loss) of affiliates increased by $8.0 million (30.2%) due to the improved
results of USAM. USAM owns 11% of the Galileo International Partnership
("GIP"), which owns and operates the Galileo Computerized Reservation System
("CRS"), and approximately 21% of the Apollo Travel Services Partnership
("ATS"), which markets the Galileo CRS in the U.S. and Mexico. Other, Net
decreased $8.1 million (44.1%) primarily due to a $10.7 million gain recorded
in 1995 related to USAir's sale of 13 737-300 aircraft as compared to the
effects of the $18.6 million gain recognized in 1994 (as discussed above).
Income Tax Provision (Credit)--The Company was subject to Federal
alternative minimum tax for 1995 as well as income taxes in certain states.
The Company was not subject to regular Federal income tax for 1995 as the
result of using Federal net operating loss carryforwards. The results for 1994
do not include any income tax credit due to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109") limitations in
recognizing a current benefit for net operating losses.
The Company implemented Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of" as of January 1, 1995. The effects, which were negligible, are
included in the Company's results of operations for 1995. In October 1995, the
Financial Accounting Standards Board adopted Statement No. 123 "Accounting for
Stock-Based Compensation" ("FAS 123"). This statement establishes the fair
value based method of accounting for stock compensation. The Company has
elected to continue using the intrinsic value based method of accounting
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
1994 COMPARED WITH 1993
Adverse weather during the first quarter, the two aircraft accidents which
occurred during the third quarter, the intense competitive environment
characterized by the growth of low cost, low fare airlines in USAir's markets,
widespread industry fare discounting, and USAir's cost structure had a
negative effect on USAir's results of operations during 1994.
USAir recorded a net loss of $716.2 million on revenue of $6.6 billion for
1994, compared with a net loss of $418.8 million on revenue of $6.6 billion
for 1993. USAir estimates that severe winter weather in the first quarter of
1994 negatively affected its results of operations by approximately $50
million and that the effect of the two aircraft accidents during the third
quarter of 1994 produced a revenue shortfall of approximately $150 million
from forecast amounts for the third and fourth quarters.
USAir's 1994 financial results contain $234.2 million of unusual items as
discussed in "1995 Compared with 1994" above.
The financial results for 1993 included: (i) a $43.7 million charge for the
cumulative effect of an accounting change, as required by Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits;" (ii) a $68.8 million charge for severance, early
retirement, and other personnel-related expenses for a workforce reduction of
approximately 2,500 full-time positions; (iii) a $36.8 million charge based on
a projection of the repayment of certain employee pay reductions; (iv) a $13.5
million charge for certain airport facilities at locations where USAir has,
among other things, discontinued or reduced its service; (v) $8.8 million for
a loss on USAir's investment in the Galileo International Partnership, which
operates a computerized reservations system; and (vi) an $18.4 million credit
related to non-operating aircraft. The following table indicates where these
items (excluding the accounting change) appear in USAir's consolidated
statement of operations ($ millions, brackets denote expense):
36
<PAGE>
<TABLE>
<CAPTION>
WORKFORCE EMPLOYEE AIRCRAFT/
LINE ITEM REDUCTION PAYBACK FACILITIES GALILEO TOTAL
- --------- --------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Personnel Costs................. $(65.6) $(36.8) $ -- $ -- $(102.4)
Aircraft Maintenance............ -- -- 18.4 -- 18.4
Depreciation and Amortization... -- -- (13.5) -- (13.5)
Other Operating Expenses........ (3.2) -- -- -- (3.2)
------ ------ ------ ----- -------
Total Operating................. $(68.8) $(36.8) $ 4.9 $ -- $(100.7)
====== ====== ====== ===== =======
Other Non-Operating............. $ -- $ -- $ -- $(8.8) $ (8.8)
====== ====== ====== ===== =======
</TABLE>
Operating Revenues--Increases in traffic which were stimulated by the lower
fares during 1994 were not sufficient to offset USAir's lower yields
experienced during 1994.
As discussed above, severe winter weather in the first quarter of 1994 had a
material adverse effect on USAir's operations and financial results. Passenger
transportation revenue increased during the second quarter compared with 1993
because increases in passenger traffic more than offset the dilutive effect of
the lower fares. However, this trend did not continue in the third and fourth
quarters primarily due to the reduced number of passengers following the two
aircraft accidents. By early 1995, USAir's traffic had largely recovered from
the effects of the accidents and approached a level normally associated with
USAir's capacity in the marketplace.
USAir's Passenger Transportation Revenue decreased $159.6 million (2.6%) in
1994 compared with 1993. Despite the negative effect of the adverse weather
during the first quarter and the two accidents during the third quarter,
USAir's scheduled traffic as measured by RPMs increased by 7.7% during 1994 on
2.6% of additional capacity, as measured by ASMs, resulting in a 3.0
percentage point increase in passenger load factor, a measure of capacity
utilization. However, USAir's yield decreased by 9.6% in 1994 compared with
1993 due to several factors including lower fares resulting from increased
competition from low cost, low fare carriers in USAir's markets and industry
fare discounting promotions.
USAir's Cargo and Freight revenue decreased $10.1 million (5.9%) due to
overall lower volumes and lower mail yields during 1994. The $125.2 million
(33.8%) increase in USAir's Other Revenue is the result of several factors
including the wet lease arrangement between USAir and BA, increased volume and
rate for cancellation and rebooking fees, and fees from companies which
participate in USAir's frequent traveler program. These increases were largely
offset by increases in other operating expenses. USAir has begun to phase out
the wet lease arrangements with BA. See "Business--British Airways Investment
Agreement--U.S.-U.K. Routes." One each of the three aircraft began the wet
lease service in the months of June 1993, October 1993 and January 1994.
Operating Expenses--USAir's Personnel Costs increased $55.2 million (2.0%).
Excluding the effect of the unusual items discussed and presented in the
tables above, USAir's personnel costs increased $157.3 million (6.1%) in 1994
compared with 1993 due to the expiration during 1993 of employee wage
reductions, subsequent contractual and general salary increases and a lower
discount rate used during 1994 in the calculation of pension and post-
retirement benefit expense. These increases more than offset any expense
reductions realized as a result of the workforce reduction during 1994.
Aviation Fuel expense decreased $35.6 million (5.2%), which is the result of
an 8.8% reduction in the cost of fuel partially offset by a 3.8% increase in
consumption compared with 1993. USAir's Commissions expense decreased $10.6
million (1.9%) as a result of decreased passenger revenue. See "Business--
Industry Restructuring and Cost-Cutting," and "Business--Legal Proceedings."
USAir's Other Rent and Landing Fees expense decreased $9.4 million (2.2%)
primarily due to lower operating costs at certain airport facilities. USAir's
Aircraft Rent increased $89.8 million (20.8%). Excluding the effect of the
unusual items discussed and presented in the tables above, USAir's aircraft
rent decreased $25.7 million (6.0%) in 1994 compared with 1993 due to the
expiration or renegotiation of several aircraft leases and additional wet
lease service over 1993 levels. USAir's Aircraft Maintenance increased $26.9
million (8.7%), which resulted from the $18.4 million credit in 1993 (see
above table) and initial repairs on certain of USAir's newer aircraft in 1994.
USAir's Depreciation and Amortization expense increased $62.0 million (19.1%).
Excluding the effect of the
37
<PAGE>
unusual items discussed and presented in the tables above, USAir's
depreciation and amortization expense increased $17.6 million (5.6%) in 1994
compared with 1993 primarily due to the delivery of new Boeing 757-200
aircraft. USAir's Other Expenses, Net increased $145.1 million (10.8%).
Excluding the effect of the unusual items discussed and presented in the
tables above, USAir's Other Expenses, Net increased $65.8 million (4.9%) in
1994 compared with 1993 largely due to increases in several passenger volume-
related expense categories and expenses related to the increase in USAir's
other revenue category discussed above.
Other Income (Expense)--USAir's Interest Income improved by $3.3 million
(13.1%) as a result of higher cash levels and more favorable interest rates in
1994. Interest Expense increased $47.2 million (19.8%) primarily as a result
of interest incurred on certain aircraft-secured and unsecured financings
completed during 1993. Interest Capitalized decreased $4.0 million (22.5%)
because average deposits for future aircraft deliveries were lower during 1994
compared with 1993. Equity in earnings (loss) of affiliates increased by $39.6
million. The improvement primarily reflects charges recognized by GIP during
1993 to eliminate duplicate facilities and operations resulting from the
merger of Covia Partnership and Galileo Limited. Other, Net increased $35.1
million principally related to an $18.6 million gain recognized by USAir in
1994 (discussed above). The remaining variance is mainly attributable to
overall higher net losses recorded by USAir in 1993 in connection with
miscellaneous asset dispositions.
Effective January 1, 1993, USAir adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The adoption of
FAS 109 resulted in no cumulative adjustment. Results for 1994 and 1993 do not
include any income tax credit due to the FAS 109 limitations in recognizing a
current benefit for net operating losses. See Note 6 to USAir's consolidated
financial statements for additional information.
INFLATION AND CHANGING PRICES
Inflation and changing prices do not have a significant effect on USAir's
operating revenues and expenses (other than depreciation and amortization)
because such revenues and expenses generally reflect current price levels.
Depreciation and amortization expense is based on historical cost. For
assets acquired through the purchase of Pacific Southwest Airlines, USAir's
historical cost is based on fair market value of the assets on May 29, 1987.
In the case of Piedmont Aviation, Inc., USAir's historical cost is based on
the fair market value of the assets on November 5, 1987, reduced by the tax
effect of that portion of fair market value not deductible for tax purposes in
the form of depreciation and amortization. Therefore, aggregate depreciation
and amortization is lower than if this expense reflected today's replacement
costs for existing productive assets. In evaluating how inflation would
increase depreciation expense, however, consideration should also be given to
the reduction in other operating expenses, such as aircraft maintenance and
aviation fuel, that would be achieved from the operating efficiencies of
newer, more technologically advanced productive assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $578.3 million for the year ended December
31, 1995. As of December 31, 1995, USAir's unrestricted cash, cash equivalents
and short-term investments totaled approximately $899.0 million.
During December 1995, USAir completed a transaction which enabled it to
substitute previously unencumbered aircraft in lieu of cash deposits for
certain workers' compensation liabilities and letters of credit which are
classified as "Other Assets" on USAir's balance sheet at that date.
Although USAir's liquidity and capital resources improved considerably
during 1995, USAir remains highly leveraged. In order to meet debt service,
lease and other obligations and to finance daily operations, USAir requires
substantial liquidity and working capital. Developments beyond the control of
USAir might occur which could have a material adverse effect on USAir's
prospects, liquidity, financial condition and results of operations, including
a downturn in the economy, adverse regulatory changes, intensified industry
fare wars, substantial
38
<PAGE>
increases in jet fuel prices or fuel taxes, adverse weather conditions,
negative public perception regarding safety or further incursions by low cost,
low fare carriers into USAir's markets. However, based on current
expectations, USAir believes that its cash balances will be more than
sufficient to meet its liquidity requirements for the remainder of 1996 and is
evaluating the possible redemption or refinancing of certain debt instruments
and capital leases in order to lower interest and lease expenses. Depending on
market, economic and other factors, USAir's expectations of its liquidity
requirements are subject to change.
Certain USAir employees whose wages and/or benefits were temporarily reduced
during 1992 and 1993 currently participate in a profit sharing plan (a
component of the 1992 Salary Reduction Program) designed to recompense them
for the concessions made during that time period. The plan will cease to exist
after these employees have been recompensed to the extent permitted under the
provisions of the plan. Estimated savings of approximately $23 million
attributable to the suspension of longevity/step increases will not be subject
to repayment through the profit-sharing program. This profit sharing plan is
distinct from two other profit sharing plans that USAir currently offers in
conjunction with certain of its defined contribution plans and its Employee
Stock Ownership Plan. Payouts are determined based on USAir Group's pre-tax
results for a year, less charges associated with postretirement benefit
expenses other than for pensions. Certain unusual items are also excluded from
the calculation. Based on USAir Group's 1995 results and the provisions of the
profit sharing plan, USAir recognized charges of approximately $49.7 million
for this plan in 1995. USAir made a cash payment of approximately $73.7
million to plan participants in March 1996 for 1995 activity. The maximum
remaining pay-out under this plan after the March 1996 payment, the timing of
which is dependant on USAir Group's future profitability, among other factors,
is currently estimated to be no more than $134.3 million.
As discussed above in "Risk Factors--Deferral of Dividends by USAir Group",
USAir Group has deferred dividend payments on all series of its outstanding
preferred stock. The aggregate annual dividend requirements related to USAir
Group's outstanding preferred stock issuances, each of which has a cumulative
dividend feature, currently amount to approximately $79.2 million.
Accordingly, aggregate dividends-in-arrears as of December 31, 1995, including
additional dividends (interest) on deferred dividends, of approximately $117.7
million represent a future obligation of USAir Group. In addition, USAir
Group's Series A Preferred Stock is mandatorily redeemable on August 7, 1999
at $1,000 per share plus accrued dividends (interest). The Series F Preferred
Stock and Series T Preferred Stock are mandatorily redeemable in the year
2008. As of December 31, 1995, the redemption values of the Series A Preferred
Stock, Series F Preferred Stock and Series T Preferred Stock were
approximately $412.1 million, $329.1 million, and $109.6 million,
respectively.
Investing activities during 1995 included cash inflows of $219.8 million
from the disposition of assets (primarily from thirteen Boeing 737-300
aircraft, offset by $142.3 million paid for the acquisition of assets ($61.7
million cash payments related to new 757-200 aircraft, $80.6 million cash
payments related to the purchase of rotables, hush kits, and various ground
support equipment). Net cash provided by investing activities for 1995 was
$150.7 million.
Financing activities during 1995 included $278.3 million of debt payments,
including the redemption of USAir's remaining outstanding 12 7/8% Unsecured
Senior Notes (the "12 7/8% Notes"). In addition, USAir incurred debt of $169.7
million associated with the delivery of seven new Boeing 757-200 aircraft and
scheduled aircraft progress payments for future aircraft deliveries half of
1995. In connection with the deferral of eight 757-200 deliveries to 1998,
USAir rescheduled the due date of $70.8 million of previously satisfied
aircraft purchase deposits into the future resulting in a reduction of both
debt and equipment deposits. USAir had a $68.6 million 8.4% note payable to
USAir Group related to USAir Group's purchase of aircraft-secured debt
obligations of USAir. The $169.7 million, $70.8 million and $68.6 million are
reflected as non-cash activity in USAir's Consolidated Statement of Cash Flows
because USAir experienced an increase or decrease in fixed assets or equipment
deposits concurrently with the increase or decrease in debt. USAir made early
debt payments, including the redemption of the 12 7/8% Notes, totalling
approximately $202.1 million during 1995. Further steps by USAir to prepay
debt and lease obligations are possible.
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USAir is a party to certain financial contracts to reduce exposure to
fluctuations in the price of jet fuel and changes in the U.S. dollar to
Japanese Yen conversion rates. Under the jet fuel arrangements, USAir pays a
fixed rate per notional gallon of fuel and receives in return a floating rate
per notional gallon based on the market rate during the month of settlement.
Decreases in the market cost of jet fuel below the rates specified in the
contracts require USAir to make cash payments. However, USAir believes these
contracts do not present a material risk to USAir's financial position or
liquidity due to the relatively simple terms of the agreements, their purpose
and their short remaining duration. USAir has reviewed the financial condition
of each of the counterparties to these financial contracts and believes that
the potential for default by any of the current counterparties is negligible.
In prior years, USAir participated in contracts to reduce exposure to interest
rate changes but those contracts expired during 1995 and were not renewed. See
Note 2 to USAir's consolidated financial statements for additional
information.
USAir has received notices from the U.S. Environmental Protection Agency and
various state agencies that it is a potentially responsible party ("PRP") with
respect to the remediation of existing sites of environmental concern.
Negotiations with various governmental agencies continue concerning known and
possible cleanup sites. USAir has made financial contributions for the
performance of remedial investigations and feasibility studies at sites in
Moira, New York; Escondido, California; and Elkton, Maryland. The
contributions were approximately $200,000 in the aggregate for 1995, 1994 and
1993. USAir believes that the ultimate resolution of known environmental
contingencies should not have a material adverse effect on its liquidity,
financial position or results of operations based on USAir's experience with
similar environmental sites.
USAir has been identified as a PRP for environmental contamination at Boston
Logan Airport. There are a number of other PRPs at the site. The Company is
presently unable to assess its proportionate share of contribution, but does
not expect any such contribution to have a material adverse effect on its
financial condition or results of operations.
USAir Group terminated its revolving credit facility with a group of banks
during 1994. USAir Group had historically utilized such a facility to
supplement its and USAir's liquidity from time to time. In addition, USAir's
revolving accounts receivable sale program expired in December 1994. USAir was
unable to sell receivables under the agreement during 1994 because of failure
to comply with certain financial covenants required to be maintained in
connection with that agreement. USAir had engaged in discussions with respect
to a replacement receivables sale facility but has elected not to pursue such
a financing at this time.
USAir anticipates that its 1996 capital expenditures will be approximately
$257 million. Of this amount, approximately $67 million relates to progress
payments for future aircraft deliveries and $35 million relates to the
purchase of hush kits for certain aircraft in order to comply with federal
noise and pollution mandates. USAir expects that it will satisfy its liquidity
requirements for 1996 through a combination of cash flow from operations and
cash on hand. As a result of the recent aircraft delivery deferral agreements
with Boeing, the Company's capital commitments have been substantially reduced
for the 1996-2000 time period. USAir currently has committed financing for a
significant portion of the purchase price for each of the scheduled 1998
deliveries of Boeing 757 aircraft.
Except for the Old Notes, USAir's debt securities are presently rated below
investment grade by Standard & Poors and Moody's. The ratings of USAir's debt
securities make it more difficult and costly for USAir to effect additional
financing, particularly unsecured debt financing.
In February 1996, USAir issued the Old Notes under Securities and Exchange
Commission Regulation 144A. The Private Offering netted proceeds of
approximately $259 million which were used as a part of the funds necessary to
repay in full the indebtedness incurred in connection with certain 757-200
aircraft delivered to USAir in 1994 and 1995.
During 1994, USAir's investment in new aircraft acquisitions and purchase
deposits totaled $270.6 million (which includes $224.6 million presented as
non-cash on USAir's consolidated statement of cash flows since
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debt was incurred upon delivery of aircraft or to satisfy equipment deposit
progress payments). USAir took delivery of five new Boeing 757-200 aircraft
during 1994. USAir invested $128.9 million in non-aircraft property during 1994
(e.g., ground support equipment, computer equipment, software, aircraft
rotables and hush kits, and take-off and landing slots), partly offset by $55.5
million in proceeds from disposition of assets which includes insurance
proceeds related to the jet aircraft involved in the September 1994 accident.
Net cash provided by financing activities was $70.2 million, which includes
$172.2 million net proceeds received by USAir upon the sale of $175 million
principal amount of 9 5/8% Senior Notes due 2001 through an underwritten public
offering, offset by $102.0 million of scheduled debt payments. In addition, as
discussed above, USAir incurred $270.6 million of debt upon delivery of five
757-200 aircraft and to satisfy equipment deposit progress payments.
During 1993, USAir's investment in new aircraft acquisitions and purchase
deposits totaled $469.2 million (which includes $343.2 million presented as
"non-cash" on USAir's consolidated statement of cash flows because debt was
incurred upon delivery of aircraft or to satisfy equipment deposit progress
payments). USAir took delivery of 11 Boeing 757-200, one Boeing 767-200ER, and
six McDonnell Douglas MD-82 aircraft during the year. The MD-82s were
immediately sold to a third party. In addition, in January 1993 USAir sold two
other MD-82 aircraft which had been delivered in the fourth quarter of 1992.
Proceeds from the sale of the MD-82s approximated $168 million. USAir completed
financing arrangements for, or internally funded, all of its 1993 aircraft
expenditures. The financing arrangements included the $337.7 million issue of
Pass Through Certificates which USAir sold through an underwritten public
offering on November 1, 1993. USAir invested $150.8 million in non-aircraft
property during 1993 (e.g., ground support equipment, computer equipment,
software, aircraft rotables and hush kits, take-off and landing slots).
On July 8, 1993, USAir sold $300 million principal amount of 10% Senior Notes
due 2003 ("10% Notes") through an underwritten public offering. The offering
netted proceeds of approximately $294 million. The 10% Notes are
unconditionally guaranteed by USAir Group.
All net proceeds received by USAir from the sale of the 10% Notes and the 9
5/8% Notes were added to the working capital of USAir for general corporate
purposes.
As of December 31, 1995, USAir's ratio of current assets to current
liabilities was .60 to 1 and the debt component of USAir's capitalization
structure was greater than 100% due to the existence of a net capital
deficiency.
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BUSINESS
USAir, a certificated air carrier engaged primarily in the business of
transporting passengers, property and mail, is the principal operating
subsidiary of USAir Group, and accounted for approximately 93% of USAir
Group's operating revenues for the fiscal year ended December 31, 1995. USAir
enplaned more than 57 million passengers in 1995 and is the fifth largest
United States air carrier ranked by RPMs flown. As of December 31, 1995, USAir
provided regularly scheduled jet service through 108 airports to approximately
143 cities in the continental United States, Canada, Mexico, France, Germany,
and the Caribbean. USAir added service to Italy and Spain in 1996. USAir's
executive offices are located at 2345 Crystal Drive, Arlington, Virginia 22227
(telephone number (703) 418-7000), and its primary connecting hubs are located
at the Pittsburgh, Charlotte/Douglas, Philadelphia and Baltimore/Washington
International Airports. As discussed below in "--Significant Impact of Low
Cost, Low Fare Competition," a substantial portion of USAir's RPMs are flown
within or to and from the eastern United States. USAir also maintains
significant operations at major airports in the large east coast population
centers of Boston, LaGuardia and Washington National. When measured by
departures, USAir is the largest or second largest airline at each of the
foregoing airports and is the predominant air carrier in many smaller eastern
cities, such as Albany, Buffalo, Hartford, Providence, Richmond, Rochester and
Syracuse. In addition, USAir is the leading airline from the Northeast to
Florida. For fiscal year 1995, approximately 36% of all scheduled flights on
the east coast of the United States were USAir flights. Approximately 64% of
USAir's flights and 44% of its ASMs are represented by intra-east coast
flying.
USAir has an important international alliance with BA, a major investor in
USAir Group. As of December 31, 1995, the two air carriers had implemented
code sharing from 70 of the 138 airports currently authorized by the United
States DOT. The USAir/BA alliance also extends to the sharing of ground
services at certain airports and joint cooperation in areas such as product
branding, cargo services, jet fuel purchasing, frequent traveler programs and
maintenance services. On June 11, 1996, American and BA announced a proposed
alliance to jointly market, price and manage their North Atlantic airline
services, effective April 1, 1997, subject to United States and international
approvals. The joint services would carry the designator codes of both
airlines, and each would code-share behind/beyond the other's gateways. The
two airlines also intend to act cooperatively in other areas, such as
marketing, sales, facilities use and cargo. The BA/American alliance, as
proposed, does not prevent American or BA from entering into or continuing
commercial arrangements with other airlines, including USAir. Certain
competition authorities in the United States and Europe have made inquiries
into the proposed alliance and several airlines serving the North Atlantic
have raised strong objections to the proposed alliance. USAir has stated that
the proposed alliance "provides positive opportunities" and that "USAir will
act in the best interests of its shareholders, employees and communities
served". At present, USAir is reviewing the proposed alliance and is unable to
predict how, if approved, the BA/American alliance would affect USAir and its
relationship with BA.
USAir also code shares with eleven regional airline affiliates operating
under the "USAir Express" trade name. USAir has entered into service
agreements with each of the USAir Express carriers. Through its service
agreements, USAir provides reservations and, at certain stations, ground
support and other services, in return for service fees. USAir Group owns three
of the USAir Express carriers--Piedmont, Allegheny and PSA. The USAir Express
network feeds traffic into USAir's route system at several points, including
its major hub operations at Pittsburgh, Charlotte, Philadelphia and BWI. At
December 31, 1995, USAir Express carriers served 176 airports in the United
States, Canada and the Bahamas, including 76 also served by USAir. During
1995, USAir Express' combined operations enplaned approximately 9.6 million
passengers, over half of whom connected to USAir flights. USAir also has a
management agreement and code shares with Shuttle, Inc. operating under the
name "USAir Shuttle." The USAir Shuttle operates frequent service between
LaGuardia and Boston and between LaGuardia and Washington National.
In January 1996, Stephen M. Wolf was appointed Chairman and Chief Executive
Officer of USAir and of USAir Group. Mr. Wolf succeeded Seth E. Schofield, who
retired after 38 years with USAir. Mr. Wolf has been a senior executive at
United, Flying Tigers, Republic, Continental, Pan Am and American. In
addition, in February 1996, USAir appointed Rakesh Gangwal as President and
Chief Operating Officer of USAir and USAir Group and Lawrence M. Nagin as
Executive Vice President--Corporate Affairs and General Counsel of USAir
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and USAir Group. Mr. Gangwal has been a senior officer at Air France and
United and Mr. Nagin has held senior positions at United and Flying Tigers.
STRATEGY
USAir recorded a net loss of $54.9 million for the first three months of
1996 compared to a $101.8 million loss for the first three months of 1995.
USAir recorded net income of $33.0 million in 1995, its first profitable year
since 1988. From 1989 through 1994, USAir incurred substantial losses. Its
results of operations have been adversely affected by, among other factors,
the growth of low cost, low fare competition, particularly in 1994, and its
unit costs, which are among the highest of United States air carriers. USAir
has been striving to improve its profitability and respond to the competitive
environment that characterizes the United States airline industry by:
--Rationalizing the level and geographic distribution of capacity;
--Improving product and delivery; and
--Reducing capital requirements and operating costs.
Stephen M. Wolf, Chairman of the Board of Directors and Chief Executive
Officer of both USAir Group and USAir, and Rakesh Gangwal, President and Chief
Operating Officer of both companies, have held a series of employee meetings
where they presented their assessment of USAir's competitive position. The
focal point of these meetings was to communicate senior management's belief
that USAir must lower its personnel costs, increase employee productivity,
increase the quality of USAir's service and customer satisfaction and grow in
size to ensure long-term viability. The Chairman made a similar presentation
at USAir Group's annual meeting of stockholders in May 1996. USAir remains
committed to reducing USAir's personnel costs and improving employee
productivity. With regards to the growth of USAir, USAir believes that
internal growth is preferable but has not excluded other alternatives.
CAPACITY AND ROUTE RATIONALIZATION
Beginning in the spring of 1995, USAir instituted a significant
rationalization of its capacity and routes with the goal of reducing less
profitable non-hub (point-to-point) flying, emphasizing the quality of
departures versus the quantity of flights, reducing excess capacity in strong
markets and replacing low demand jet service with modern turboprop aircraft
operated by USAir Express. The effect of USAir's rightsizing plan has been a
reduction in the number of USAir's departures and its capacity. In the second
half of 1995, departures decreased by 17% and capacity (as measured by ASMs)
decreased 10.8% compared to the second half of 1994. Although USAir's traffic
also declined as a result of this plan, USAir was successful in retaining a
significant portion of the revenue and traffic from eliminated flights. In the
second half of 1995, USAir achieved a record load factor of 66.2%. For the
full year 1995, USAir's load factor also set a record at 64.7%. Load factors
for the first quarters of 1996 and 1995 were 64.6% and 59.7%, respectively, a
4.9 point improvement. For fiscal year 1995, USAir's departures, capacity and
traffic were down by 10%, 4.7% and 0.9%, respectively. In addition, by
December 31, 1995, USAir non-hub flying represented less than 10% of its total
flying, compared to approximately 18% at December 31, 1994.
USAir has been seeking to broaden its route portfolio by leveraging its
strong east coast franchise into expanded transcontinental and international
service from the eastern United States. By diversifying its route structure in
this way, USAir can enhance its long-haul service and increase its average
length of haul. Increasing its average length of haul will enable USAir to
increase the average value of tickets sold and reduce the unit cost of serving
each passenger. In 1995, USAir's average length of haul increased 4.1% to 664
miles from 638 miles in 1994. Average lengths of haul were 673 and 659 miles
for the first quarters of 1996 and 1995, respectively, an increase of 2.1%
year-over-year. Domestically, USAir has added more flights to the west coast
from its hubs. In 1995, USAir retired, sold, returned or otherwise disposed of
37 operating aircraft while adding seven Boeing 757-200s--an aircraft more
suitable for transcontinental operations. At March 31, 1996, USAir operated 34
Boeing 757-200 aircraft and had orders for eight additional 757-200 aircraft
to be delivered in 1998.
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Internationally, USAir has expanded service to the Caribbean and has
realigned its international routes in an effort to further develop Philadelphia
and Boston as transatlantic gateways. In this regard, the DOT recently granted
USAir a two-year exemption authority to operate to Madrid, Spain from both
Philadelphia and Boston. USAir began service to Madrid from Philadelphia on
June 15, 1996. In addition, USAir recently re-aligned its Frankfurt service. It
increased the number of weekly flights from the East Coast from 14 to 21 in
June 1995 for the summer season and introduced non-stop service from
Philadelphia and Boston. In February 1996, USAir received final approval from
the DOT to serve Munich, Germany from Philadelphia. USAir inaugurated its
service to Munich on May 23, 1996. The number of weekly USAir flights to
Germany has recently increased to 28. In July 1996, USAir began code-sharing
with German airline Deutsche BA on flights to Berlin and Dusseldorf from
Munich. In April 1996, the DOT granted USAir authority to institute service to
Rome, Italy from Philadelphia with through service from Los Angeles. USAir
inaugurated its service to Rome on June 1, 1996. USAir estimates that its
transatlantic capacity in 1996 (as measured by ASMs) has increased by
approximately 54% compared to 1995. USAir believes that the further development
of international service from Philadelphia and Boston will enable it to achieve
a competitive advantage by leveraging USAir's existing domestic network with
the strong local transatlantic demand and the favorable geographic position of
these cities.
In May 1996, USAir completed its "wet lease" arrangements with BA. Under the
wet lease arrangements, USAir leased three Boeing 767-200ER aircraft, along
with cockpit and cabin crews, to BA in order to serve three routes between the
U.S. and London. USAir is utilizing the previously wet leased aircraft as part
of USAir's expansion of international service, as discussed above. BA did not
exercise its right on January 21, 1996 to purchase additional preferred stock
in USAir Group, as discussed below in "British Airways Investment Agreement--
Provisions Regarding Additional BA Investments. BA Announcement Regarding No
Additional Investment in USAir Group."
USAir's reduction in jet aircraft and its continuing efforts to reduce costs
and enhance revenue by eliminating less profitable routes have resulted in the
cessation of or reduction in jet flying between certain city pairs. In some
cases, existing or former jet routes have been turned over to USAir Express
with the goal of maintaining portions of the revenue base (particularly the hub
connecting traffic) with lower cost operations.
In 1992, USAir reached an agreement with the creditors of the Trump Shuttle
to manage and operate the Trump Shuttle under the name "USAir Shuttle" for a
period of up to ten years. Under the agreement, USAir Group has an option to
purchase the shuttle operation on or after October 10, 1996 with an exclusive
right to do so until April 10, 1997. USAir believes that the USAir Shuttle
fosters traveler loyalty towards USAir because of the USAir Shuttle's
participation in USAir's FTP.
ENHANCED CUSTOMER SERVICE, PERFORMANCE AND RELIABILITY
USAir has undertaken a number of initiatives to build brand loyalty among its
customers with the goal of maintaining and enhancing its traditional unit
revenue premiums over its competitors. USAir also hopes to increase its market
share of business travelers and long-haul customers. The initiatives include:
Focus on Business Traveler--USAir is expanding the first-class cabins on a
significant portion of its aircraft, expanding "business centers" in certain
airports, upgrading certain USAir Club facilities and installing GTE Airfone's
on-board phone system to improve service. USAir also improved business
passenger accessibility to the First Class cabin through expansion of a program
which lets a passenger sit in First Class for the price of a full fare coach
ticket. This product is now available in most transcontinental markets that
USAir serves. USAir also believes that the introduction of its personal travel
software, "Priority Travel-Works", will appeal to many high-volume business
travelers by providing users with more information and greater control over
their travel arrangements. In April 1996, USAir announced that it was
discontinuing its Business Select service. Business Select was a business class
product offered on certain short-haul flights on certain Boeing 737-200
aircraft. USAir will instead modify the cabins on those aircraft to increase
the size of the first class cabin.
Technology and New Facilities--In addition to "Priority TravelWorks," USAir
is investing in technology to positively affect its marketing, operational
performance and customer services. USAir introduced "ticketless
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travel" (i.e., electronic ticketing) in April 1996 in order to cut distribution
costs and increase travelers' convenience. USAir is working to expand
electronic ticketing to international service and USAir Shuttle flights. USAir
is also working with major computer reservation systems to make electronic
ticketing available to travel agents. In addition, USAir is exploring self-
ticketing machines which, if expanded from the test phase, could further reduce
distribution costs and save time for USAir's customers. USAir has also
implemented a new inventory management system that allows it to better allocate
seats within fare levels to maximize revenues. USAir has created a state-of-
the-art operations control center in Pittsburgh. The center improves
operational decision-making by more closely coordinating all flight-related
functions such as dispatching, aircraft routing, maintenance and technical
support, crew scheduling and passenger services.
Improved Service Levels--USAir has improved both its operational performance
and attention to customer services. In 1994, USAir ranked ninth in on-time
performance among the ten major United States airlines. USAir substantially
improved its on-time performance in 1995. USAir is also implementing customer
service enhancements in its international operations and is investing in the
training and development of its customer service employees through a "Core
Curriculum Training Program."
Safety--USAir recently implemented several additional safety initiatives. In
November 1994, USAir created a new position of Vice President-Corporate Safety
and Regulatory Compliance. In 1995, USAir established a committee of its board
of directors, the Safety Committee, which has oversight of all corporate safety
matters. In addition, USAir retained an aviation consulting firm, to conduct a
full audit of USAir's safety operations. The audit was completed in early 1995.
In the opinion of the safety auditors, USAir was being operated safely in
compliance with FAA regulations.
COST REDUCTIONS
Although USAir has recently demonstrated significantly improved financial
performance, USAir believes that it must continue to lower its costs (including
personnel costs) in order to compete effectively in a low fare environment.
Operating Costs--USAir, whose operating costs are the highest among the major
U.S. airlines, is actively pursuing several initiatives in an effort to reduce
these costs significantly. USAir is working to achieve or has already achieved
substantial cost savings through a combination of organizational and structural
changes, reengineering and other initiatives including: centralization of its
purchasing functions; realignment of customer services; improvements in
operations performance to increase crew productivity; outsourcing of cargo and
communications; and reengineering of its maintenance operations, finance,
reservations, purchasing, accounts payable, payroll and human resources
functions.
USAir has also taken other cost-cutting actions. In October 1995, USAir
closed its Reno, Nevada reservations office as part of its long-term strategy
to reduce costs and improve productivity. The closing affected approximately
260 employees. USAir believes that the reservations office in San Diego is
adequate to handle west coast customers as well as overflow calls from the East
during irregular operations. USAir reduced the number of daily departures at
Newark International Airport from 51 as of December 31, 1994 to 14 by December
1995. The changes have resulted in lower staffing levels in customer service
and maintenance.
In February 1995, USAir and several other major U.S. carriers, including
Delta, American, Northwest and United, imposed limits on the base commissions
they pay travel agents for domestic air fares. See "--Industry Restructuring
and Cost-Cutting." The new limits on commissions are designed to reduce one of
the airlines' largest expenses. USAir has experienced cost savings due to the
new commission limits.
In March 1994, in an attempt to reduce its annual labor personnel costs by
approximately $500 million through concession agreements involving wage and
benefit reductions, improved productivity and other cost savings, USAir Group
began negotiating with the unions that represent certain of USAir's employees.
USAir's wages and benefits are the largest single component of its operating
costs (approximately 41% for 1995). In late
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July 1995, USAir Group announced that it was ending discussions with the
unions on a wage concession and restructuring package and that it would
concentrate on reducing USAir's labor costs through traditional collective
bargaining. See "--Employees". USAir remains committed to obtaining labor cost
reductions.
Aircraft Commitments--In an attempt to reduce aircraft ownership costs,
facilitate its capacity rationalization plan and reduce its fleet size and
number of fleet types, USAir has deferred certain new aircraft deliveries,
pursued the sale or lease of certain jet aircraft and declined to renew leases
for certain other aircraft upon lease expiry. In 1995, USAir sold, leased,
retired or disposed of 37 operating aircraft (including the sale of thirteen
Boeing 737-300 aircraft) and eliminated all Boeing 727-200s from its operating
fleet. USAir recorded a small financial statement gain from the sales of the
above-described 737-300 aircraft to leasing companies. USAir intends to lease,
sublease, retire or return to the lessors additional Fokker F28-4000s and
Douglas DC-9-30s in 1996 and 1997.
USAir has no current plans to add new aircraft to its fleet until January
1998. In May 1994, USAir reached an agreement with Boeing, to reschedule the
delivery of 40 737-series aircraft from the 1997 through 2000 time period to
the years 2003 through 2005. As part of the same agreement, USAir relinquished
all of its options to purchase 737-series, 757-series and 767-series aircraft
during the 1996 through 2000 time period. In June 1995, USAir reached
agreements with Boeing and Rolls Royce to reschedule the delivery dates for
eight 757-200 aircraft from 1996 to 1998. As a result, USAir's capital
commitments have been substantially reduced for the 1996 to 2000 time period.
In addition, with application of the proceeds from the sale of the Old Notes
on February 16, 1996, USAir has committed financing for a substantial portion
of the purchase price for each of the scheduled 1998 deliveries.
In May 1991, USAir ceased operating its fleet of British Aerospace BAe-146
("BAe-146") aircraft and USAir has not resumed operation of these aircraft.
USAir owns one and leases or subleases 17 BAe-146 aircraft. USAir has
continued to pay rent, insure (or cause to be insured) the aircraft and
perform (or cause to be performed) its other obligations under the BAe-146
leases, except that, for those BAe-146s that remain in storage, USAir has not
performed mandatory airworthiness directives on certain of those aircraft as
required by such leases. The stored BAe-146s are being preserved in accordance
with FAA-approved procedures and manufacturer guidelines. In the fourth
quarter of 1994, USAir recorded a non-recurring charge of approximately $132.8
million for the BAe-146 aircraft. During 1994, USAir again evaluated the
secondary market for BAe-146 aircraft and determined that it was probable that
USAir would not be successful in its efforts to sublease or otherwise dispose
of these aircraft prior to lease expiry. Accordingly, USAir did not include a
provision for any potential subleasing activity in determining the amount of
the 1994 charge. USAir has had recent success, however, in remarketing the
BAe-146 fleet. This change is based in large part on a favorable change in
market conditions attributible to, among other factors, a shortage in certain
markets of narrowbody aircraft that comply with applicable noise regulations
and the engine manufacturer recently offering maintenance cost guarantees for
the BAe-146s Avco-Lycoming engines. As of June 30, 1996, USAir had delivered
seven BAe-146 aircraft to European airlines and, as of July 10, 1996, had
entered into sublease agreements with foreign and domestic airlines for nine
additional BAe-146 to be delivered in 1996. As a result of USAir's ability to
sublease some of the grounded aircraft, USAir reversed $4.1 million of the
1994 charge of $132.8 million for BAe-146s during the fourth quarter of 1995.
USAir projects that it will make additional reversals in the second, third and
fourth quarters of 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--1995 Compared with 1994."
GENERAL INDUSTRY CONDITIONS
Demand for air transportation historically has tended to mirror general
economic conditions. During the most recent economic recession in the United
States, the change in industry capacity failed to mirror the reduction in
demand for domestic air transportation due primarily to continued delivery of
new aircraft and, secondarily, to the operation of certain major U.S. carriers
under the protection of Chapter 11 of the Bankruptcy Code for extended
periods. While industry capacity has leveled off and the general economy has
improved, USAir expects that the airline industry will remain extremely
competitive for the foreseeable future, primarily due to the dramatic change
which has occurred in industry pricing and which has resulted in generally
lower fares. See "--Significant Impact of Low Cost, Low Fare Competition."
46
<PAGE>
In 1995, the U.S. airline industry had its best year since the recession
began in July 1990, with several airlines posting profits, although many of
the major carriers continue to be burdened with large amounts of debt. Unlike
the results of some of its competitors, USAir's results did not improve in
1994. USAir experienced a pre-tax loss of $716.2 million in 1994. The entire
airline industry experienced further improved results in 1995. USAir's results
improved in 1995 as well. Nonetheless, USAir believes that for the foreseeable
future, while the demand for higher yield "business fares" will remain
essentially flat and relatively inelastic, the lower yield "leisure" market,
which is affected by the general economy, will remain highly price sensitive.
This trend will make it more difficult for the domestic airlines, including
USAir, to sustain meaningful yield increases in the long run. In addition,
USAir recorded a net loss in the first quarter of 1996 while the other United
States majors posted positive earnings for the same period. Therefore, USAir
believes it must reduce its cost structure substantially in order to ensure
its long-term financial stability.
SIGNIFICANT IMPACT OF LOW COST, LOW FARE COMPETITION
Most of USAir's operations are in competitive markets. USAir experiences
competition of varying degrees with other air carriers and with all forms of
surface transportation. USAir competes with at least one major airline on most
of its routes between major cities. Vigorous price competition exists in the
airline industry, and competitors have frequently offered sharply reduced
discount fares in many of these markets. Airlines, including USAir, use
discount fares and other promotions to stimulate traffic during normally slack
travel periods, to generate cash flow and to increase relative market share in
selected markets. Discount and promotional fares are often subject to various
restrictions such as minimum stay requirements, advance ticketing, limited
seating and refund penalties. USAir has often elected to match discount or
promotional fares in certain markets in order to compete vigorously in those
discounted markets.
The dramatic expansion of low fare competitive service in many of USAir's
markets in the eastern United States during 1994 and USAir's competitive
response of reducing its fares up to 70% in certain affected primary and
secondary markets in order to preserve its market share contributed to large
losses in 1994. In particular, Continental created a high frequency, low fare
product called "Continental Lite." By late 1994, USAir competed with
Continental in primary and secondary markets from which USAir then generated
46% of its passenger revenue with fare reductions of up to 70% in certain
markets. As discussed below, in 1995 the airline industry did not generally
experience the deep level of fare discounting prevalent during the last
several years. Continental abandoned its Continental Lite strategy in 1995 and
fare levels have somewhat recovered. Nonetheless, USAir does not believe that
there has been a reduction in the public demand for generally lower air fares.
The growth of the operations of low cost, low fare carriers in USAir's markets
in domestic markets represents an intense competitive challenge for USAir,
which has higher operating costs and fewer financial resources than many of
its competitors. For example, the expansion of Southwest into BWI, Florida and
the Northeast poses a competitive challenge for USAir. Southwest has a
significant cost advantage over USAir. USAir believes that it must reduce its
operating costs substantially if it is to ensure its long-term financial
stability and that low-cost incursions into markets served by USAir could have
a material and adverse affect on USAir's financial condition and results of
operations.
In addition, other low cost carriers may enter other USAir markets. For
example, America West commenced service in April 1994 between Columbus, Ohio,
where it operates a hub, and Philadelphia, where USAir has a hub operation.
Other carriers, including some of the larger carriers, have also developed or
indicated their intent to develop similar low fare short-haul service, such as
United's low cost, low fare operation in the western United States. Delta has
procured concessions from its pilot union that would enable Delta to start a
low cost, short-haul service to compete with airlines such as Southwest. Delta
is presently the second largest airline on the East Coast of the United
States. It is possible that this service might be introduced in markets that
USAir serves, which may result in greater competition and lower fares in those
markets. USAir has stated that it will be competitive on routes that are
important to USAir and has underscored the necessity of cutting costs to
remain competitive with insurgents on these routes.
47
<PAGE>
INDUSTRY RESTRUCTURING AND COST-CUTTING
Major carriers that compete with USAir have implemented, or are in the
process of implementing, measures to reduce their operating costs. For
example, United has substantially reduced its personnel costs as part of a
recapitalization transaction completed in July 1994. United initiated its low
cost, low fare operation in the western U.S. in October 1994. Delta reached
agreement with certain of its employees regarding concessions. Delta has also
recently turned over several of its former routes to Delta Connection code-
share carriers that have lower cost structures. American announced a
restructuring of its non-union workforce and is still seeking substantial
concessions and productivity gains from its pilot group. TWA has negotiated
productivity improvements with its unionized employees and has recently
emerged from bankruptcy for the second time pursuant to a "pre-packaged"
reorganization plan approved by a bankruptcy court which reduces the carrier's
debt by approximately 30%. Continental has reduced capacity and returned non-
productive aircraft to lessors. In early 1995, Southwest announced that its
pilots had ratified a 10-year labor contract that provides for no wage
increases in the first five years, providing for grants of stock options to
the pilots instead. USAir expects that the implementation of this labor
contract will further enhance Southwest's low cost advantage over USAir and
other carriers. These actions by certain of USAir's competitors illustrate the
trend among the major U.S. airlines to restructure in order to reduce their
operating costs and enable them to compete in a low fare environment. See "--
Strategy" and "--Capacity and Route Rationalization" above for a discussion of
USAir's cost reduction initiatives.
There are recent examples of companies in the airline industry which have
obtained employee concessions in agreements that provided for the
recapitalization of the companies, including employee ownership stakes and
employee participation in corporate governance. Most recently, in July 1994,
UAL, consummated the recapitalization noted above which resulted in majority
ownership and board membership for certain employee groups in exchange for
concessions. In other cases, airlines have filed for bankruptcy protection
under Chapter 11 of the Bankruptcy Code, and some airlines have ceased
operation altogether when their operating costs remained excessive in relation
to their revenues, and their liquidity became insufficient to sustain their
operations.
In 1995, various carriers, including USAir, implemented cutbacks in service
in the eastern U.S. The "intra-east coast" area represents approximately 64%
of USAir's departures and approximately 44% of its ASMs. USAir has implemented
a plan to cut capacity throughout its system and to emphasize the strength of
its hubs in Pittsburgh, Charlotte, Philadelphia and Baltimore, as well as
other major east coast urban centers. See "--Strategy" and "--Capacity and
Route Rationalization" above. The major carriers decreased service in the East
by approximately 9.8% year-over-year. However, several smaller carriers
increased the number of departures in this region during the same time period
or have announced plans to introduce or increase service in this region. The
net result was a decrease in jet capacity in the intra-east coast region of
approximately 3.5% for the full year 1995 from 1994 levels.
The trend toward globalization of the airline industry has accelerated in
recent years as certain U.S. carriers, including USAir, have formed marketing
and strategic alliances with foreign carriers. Certain foreign carriers have
made substantial investments in U.S. carriers which have frequently been tied
to marketing alliances or, less frequently, reciprocal investments by the U.S.
carrier in its foreign partner. Foreign investment in U.S. air carriers is
restricted by statute and may be subject to review by the DOT and, on
antitrust grounds, by the DOJ.
In February 1995, several major U.S. carriers, including Delta, American,
Northwest, United and USAir, imposed limits on the base commissions they pay
travel agents for domestic air fares. Formerly, most major airlines paid a
fixed base commission of approximately 10% on the price of a ticket for the
distribution of all domestic tickets. The new cap limits base commission
payments to $50 for a round-trip domestic ticket with a base fare above $500
and $25 for a one-way domestic ticket with a base fare above $250. The new
limits on commissions are designed to reduce one of the airlines' largest
expenses. USAir has experienced cost savings through its implementation of a
limit on the commissions it pays travel agents for domestic air fares. As a
result of the new limits on commissions, some travel agents have filed
lawsuits against the airlines that imposed commission caps, including USAir,
claiming that the airlines violated antitrust laws. See "--Legal Proceedings."
48
<PAGE>
DEFERRAL OF DIVIDENDS BY USAIR GROUP
On September 29, 1994, USAir Group announced that it was deferring the
quarterly dividend payment due September 30, 1994 on the 358,000 outstanding
shares of its Series A Preferred Stock. The Series A Preferred Stock is owned
by affiliates of Berkshire. USAir Group has also deferred quarterly dividend
payments on all of its other outstanding series of preferred stock, including
the Series F Preferred Stock and the Series T Preferred Stock which is owned by
BA, as well as on the publicly held Series B Preferred Stock. On March 13,
1995, Berkshire announced that it had recorded a pre-tax charge of $268.5
million to recognize a decline in the value of its investment in the Series A
Preferred Stock that had an original cost of $358 million. On May 22, 1995, BA
announced that it had made a $200 million provision against its $400 million
investment in preferred stock of USAir Group. USAir Group has not paid a
dividend on its Common Stock, since the second quarter of 1990. As of June 28,
1996, the board of directors of USAir Group had not authorized the resumption
of any dividends on USAir Group's preferred stock or Common Stock and there can
be no assurance when or if such dividend payments will resume.
Under the terms of the Series A Preferred Stock, Berkshire has the right to
elect two additional directors to the board of directors of USAir Group after a
scheduled dividend payment has not been paid for thirty days. Berkshire has
informed USAir Group that it does not intend to exercise this right at this
time. Berkshire's Chairman Warren E. Buffett and Vice Chairman Charles T.
Munger served as directors on USAir Group's and USAir's boards of directors
from January 27, 1993 until November 28, 1995. They did not stand for re-
election as directors in November 1995. Under the terms of the Series B
Preferred Stock, the holders of that security have the right to elect two
additional directors to the board of directors of USAir Group if six quarterly
dividends are not paid. That right became effective on February 15, 1996. In
May 1996, Berkshire offered to sell the Series A Preferred Stock to USAir
Group. Berkshire has advised that if USAir Group does not buy back the shares
from Berkshire, Berkshire may sell the Series A Preferred Stock to third
parties but Berkshire has stated it will not knowingly sell the shares to any
person who would own 3% or more of a voting stake in USAir Group as a result of
the purchase. As of March 31, 1996, USAir believes that USAir Group was legally
prohibited from paying dividends on or redeeming its capital stock in
accordance with Section 170 of the Delaware General Corporation Law. A
requisite percentage of Series B Preferred Stockholders informed USAir Group
that they would be pursuing the right to elect two additional directors to the
Company's board of directors and they have provided the name of one such
nominee to USAir Group. If Berkshire were also to exercise its right to elect
two directors, BA would have the right to designate an additional nominee for
election as director to the board of directors of USAir Group pursuant to the
Investment Agreement.
LIKELIHOOD OF NO FUTURE INVESTMENTS BY BRITISH AIRWAYS
As described in greater detail in "--British Airways Investment Agreement"
below, on January 21, 1993, USAir Group and BA entered into the Investment
Agreement. BA invested approximately $400 million in certain preferred stock of
USAir Group in accordance with the Investment Agreement. The deadline for BA's
election to purchase a certain series of preferred stock of USAir Group and
therefore, to elect to make any further investment in USAir Group pursuant to
the Investment Agreement, was January 21, 1996 (except that, if the DOT shall
approve all of the transactions contemplated by the Investment Agreement on or
before January 21, 1998, BA may make additional investments in USAir Group
under certain circumstances). BA declined to make any further investment on or
before the January 21, 1996 deadline. BA stated publicly that it was precluded
from making additional investments under existing DOT policy and that it did
not expect DOT approval to be forthcoming. Pursuant to the Investment
Agreement, BA has the right to maintain its proportionate ownership of USAir
Group's securities under certain circumstances by purchasing additional shares
of certain series. British Airways has advised USAir Group that it would not
exercise the right (triggered by the issuances of USAir Group Common Stock
pursuant to certain USAir Group benefit plans during the nine months ended
March 31, 1996) to buy additional shares of Series T Convertible Exchangeable
Senior Preferred Stock. See "--Provisions Regarding Additional BA Investments;
BA Announcement Regarding No Additional Investment in USAir Group".
49
<PAGE>
EMPLOYEES
At December 31, 1995, USAir employed approximately 39,900 full-time
equivalent employees. USAir employed approximately 4,900 pilots, 9,200
maintenance and related personnel, 10,000 station personnel, 3,900
reservations personnel, 7,700 flight attendants and 4,200 personnel in other
administrative and miscellaneous job categories. Approximately 26,100, or 65%,
of the employees of USAir are covered by collective bargaining agreements with
various labor unions, or will be covered by a collective bargaining agreement
for which initial negotiations are in progress.
After negotiating with the leaders of its labor groups since March 1994 in
an attempt to reduce its annual personnel costs by approximately $500 million,
USAir Group had reached an agreement in principle on March 29, 1995 with the
negotiating committee of the Airline Pilots Association ("ALPA"), which
represents USAir's pilots. During the second quarter of 1995, USAir Group
reached agreements in principle with the International Association of
Machinists and Aerospace Workers ("IAM"), the Association of Flight Attendants
("AFA") and the Transport Workers Union (the "TWU"). The agreements in
principle provided for wage and other concessions in exchange for equity
participation in USAir Group and representation on USAir Group's board of
directors for USAir's employees. The IAM represents USAir's mechanical and
related employees and USAir's fleet service employees. The AFA represents
USAir's flight attendants. The TWU represents USAir's flight crew training
instructors, flight simulator engineers and dispatch employees. The tentative
agreement with the TWU was with respect to only the flight crew training
instructors. Each of the tentative agreements was subject to many significant
conditions, including union ratification, negotiation and ratification of
acceptable agreements between USAir and its other labor groups, the
restructuring of holdings by other parties and approval of the boards of
directors of USAir Group and USAir and the stockholders of USAir Group. In
July 1995, the members of the AFA voted against ratification of their
agreement in principle. ALPA made significant additional demands which were
unacceptable and negotiations were thereafter terminated by USAir Group.
USAir continues to believe that its long-term future depends on reduced
costs of operation, including especially lower personnel costs. USAir remains
committed to obtaining labor cost reductions. Talks between USAir and the
IAM's advisory counsel continued during the first two quarters of 1996.
USAir's contract with ALPA became open for negotiations on April 30, 1996 and
collective bargaining talks have begun. USAir cannot predict the outcome of
these negotiations at this time or if USAir will be able to secure meaningful
wage and benefit concessions and productivity improvements from its unionized
employee groups.
HISTORICAL COST REDUCTION PROGRAMS
In 1994, USAir implemented measures announced in September 1993 to reduce
projected operating costs. These measures included a workforce reduction of
approximately 2,500 full time positions. However, USAir's ability to implement
additional workforce reductions is currently limited by its existing labor
contracts. Due to the inclusion of "no furlough" provisions in its current
labor agreements with ALPA and the AFA, USAir may not furlough employees
covered by those agreements for specified periods of time.
In 1992 and 1993, USAir reached agreement on new contracts with ALPA with
respect to USAir's pilot employees, the IAM with respect to USAir's mechanics
and related employees, the AFA with respect to its flight attendant employees,
and the TWU with respect to 170 flight dispatch employees and approximately 60
USAir flight simulator engineers. Each contract (except the contract covering
the flight dispatch employees) provided for wage reductions and suspension of
longevity/step increases for a twelve-month period beginning shortly after the
effective date of the contract. The wages of each such group of employees
reverted to pre-reduction levels at the expiration of the relevant twelve-
month period and were subsequently increased in accordance with the
50
<PAGE>
relevant contract. Pursuant to their contracts, the pilots, the IAM-
represented employees, the flight attendants and the flight simulator
engineers also agreed to participate in contributory managed care medical and
dental programs. The flight dispatch employees also participated in wage
reductions, suspensions of longevity/step increases and contributory managed
care medical and dental programs because of their non-contract status when
those measures were implemented for non-contract employees, as described in
the following paragraph.
None of the above groups of employees, other than a small group of flight
simulator engineers, is currently scheduled to receive further wage increases
under the terms of its contract. However, members of all such groups,
including the mechanics and related employees and the flight dispatch
employees, are entitled to wage increases based on longevity. Each contract
provides for productivity improvements. The defined benefit pension plans for
the flight dispatch employees and the flight simulator engineers have been
frozen.
In accordance with its previously announced policy, when ALPA agreed to the
cost reduction program described above, USAir implemented wage reductions and
suspension of longevity/step increases on its non-contract employees for the
twelve-month period commencing in June 1992. Earlier in 1992, USAir had
implemented the contributory managed care medical and dental programs for non-
contract employees. Prior to January 1, 1992, USAir exclusively paid
contributions to the basic defined benefit pension plan for its non-contract
employees. USAir froze this pension plan at the end of 1991, which resulted in
a one-time book gain of approximately $107 million for 1991. USAir implemented
a defined contribution pension plan for these employees on January 1, 1993,
which is composed of three components: contributions by USAir based on age and
a percentage of salary, a partial match by USAir of employee contributions to
a savings plan and a profit sharing plan.
Taken together, the above measures provided for temporary wage reductions
and suspension of longevity/step increases in wages that USAir estimates saved
approximately $120 million during the period June 1992 through March 1994.
These concessions provided for productivity improvements which saved USAir
approximately $55 million during the same period. All employees affected by
these changes also agreed to participate in contributory managed care medical
and dental programs which result in savings for USAir. In exchange for the
concessions agreed upon by its unionized employees, USAir included "no
furlough" provisions in each of the new labor agreements with ALPA, the IAM
and the AFA, which prohibit (or prohibited) USAir from furloughing employees
hired on or before the effective date of the agreements through September 30,
1995 in the case of the agreement with the IAM for mechanics and related
employees, through December 31, 1996 in the case of the agreement with the
AFA, and through June 30, 1997 in the case of the agreement with ALPA.
USAir recorded a non-recurring charge of approximately $36.8 million in the
fourth quarter of 1993 based on a projection of the repayment of the amount of
the temporary wage and salary reductions discussed above in the event that the
employees who sustained the pay cuts leave the employ of USAir. USAir has
adjusted and will adjust this accounting charge in subsequent periods to
reflect the change in the present value of the liability and changes in
actuarial assumptions including, among other things, actual experience with
the rate of attrition for these employees and whether such employees have
received payments under the profit sharing program discussed in the next
paragraph.
In exchange for the temporary wage and salary reductions and other
concessions during a twelve month period in 1992 and 1993 described above,
including the freeze of the defined benefit plan for non-contract employees,
affected employees participate in a profit sharing program and have been
granted options to purchase USAir Group Common Stock. The profit sharing
program is designed to recompense those employees whose pay has been reduced
in an amount equal to (i) two times salary foregone plus; (ii) one times
salary foregone (subject to a minimum of $1,000) for the freeze of the pension
plans described above. Estimated savings of approximately $23 million
attributable to the suspension of longevity/step increases will not be subject
to repayment through the profit sharing program. Until the maximum payout has
been made, annual pre-tax profits, as defined in the program, of USAir Group
would be distributed to participating employees as follows:
51
<PAGE>
25% of the first $100 million in pre-tax profits;
35% of the next $100 million in pre-tax profits; and
40% of the pre-tax profits exceeding $200 million.
Calculation of profits under the profit sharing plan excludes charges for
postretirement benefit expenses other than for pensions (approximately $78.6
million for 1995) and certain unusual items. This program will be in effect
until USAir employees are recompensed for two times salary foregone or three
times for employees who also had pension benefits foregone. The plan is
independent of the profit sharing plan which is an element of the new defined
contribution pension plan for non-contract employees discussed above. Based on
USAir Group's 1995 results and the provisions of the profit sharing plan,
USAir recognized charges of approximately $49.7 million under this plan in
1995. Since certain amounts were expensed in prior years, even though 1995 was
USAir's first profitable year since the inception of the plan, the cash payout
for 1995 was approximately $73.7 million and was made to employees covered by
the provisions of this plan in the first quarter of 1996.
Under the stock option program, employees whose pay was reduced received
options to purchase 50 shares of USAir Group Common Stock at $15 per share for
each $1,000 of salary reduction. The options became exercisable following the
twelve-month period of the salary reduction program for each group of
employees. Generally, participating employees have five years from the grant
date to exercise such options. As of December 31, 1995, USAir Group had
granted options to purchase approximately five million shares of Common Stock
to USAir employees under the program.
ALPA CONTRACT: EFFECTS OF A CHANGE OF CONTROL OF USAIR GROUP OR USAIR
USAir's current labor contract with ALPA provides that in the event of a
"change of control" of USAir Group or USAir, ALPA will have the right to
extend the duration of the contract for one, two or three years at its option
beyond the amendable date of the agreement with across-the-board wage
increases of 4.5% on April 30, 1996 and on each anniversary thereof for the
following three years. A "change of control" is defined as a single
transaction or multi-step related transactions through which (i) securities
which constitute and/or are then currently exchangeable into, exercisable for
or convertible into 50% or more of the outstanding Common Stock (and Common
Stock then currently issuable upon the exchange, exercise or conversion of
securities) and/or (ii) 50% or more of the value of the assets of USAir Group
or USAir, are acquired or held by a single purchaser or a group of purchasers
acting in concert.
UNIONIZING EFFORTS
During 1994, certain unions engaged in efforts to unionize USAir's fleet
service employees. The RLA governs, and the NMB has jurisdiction over,
campaigns to unionize workers. After the IAM won a runoff election, on July
22, 1994 the NMB certified the IAM to represent the fleet service class or
craft. Under the RLA, which governs labor relations in the airline industry,
USAir is obligated to negotiate a collective bargaining agreement with the IAM
governing the terms and conditions of employment for the fleet service
employees. This obligation does not require USAir to agree to any particular
term or condition sought by the IAM.
On June 3, 1994, after determining that the United Steel Workers of America
("USWA") had submitted a sufficient number of authorization cards, the NMB
ordered an election among USAir's passenger service employees, a class or
craft of approximately 10,000 workers consisting primarily of USAir's ticket
counter/gate agents and reservations agents, to determine whether the USWA or
other union would represent these employees. The NMB mailed ballots to
eligible passenger service employees on July 19, 1994 and tabulated the
ballots on August 18, 1994. Less than a majority of the eligible passenger
service employees voted in favor of representation and, as a result, no union
represents the passenger service employees at this time.
Certain unions are again engaged in efforts to unionize USAir's passenger
service employees. Under the RLA, the NMB could order an election among a
class or craft of eligible employees if a union submitted an
52
<PAGE>
application to the NMB supported by the authorization cards from at least 35%
of the applicable class or craft of employees. If the NMB ordered an election
and a majority of the eligible employees voted for representation, USAir would
be required to negotiate a collective bargaining agreement with the union that
wins the election. On April 24 and 25, 1996, respectively, the IAM and the
Communications Workers of America filed applications with the NMB requesting
that an election be held among USAir's passenger service workers. The NMB is
in the process of determining whether these applications are supported by
sufficient authorization cards to warrant an election. USAir cannot predict
whether an election will be held among the passenger service class or craft,
or the outcome of the election, if held.
STATUS OF USAIR'S LABOR AGREEMENTS
The following table presents the status of USAir's labor agreements as of
December 31, 1995:
<TABLE>
<CAPTION>
EXPIRATION
APPROXIMATE DATE DATE OF
NUMBER OF CONTRACT "NO-FURLOUGH"
UNION CLASS OR CRAFT EMPLOYEES AMENDABLE CLAUSE
- ----- -------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
AFA... flight attendants 7,700 1/97 12/31/96
ALPA.. pilots 4,900 5/96(2) 6/30/97
IAM... mechanics and related employees 7,800 10/95(2) 9/30/95
IAM... fleet service employees 5,400(1) (3) --
TWU... flight crew training instructors,
flight simulator engineers and
dispatch employees 270 8/96-8/97(4) --
</TABLE>
- --------
(1) Estimated number of employees who will be covered under this new contract.
(2) Currently in negotiations.
(3) Initial contract in negotiation.
(4) Separate contracts cover the flight crew training instructors, the flight
simulator engineers and the dispatch employees.
COMPUTERIZED RESERVATION SYSTEMS
At December 31, 1992, USAM Corp. ("USAM"), a subsidiary of USAir, owned 11%
of the Covia Partnership ("Covia") which owned and operated a computerized
reservation system ("CRS"). In September 1993, Covia purchased the assets of
the corporation that owned and operated the Galileo CRS which provided CRS
services to travel agent subscribers in Europe. Covia was then separated into
three entities. As a result, at December 31, 1995, USAM owned 11% of the
Galileo International Partnership, approximately 11% of the Galileo Japan
Partnership and approximately 21% of the Apollo Travel Services Partnership.
USAir's equity in the earnings of such partnerships for the first quarter of
1996 and for the years 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1ST QTR 1996 1995 1994
------------ ------- -------
($ THOUSANDS)
<S> <C> <C> <C>
Apollo Travel Services (ATS)...................... $6,338 $20,708 $20,089
Galileo International Partnership (GIP)........... 4,783 13,320 6,081
Galileo Japan Partnership (GJP)................... 141 518 365
</TABLE>
The Galileo International Partnership owns and operates the Galileo CRS.
Galileo Japan Partnership markets CRS services in Japan. Apollo Travel
Services markets CRS services in the U.S. and Mexico. Galileo CRS is the
second largest of the four CRS systems in the U.S. based on revenues generated
by travel agency subscribers. A subsidiary of United controls 38% of the
partnership, and the other partners exclusive of USAir's interest are
subsidiaries of BA, Swissair, KLM Royal Dutch Airlines, Alitalia, Air Canada,
Olympic Airways, Austrian Airlines, Aer Lingus and TAP Air Portugal.
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<PAGE>
USAM accounts for these investments using the equity method. Summarized
financial information for ATS and GIP (combined, in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1995 1994
--------- ---------
<S> <C> <C>
Current assets......................................... $ 397 $ 293
Noncurrent assets...................................... 508 541
--------- ---------
Total assets......................................... 905 834
Current liabilities................................... 292 246
Long-Term liabilities................................. 227 337
--------- ---------
Total liabilities.................................... 519 583
--------- ---------
Net assets......................................... $ 386 $ 251
========= =========
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1994
--------- ---------
<S> <C> <C>
Service revenues....................................... $ 1,307 $ 1,178
Cost and expenses...................................... 1,088 1,034
--------- ---------
Net earnings....................................... $ 219 $ 144
========= =========
</TABLE>
53--1
<PAGE>
CRSs play a significant role in the marketing and distribution of airline
tickets. Travel agents issue tickets which generate the majority of USAir's
passenger revenues. Most travel agencies use one or more CRSs to obtain
information about airline schedules and fares and to book their clients'
travel.
FREQUENT TRAVELER PROGRAM
Under USAir's FTP, participants generally receive mileage credits equal to
the greater of actual miles flown or 500 miles, effective May 1, 1995 (750
miles before May 1, 1995), for each paid flight segment on USAir or USAir
Express, or actual miles flown on one of USAir's FTP airline partners.
Participants generally receive a minimum of 500 mileage credits, effective May
1, 1995, for each paid flight on USAir Shuttle (1,000 miles prior to May 1,
1995). Participants flying on first or business class tickets generally
receive additional credits. Participants may also earn mileage credits by
utilizing certain credit cards, staying at participating hotels or by renting
cars from participating car rental companies. Mileage credits earned by FTP
participants, which do not expire under current program guidelines, can be
redeemed for various travel awards, including fare discounts, first class
upgrades and tickets on USAir or other airlines participating in USAir's FTP.
Certain awards also include hotel and car rental awards. Awards may not be
brokered, bartered or sold, and have no cash value.
USAir and its airline partners limit the number of seats allocated per
flight for award recipients through inventory management techniques. The
number of seats available for frequent travelers varies depending upon flight,
day, season and destination. Award travel for all but USAir's most frequent
travelers generally is not permitted on blackout dates, which correspond to
certain holiday periods in the United States or peak travel dates to foreign
destinations. USAir reserves the right to terminate the FTP or portions of the
program at any time, and the FTP's rules, partners, special offers, blackout
dates, awards and mileage levels are subject to change without prior notice.
USAir accounts for its FTP under the incremental cost method, whereby
estimated future travel awards are valued at the estimated average incremental
cost of carrying one additional passenger. Incremental costs include unit
costs for passenger food, beverages and supplies, fuel, reservations,
communications, liability insurance and denied boarding compensation expenses.
No profit or overhead margin is included in the accrual for incremental costs.
The Company periodically reviews the assumptions made to calculate its FTP
liability for reasonableness and makes adjustments to these assumptions as
necessary. No liability is recorded for airline, hotel or car rental award
certificates that are to be honored by other parties because there is no cost
to USAir for such awards.
Effective January 1, 1995, USAir increased the minimum mileage level
required for a free domestic flight from 20,000 to 25,000. FTP participants
had accumulated mileage credits for approximately 3,350,000 awards and
3,697,000 awards at December 31, 1995 and 1994, respectively, at the 25,000
mile level required to earn an award. Because USAir expects that some
potential awards will never be redeemed, the calculations of the accrued
liability for incremental costs at December 31, 1995 and 1994 were based on
approximately 87% and 86%, respectively, of the accumulated credits. Mileage
for FTP participants who have accumulated less than the minimum number of
mileage credits necessary to claim an award is excluded from the calculation
of the accrual. Incremental changes in FTP liability resulting from redeemed
or additional mileage credits are recorded as part of the regular review
process.
USAir's customers redeemed approximately 1,160,000, 927,000 and 841,000
awards for free travel on USAir in 1995, 1994 and 1993, respectively,
representing approximately 9.0%, 7.0% and 8.0% of USAir's RPMs in those years,
respectively. USAir does not believe that usage of FTP awards results in any
significant displacement of revenue passengers. USAir's exposure to the
displacement of revenue passengers is not significant, as the number of USAir
flights that depart 100% full is minimal. In the second quarter of 1995, the
quarter when the highest number of free frequent traveler trips were flown for
the year, for example, fewer than 6.5% of USAir's flights departed 100% full.
During this same quarterly period, approximately 5.2% of USAir's flights
departed 100% full and also had one or more passengers on board who were
traveling on FTP award tickets.
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During 1995, four members of USAir's FTP filed class action lawsuits against
USAir in Illinois, Pennsylvania, California and New Jersey state courts,
alleging breach of contract relating to changes made to USAir's FTP effective
December 31, 1989 and/or January 1, 1995. A similar lawsuit has been pending in
California state court since 1989. The lawsuits seek unspecified damages and an
injunction against allegedly objectionable changes to USAir's FTP and any
subsequent retroactive changes to the FTP. See "--Legal Proceedings." USAir
denies the allegations made in the lawsuits and intends to vigorously defend
itself. In addition, the DOT has expressed concern about potential consumer
fraud relating to frequent traveler programs and their restrictions on the use
of awards. It is uncertain whether USAir will be named party in any further
litigation or if the DOT will take any action with respect to frequent traveler
programs. The ultimate resolution of these lawsuits or potential lawsuits or
possible DOT actions and the potential impact on the Company's results of
operations and financial condition cannot be predicted at this time.
MAINTENANCE MARKETING JOINT VENTURE WITH BA
USAir and an affiliate of BA jointly organized Airline Technical Services
L.L.C., a Delaware limited liability company, on October 12, 1995. The goal of
this venture is the joint marketing in North America, Central America and South
America of contract maintenance, engineering and technical services for USAir
and BA. USAir hopes to enhance the utilization of maintenance personnel by
taking on outside maintenance work, generating revenues associated with its
excess maintenance capacity and BA's experience with contract maintenance.
USAir also hopes that exposure to the competitive marketplace will lead to
productivity improvements by its own maintenance personnel.
JET FUEL
All petroleum product prices continue to be subject to unpredictable
economic, political and market factors. Also, the balance among supply, demand
and price has become more reactive to world market conditions. Accordingly, the
price and availability of jet fuel, as well as other petroleum products,
continues to be unpredictable. Because fuel costs constitute a major
expenditure for USAir (approximately 9% of its operating costs for fiscal year
1995), significant increases in fuel costs could materially and adversely
affect USAir's results of operations.
USAir continues to adjust its jet fuel purchasing strategy to take advantage
of the best available prices while attempting to ensure that supplies are
secure. In addition, USAir has entered into agreements to hedge the price of a
portion of its jet fuel needs, which may have the net effect of increasing or
decreasing USAir's fuel expense.
In August 1993, the United States increased taxes on domestic fuel, including
aircraft fuel used on domestic routes, by 4.3 cents per gallon. Airlines were
exempt from the tax increase until October 1, 1995, and pending legislation in
Congress would reinstate the exemption through September 30, 1997, subject to
termination of the exemption on September 30, 1996 if certain aviation trust
funds are not extended. These aviation trust funds expired on December 31, 1995
and have not, as of July 10, 1996, been extended. There can be no assurance
that the fuel tax exemption will be reinstated, or if reinstated, the terms on
which and the period for which the exemption will be effective. The additional
fuel tax is currently being paid. Non-reinstatement of the fuel tax exemption
would increase the annual operating expenses of USAir by approximately $47
million based on projected domestic fuel consumption for 1996.
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<PAGE>
The following table sets forth statistics about USAir's jet fuel consumption
and cost for each of the last four fiscal years:
<TABLE>
<CAPTION>
GALLONS PERCENTAGE OF
FISCAL CONSUMED TOTAL COST AVERAGE COST OPERATING
YEAR (MILLIONS) (MILLIONS)(1) PER GALLON(1) EXPENSES(2)
- ------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1995....................... 1,137 $605.0 $0.53 9.0%
1994....................... 1,205 $642.3 $0.53 9.4%
1993....................... 1,161 $677.9 $0.58 10.2%
1992....................... 1,183 $720.6 $0.61 11.1%
</TABLE>
- --------
(1) Cost includes the base cost of fuel and transportation charges.
(2) Operating expenses have been adjusted to exclude non-recurring and unusual
items and expenses generated under the BA wet lease arrangements.
The cost of jet fuel per gallon for the first quarter of 1996 (58.61c)
increased by 12.6% from first quarter of 1995 levels (52.06c).
INSURANCE
USAir maintains insurance of the types and in amounts deemed adequate to
protect itself and its property. Principal coverage includes liability for
bodily injury to or death of members of the public, including passengers;
damage to property of USAir and others; loss of or damage to flight equipment,
whether on the ground or in flight; fire and extended coverage; and workers'
compensation and employer's liability. Coverage for environmental liabilities
is expressly excluded from USAir's insurance policies. In the third quarter of
1995, USAir's liability insurance was renewed. Rates increased due to a number
of factors, including the two aircraft accidents in 1994.
INDUSTRY REGULATION AND AIRPORT ACCESS
USAir operates under a certificate of public convenience and necessity issued
by the DOT. Such certificate may be altered, amended, modified or suspended by
the DOT if the public convenience and necessity so require, or may be revoked
for intentional failure to comply with the terms and conditions of a
certificate. The airline is also regulated by the FAA, a division of the DOT,
under Subtitle VII of 49 U.S.C. 40101 et seq. (the "Act"), primarily in the
areas of flight operations, maintenance, ground facilities and other technical
matters. Pursuant to these regulations, USAir has established, and the FAA has
approved, a maintenance program for each type of aircraft operated by USAir
that provides for the ongoing maintenance of such aircraft, ranging from
frequent routine inspections to major overhauls.
Recently adopted regulations require phase-out of certain aircraft and ageing
aircraft modifications. Such types of regulations can significantly increase
costs and affect an airline's ability to compete.
The DOT allows local airport authorities to implement procedures designed to
abate special noise problems, provided such procedures do not unreasonably
interfere with interstate or foreign commerce or the national transportation
system. Certain airports, including the major airports at Boston, Washington,
D.C., Chicago, Los Angeles, San Diego and San Francisco, have established
airport restrictions to limit noise, including restrictions on aircraft types
to be used and limits on the number of hourly or daily operations or the time
of such operations. In some instances these restrictions have caused
curtailments in services or increases in operating costs and such restrictions
could limit the ability of USAir to expand its operations at the affected
airports. Local authorities at other airports are considering adopting similar
noise regulations.
In the last several years, the FAA has issued a number of maintenance
directives and other regulations relating to, among other things, retirement of
older aircraft, collision avoidance systems, airborne windshear avoidance
systems, noise abatement and increased inspections and maintenance procedures
to be conducted on older aircraft.
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<PAGE>
Several airports have recently sought to increase substantially the rates
charged to airlines, and the ability of airlines to contest such increases has
been restricted by federal legislation, DOT regulations and judicial
decisions. In addition, legislation which became effective June 1, 1992 allows
public airports to impose passenger facility charges of up to $3 per departing
or connecting passenger at such airports. With certain exceptions, these
charges are passed on to the airlines' passengers.
The FAA has designated John F. Kennedy, LaGuardia, O'Hare and Washington
National airports as "high density traffic airports" and has limited the
number of departure and arrival slots at those airports. Currently, slots at
the high density traffic airports may be voluntarily sold or transferred
between carriers. The DOT has in the past reallocated slots to other carriers
and reserves the right to withdraw slots. Various amendments to the slot
system, proposed from time to time by the FAA, members of Congress and others,
could, if adopted, significantly affect operations at the high density traffic
airports or expand slot controls to other airports. Certain of such proposals
could restrict the number of flights, limit the ownership transferability of
slots, increase the risk of slot withdrawal, or otherwise decrease the value
of USAir slots. USAir holds a substantial number of slots at LaGuardia and
Washington National. These slots are valuable assets and important in USAir's
overall business strategy. USAir cannot predict whether any of these proposals
will be adopted.
The availability of international routes to United States carriers is
regulated by agreements between the United States and foreign governments. The
United States has in the past generally followed the practice of encouraging
foreign governments to accept multiple carrier designation on foreign routes,
although certain countries have sought to limit the number of carriers.
Foreign route authorities may become less valuable to the extent that the
United States and other countries adopt "open skies" policies liberalizing
entry on international routes. In February 1995, the United States and Canada
reached a formal agreement which deregulates airline services between Canada
and the United States and provides that Canadian airlines have immediate "open
skies" access to the United States and that U.S. airlines will have limited
new route rights to Vancouver and Montreal for two years and to Toronto for
three years and open skies thereafter. This agreement is expected to result in
significant increased traffic between the United States and Canada. The
agreement provides for two new Toronto designations in the first year. In
October 1995, the DOT granted to USAir route authority for non-stop service
between Pittsburgh and Toronto. On May 1, 1995, the DOT granted to USAir the
temporary exemption authority to begin twice-daily roundtrip nonstop service
between Washington National and Toronto once a Canadian carrier entered that
market. Air Canada initiated service on that route beginning in June 1995. In
February 1996, the DOT issued a show cause order awarding USAir final
certification to serve the Washington National to Toronto route. USAir's
authority will be effective pending the DOT's determination as to which U.S.
carrier will receive the final certification to operate the route. The route
will be open to all carriers in 1997. In addition, in October 1995, the DOT
granted USAir a two-year exemption route authority to operate between Madrid,
Spain and both Philadelphia and Boston. USAir commenced service from
Philadelphia to Madrid on June 15, 1996. In April 1996, the DOT awarded USAir
authority to institute service to Rome, Italy from Philadelphia with through
service from Los Angeles. USAir inaugurated its service to Rome on June 1,
1996. In February 1996, USAir received final approval from the DOT to
institute service to Munich, Germany from Philadelphia. USAir began its Munich
service on May 23, 1996. In July 1996, the DOT approved a code-sharing
arrangement between USAir and German airline Deutsche BA for connecting
service from Munich to Berlin and Dusseldorf.
Many aspects of USAir's operations are subject to increasingly stringent
federal, state and local laws protecting the environment. Future regulatory
developments could affect operations and increase operating costs in the
airline industry, including for USAir.
Additional laws and regulations have been proposed or are contemplated that
could significantly affect the cost of airline operations by, for example,
raising fuel taxes, imposing additional requirements or restrictions on
operations or impairing access to capital markets. For example, proposals are
being considered that would provide that a portion of the appropriations for
the FAA and other aviation governmental functions be funded pursuant to
additional taxes on ticket and cargo revenue or fees for use of the air
traffic control system. USAir cannot predict what laws and regulations may be
adopted or their impact, but the impact could be significant. Certain
regulatory changes, if proposed and adopted, could materially adversely affect
USAir and could require charges to USAir's financial statements.
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<PAGE>
BRITISH AIRWAYS INVESTMENT AGREEMENT
The following summary of certain terms of the Investment Agreement is
subject to the specific terms of the Investment Agreement and the exhibits
thereto, which have previously been filed with the Commission. BA has invested
approximately $400 million in USAir Group preferred stock in accordance with
the Investment Agreement. On March 7, 1994, BA announced it would make no
additional investments in USAir Group until the outcome of measures by USAir
Group to reduce costs and improve its financial results was known. On January
19, 1996, BA announced that it would not exercise its option to make any
further investment in USAir prior to the January 21, 1996 deadline provided in
the Investment Agreement. See "--Provisions Regarding Additional BA
Investments; BA Announcement Regarding No Additional Investment in USAir
Group." As of December 31, 1995, BA owned preferred stock in USAir Group
constituting approximately 21.0% of the total voting interest in USAir Group.
TERMS OF THE SERIES F PREFERRED STOCK
On January 21, 1993, USAir Group sold, pursuant to the Investment Agreement,
30,000 shares of USAir Group's Series F Preferred Stock to BA for an aggregate
purchase price of $300 million. The Series F Preferred Stock is convertible
into shares of Common Stock at a conversion price of $19.41 and has a
liquidation preference of $10,000 per share plus an amount equal to accrued
dividends. See "--Miscellaneous" for a discussion of an antidilution
adjustment to the conversion price of the Series F Preferred Stock. The Series
F Preferred Stock may be converted at the option of USAir Group at any time
after January 21, 1998 if the average composite closing market price of Common
Stock during any 30-day calendar period is at least 133% of the conversion
price. The Series F Preferred Stock is entitled to cumulative quarterly
dividends of 7% per annum when and if declared and to share in certain other
distributions.
USAir Group has deferred quarterly dividend payments on all its preferred
stock beginning with payments due September 30, 1994. See "--Deferral of
Dividends by USAir Group." The Series F Preferred Stock must be redeemed by
USAir Group on January 15, 2008. Each share of the Series F Preferred Stock is
entitled to a number of votes equal to the number of shares of Common Stock
into which it is convertible and votes with the Common Stock and USAir Group's
Series A Preferred Stock and any other capital stock with general voting
rights for the election of directors, as a single class. Subject to
adjustment, 515.2950 shares of Common Stock are issuable on conversion per
share of Series F Preferred Stock (determined by dividing the $10,000
liquidation preference per share of Series F Preferred Stock by the $19.41
conversion price), and 15,458,851 shares of Common Stock would be issuable on
conversion of all Series F Preferred Stock. However, under the terms of any
USAir Group preferred stock that is or will be held by BA ("BA Preferred
Stock"), conversion rights (and as a result voting rights) may not be
exercised to the extent that doing so would result in a loss of USAir Group's
or any of its subsidiaries' operating certificates and authorities under
Foreign Ownership Restrictions, as defined under "--Board Representation"
below, and it is assumed for this purpose that Series F Preferred Stock will
be fully converted before any other BA Preferred Stock. Under Foreign
Ownership Restrictions, no more than 25% of USAir Group's voting interest may
be held by persons other than U.S. citizens, including BA. With respect to
dividend rights and rights on liquidation, dissolution and winding up, the
Series F Preferred Stock ranks senior to USAir Group's Series B Preferred
Stock, Junior Participating Preferred Stock, Series D, no par value, and
Common Stock, and pari passu with BA Preferred Stock and Series A Preferred
Stock. See "--Miscellaneous" for information regarding BA's purchase of two
additional series of preferred stock from USAir Group pursuant to its exercise
of optional and preemptive purchase rights under the Investment Agreement.
DOT ORDER REGARDING BA'S INVESTMENT IN USAIR GROUP
On March 15, 1993, the DOT issued an order (the "DOT Order") finding, among
other things, that "BA's initial investment of $300 million does not impair
USAir's citizenship" under Foreign Ownership Restrictions as defined under "--
Board Representation" below. However, the DOT instituted a proceeding to
consider whether USAir will remain a U.S. citizen if the transactions and acts
contemplated by the Investment Agreement, including the transactions discussed
under "--Provisions Regarding Additional BA Investments; BA
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<PAGE>
Announcement Regarding No Additional Investment in USAir Group" and "--Certain
Governance Matters" below, are consummated. The DOT has suspended indefinitely
the period for comments from interested parties to the proceeding pending its
resolution of requests by other airlines for production of additional documents
from USAir. The DOT Order states that the DOT expects and advises USAir Group
and BA not to proceed with the Second Purchase and Final Purchase, as such
terms are defined under "--Provisions Regarding Additional BA Investments; BA
Announcement Regarding No Additional Investment in USAir Group," until the DOT
has completed its review of USAir's citizenship. In any event, on March 7,
1994, BA announced that it would make no additional investments in USAir Group
until the outcome of measures by USAir Group to reduce its costs and improve
its financial results was known and on January 19, 1996, BA announced that it
would not proceed with the Second Purchase.
BOARD REPRESENTATION
USAir Group increased the size of its board of directors by three on January
21, 1993 and the board filled the newly created directorships with designees of
BA (the size of the board of directors was subsequently decreased to 15 in
1995). Under the terms of the Investment Agreement, USAir Group must use its
best efforts to cause BA to be proportionally represented on the board of
directors (on the basis of its voting interest), up to a maximum representation
of 25% of the total number of authorized directors ("Entire Board"), assuming
that such proportional representation is permitted by then applicable U.S.
statutory and DOT regulatory or interpretative foreign ownership restrictions
("Foreign Ownership Restrictions"), until the later of the closing of the
Second Purchase, as defined under "--Provisions Regarding Additional BA
Investments; BA Announcement Regarding No Additional Investment in USAir Group"
below, and the date on which BA may exercise under Foreign Ownership
Restrictions the rights described under "--Certain Governance Matters" below.
U.S.--U.K. ROUTES
Under the Investment Agreement, USAir Group agreed that as promptly as
commercially practicable it would divest or, if divestiture were not possible,
relinquish, all licenses, certificates and authorities for each of its routes
between the U.S. and the U.K. (the "U.K. Routes") at such time as BA and USAir
implemented the code sharing arrangement contemplated by the Investment
Agreement discussed below. USAir Group and BA have agreed that they should
attempt to mitigate any negative impact on USAir employees or communities
served by the U.K. Routes and to share any losses suffered as a result of such
divestiture or relinquishment with due regard to their respective interests.
Accordingly, BA has been operating and marketing certain routes formerly
operated by USAir under a "wet lease." USAir has completed the wet lease
arrangements with BA. Under the wet lease arrangements, USAir had leased three
Boeing 767-200ER aircraft, along with cockpit and cabin crews, to BA in order
to serve three routes between the U.S. and London. USAir is utilizing the
previously wet leased aircraft as part of its 1996 expansion of international
service (See "--Capacity and Route Rationalization" above). In conjunction with
the termination of the wet lease arrangements and related to USAir's
relinquishment or divestiture of the U.K. Routes, BA has agreed to pay USAir a
total of $47 million in the form of periodic payments commencing with the
termination of the three wet leases and continuing annually for nine years. The
route authorities which USAir was required to sell or relinquish were the
Philadelphia-London and BWI-London route authorities purchased by USAir from
TWA in April 1992 for $50 million, and its route authority between Charlotte
and London. Assets related to the U.K. Routes were carried on USAir's books at
approximately $45 million at December 31, 1995.
CODE SHARING
BA and USAir Group entered into a code share agreement on January 21, 1993
(the "Code Share Agreement") pursuant to which certain USAir flights carry the
airline designator code of both BA and USAir. Code sharing is a common practice
in the airline industry whereby one carrier places its designator code and
sells tickets on the flights of another carrier (its code sharing partner).
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<PAGE>
The DOT initially granted approval of the code sharing agreement between
USAir and BA on March 17, 1993 for a period of one year. The authorizations to
USAir and BA were expanded by a supplemental DOT order on November 12, 1993 to
permit code sharing on flights serving an additional number of U.S. points
through additional U.S. gateways for BA's transatlantic flights. In June 1995,
the DOT renewed its approval of USAir's and BA's authority to operate code
share service on flights serving 66 U.S. cities and Mexico City. USAir has
ceased serving Mexico City. In addition, the DOT approved an expansion of the
USAir/BA code share authority to 65 new U.S. cities, Bermuda, Nassau and five
Canadian cities. The approval is valid for two years. As of December 31, 1995,
USAir and BA had implemented code sharing to 70 of the 138 airports authorized
by the DOT. BA has publicly stated that its relationship with USAir has
contributed over $150 million in annual additional revenues and cost savings.
USAir believes that the code share arrangements have also brought benefits to
USAir through domestic feed from international BA flights.
USAir believes that (i) the code share cities in the U.S. receive greater
access to international markets; (ii) it has greater access to international
traffic; and (iii) BA's and its customers benefit from better on-line
connections as well as coordinated check-in and baggage checking procedures.
USAir believes that the code sharing arrangements may continue to generate
increased revenues although USAir is unable to quantify the magnitude of any
such benefit or what the effect on USAir may be of the proposed alliance
between BA and American, if consummated. The DOT may continue to link further
renewals of the code share authorization to the U.K.'s liberalization of U.S.
air carrier access to the U.K.; however, the code sharing arrangements
contemplated by the Code Share Agreement are expressly permitted under the
bilateral air services agreement between the U.S. and U.K. Accordingly, USAir
expects that the existing code share authorization will continue to be
renewed; however, there can be no assurance that this will occur. USAir does
not believe that the DOT's failure to renew further the authorization would
result in a material adverse change in its financial condition.
PROVISIONS REGARDING ADDITIONAL BA INVESTMENTS; BA ANNOUNCEMENT
REGARDING NO ADDITIONAL INVESTMENT IN USAIR GROUP
On March 7, 1994, BA announced that it would not make any additional
investments in USAir Group until the outcome of measures by USAir Group to
reduce costs and improve its financial results was known. Under the terms of
the Investment Agreement, assuming the Series F Preferred Stock or any shares
issued upon conversion thereof were outstanding and BA had not sold any shares
of preferred stock issued to it by USAir Group or any Common Stock or other
securities received upon conversion or exchange of the preferred stock, BA had
been entitled at its option to elect to purchase from USAir Group, on or prior
to January 21, 1996, 50,000 shares of Series C Cumulative Convertible Senior
Preferred Stock, without par value ("Series C Preferred Stock"), at a purchase
price of $10,000 per share, to be paid by BA's surrender of the Series F
Preferred Stock and a payment of $200 million (the "Second Purchase"). BA did
not exercise that option.
The Investment Agreement provides that, on or prior to January 21, 1998,
assuming that BA had purchased (or was purchasing simultaneously in accordance
with the terms of the Investment Agreement) Series C Preferred Stock, BA would
have the option to purchase 25,000 (or more in certain circumstances) shares
of Series E Cumulative Convertible Exchangeable Senior Preferred Stock,
without par value ("Series E Preferred Stock"), at a purchase price of $10,000
per share (the "Final Purchase"). Series E Preferred Stock is exchangeable
under certain circumstances at the option of USAir Group into certain USAir
Group debt securities ("BA Notes"). Because BA did not elect prior to January
21, 1996, to make the Second Purchase, it cannot make the Final Purchase,
except that if the DOT approves all the transactions and acts contemplated by
the Investment Agreement on or prior to January 21, 1998, at the election of
either BA or USAir Group, BA's purchase of the Series C Preferred Stock and
the Series E Preferred Stock would be consummated under certain circumstances.
Because BA did not elect to purchase the Series C Preferred Stock by January
21, 1996, USAir Group may at its option redeem, in whole or in part, Series F
Preferred Stock and a like percentage of Series T Preferred Stock held by BA
at the higher of market value or the price of $10,000 per share, plus accrued
dividends. As of March 31, 1996, USAir believes that USAir Group was legally
prohibited from paying dividends on or redeeming its capital stock in
accordance with Section 170 of the Delaware General Corporation Law. USAir
cannot predict
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<PAGE>
whether or when the Second Purchase and Final Purchase will be consummated or
whether or when it will repurchase or redeem its shares of capital stock.
TERMS OF THE SERIES C PREFERRED STOCK AND SERIES E PREFERRED STOCK
The Series C Preferred Stock and Series E Preferred Stock are substantially
similar to Series F Preferred Stock, except as follows. Series C Preferred
Stock will be convertible into shares of Class B Common Stock or Non-Voting
Class C Stock (as such terms are defined under "Terms of BA Common Stock"
below) at an initial conversion price of approximately $19.79, subject to
Foreign Ownership Restrictions. Each share of Series C Preferred Stock will be
entitled to a number of votes equal to the number of shares of Class B Common
Stock into which it is convertible, subject to Foreign Ownership Restrictions.
If shares of Series C Preferred Stock are transferred to a third party, they
convert automatically at the seller's option into either shares of Common
Stock or a like number of shares of Series G Cumulative Convertible Senior
Preferred Stock. Series E Preferred Stock will be convertible into shares of
Common Stock or Non-Voting Class ET Stock (as defined under "Terms of BA
Common Stock" below) at an initial conversion price of approximately $21.74,
subject to increase if the Series E Preferred Stock is originally issued on or
after January 21, 1997, subject to Foreign Ownership Restrictions. Each share
of Series E Preferred Stock will be entitled to a number of votes equal to the
number of shares of Common Stock into which it is convertible, subject to
Foreign Ownership Restrictions.
TERMS OF BA COMMON STOCK
To the extent permitted by Foreign Ownership Restrictions, an amendment to
USAir Group's charter, which would be filed with the Delaware Secretary of
State immediately prior to the Second Purchase, which BA has announced it will
not complete, would create three new classes of common stock: Class B Common
Stock, par value $1.00 per share ("Class B Common Stock"), Non-Voting Class C
Common Stock, par value $1.00 per share ("Non-Voting Class C Stock"), and Non-
Voting Class ET Common Stock, par value $1.00 per share ("Non-Voting Class ET
Common Stock," collectively with Class B Common Stock and Non-Voting Class C
Common Stock, "BA Common Stock"), all of which may be held only by BA or one
of its wholly-owned subsidiaries. Except with respect to voting and conversion
rights, the BA Common Stock would be identical to the Common Stock. Shares of
BA Common Stock would convert automatically to shares of Common Stock upon
their transfer to a third party. Subject to Foreign Ownership Restrictions,
Class B Common Stock would be entitled to one vote per share. After the
effectiveness of the above charter amendment, to the extent permitted by
Foreign Ownership Restrictions, Class B Common Stock would vote as a single
class with Series C Preferred Stock on the election of one-fourth of the
directors and the approval of the holders of Class B Common Stock and Series C
Preferred Stock voting as a single class would be required for certain
matters.
CERTAIN GOVERNANCE MATTERS
Following the Second Purchase, which BA has announced it will not complete,
and assuming these changes are permitted under Foreign Ownership Restrictions,
the above charter amendment would fix the size of USAir Group's board of
directors at 16, one-fourth of whom would be elected by BA. In addition, the
vote of 80% of the Entire Board of USAir Group would be required for approval
of the following (with certain limited exceptions): (i) any agreement with the
DOT regarding citizenship and fitness matters; (ii) any annual operating or
capital budgets or financing plans; (iii) incurring capital expenditures not
provided for in a budget approved by the vote of 80% of the Entire Board in
excess of $10 million in the aggregate during any fiscal year; (iv) declaring
and paying dividends on any capital stock of USAir Group or any of its
subsidiaries (other than dividends paid only to USAir Group or any wholly-
owned subsidiary of USAir Group and any dividends on preferred stock); (v)
making investments in other entities not provided for in approved budgets in
excess of $10 million in the aggregate during any fiscal year; (vi) incurring
additional debt (other than certain debt specified in the Investment
Agreement) not in an approved financing plan in excess of $450 million in the
aggregate during any fiscal year; (vii) incurring off-balance sheet
liabilities (e.g., operating leases) not in an approved financing plan in
excess of $50 million in the aggregate during any fiscal year; (viii)
appointment, compensation and dismissal of certain senior executives; (ix)
acquisition, sale, transfer or relinquishment of route authorities or
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operating rights; (x) entering into material commercial or marketing
agreements or joint ventures; (xi) issuance of capital stock (or debt or other
securities convertible into or exchangeable for capital stock), other than (A)
the stock options granted to employees in return for pay reductions under the
USAir Group 1992 Stock Option Plan, as described under "--Employees" above,
(B) to USAir Group or any direct or indirect wholly owned subsidiary of USAir
Group, (C) pursuant to the terms of USAir Group securities outstanding when a
certain amendment to USAir Group's charter required in connection with
consummation of the Second Purchase becomes effective, or (D) pursuant to the
terms of securities the issuance of which was previously approved by the vote
of 80% of the Entire Board; (xii) acquisition of its own equity securities
other than from USAir Group or its subsidiaries, or pursuant to sinking funds
or an approved financing plan; and (xiii) establishment of a board committee
with power to approve any of the foregoing. This supermajority vote
requirement would allow four directors, including those elected by BA, to
withhold approval of the actions described above if they believe them to be
contrary to the best interests of USAir. The supermajority vote would not be
required with regard to the foregoing actions to the extent they involve the
enforcement by USAir Group of its rights under the Investment Agreement.
Following the Second Purchase, which BA has indicated it will not complete,
to the extent permitted under Foreign Ownership Restrictions, USAir Group and
BA would integrate certain of their respective business operations pursuant to
certain "Integration Principles" included in the Investment Agreement. In
addition, to the extent permitted by Foreign Ownership Restrictions or
pursuant to specific DOT approval, an "Integration Committee," headed by the
chief executive officers of USAir Group and BA and by an Executive Vice
President--Integration of USAir Group, would oversee the integration subject
to the ultimate discretion of USAir Group's board of directors. As of the
Final Purchase, which BA has indicated it will not complete, to the extent
permitted by Foreign Ownership Restrictions, the Investment Agreement provides
for the establishment of a committee ("Appointments Committee") of the board
of directors of USAir Group, composed of USAir Group's chief executive
officer, BA's chief executive officer and another director serving on both
USAir Group's and BA's board of directors, to handle all employment matters
relating to managers at the level of vice president and above, except for
certain senior executives.
BA's governance rights after the Second Purchase and the Final Purchase,
which BA has indicated it will not complete, would be subject to reduction if
BA reduced its holding in USAir Group under the following circumstances. If BA
sold or transferred, in one or more transactions, BA Preferred Stock, Common
Stock or BA Common Stock (collectively, Common Stock and BA Common Stock are
hereinafter referred to as "Non-Preferred Stock") issued directly or
indirectly upon the conversion thereof such that the aggregate purchase price
of the BA Preferred Stock, BA Notes, Non-Preferred Stock or other equity
securities of USAir Group held by BA and its directly or indirectly wholly
owned subsidiaries following such sale or transfer (the "BA Holding") was less
than both two-thirds of the aggregate purchase price of all BA Preferred
Stock, BA Notes, Non-Preferred Stock or other equity securities of USAir Group
acquired by BA and its subsidiaries following January 21, 1993 and $750
million (or $500 million if the Final Purchase had not occurred), then (i) the
number of directors elected by the Class B Common Stock and the Series C
Preferred Stock, voting together as a single class, would be limited to two;
(ii) the directors elected by the Common Stock, Series A Preferred Stock,
Series E Preferred Stock, Series T Preferred Stock, as defined under "--
Miscellaneous" below, and other capital stock with voting rights would no
longer be required to include two directors selected from among the outside
directors on the board of directors of BA; (iii) special class voting rights
applicable to the Class B Common Stock and Series C Preferred Stock would no
longer apply; and (iv) BA would no longer participate in the Appointments
Committee. In addition, if the BA Holding became less than both one-third of
the aggregate purchase price of all BA Preferred Stock, BA Notes, Non-
Preferred Stock or other equity securities of USAir Group acquired by BA and
its subsidiaries following January 21, 1993 and $375 million (or $250 million
if the Final Purchase had not occurred), then the number of directors elected
by the Class B Common Stock and the Series C Preferred Stock, voting together
as a single class, would be reduced to one. If the BA Holding became less than
$100 million, then the Class B Common Stock and the Series C Preferred Stock
would no longer vote together as a single class with respect to the election
of any directors of USAir Group, but would vote together with the Common
Stock, the Series A Preferred Stock and any other class or series of capital
stock with voting rights with respect to the election of directors of USAir
Group.
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MISCELLANEOUS
Under the terms of the Investment Agreement, BA has the right to maintain
its proportionate ownership of USAir Group's securities under certain
circumstances by purchasing shares of certain series of Series T Preferred
Stock, Common Stock or BA Common Stock. Pursuant to these provisions, on June
10, 1993, BA purchased (i) 152.1 shares of Series T-1 Preferred Stock for
approximately $1.5 million as a result of certain issuances during the period
January 21 through March 31, 1993 of Common Stock in connection with the
exercise of certain employee stock options and to certain defined contribution
retirement plans; and (ii) 9,919.8 shares of Series T-2 Preferred Stock for
approximately $99.2 million as a result of USAir Group's issuance on May 4,
1993 of 11,500,000 shares of Common Stock for net proceeds of approximately
$231 million pursuant to a public underwritten offering. Because BA partially
exercised its preemptive right in connection with the Common Stock offering
and the offering price was below a certain level, the conversion price of the
Series F Preferred Stock was antidilutively adjusted on June 10, 1993 from
$19.50 to $19.41 per share. As a result, the Series F Preferred stock is
convertible into 15,458,851 shares of Common Stock or Non-Voting Class ET
Common Stock. BA advised USAir Group that it would not exercise its optional
purchase rights under the Investment Agreement to buy additional series of
Series T Preferred Stock triggered by issuances of Common Stock of USAir Group
pursuant to certain USAir Group benefit plans during 1994 and 1995.
The Investment Agreement also imposes certain restrictions on BA's right to
acquire additional voting securities, participate in solicitations with
respect to USAir Group securities or otherwise propose or discuss
extraordinary transactions concerning USAir Group. These restrictions remain
in effect as long as BA or any of its affiliates or associates beneficially
owns any BA Preferred Stock, BA Notes or BA Common Stock, and for two years
thereafter. In addition, the Investment Agreement restricts BA's right to
transfer certain securities and requires that prior to transferring such
securities, BA must, in most cases, first offer to sell the securities to
USAir Group. BA has certain rights to require USAir Group to register for sale
USAir Group securities sold to it pursuant to the Investment Agreement.
PROPOSED ALLIANCE BETWEEN BRITISH AIRWAYS AND AMERICAN
On June 11, 1996, American and BA jointly announced that they intend to
enter into an extensive alliance and code-sharing arrangement, effective April
1, 1997, subject to United States and international regulatory approvals.
American is the second largest domestic airline and a major competitor of
USAir. The following description of the proposed BA/American alliance is based
upon public statements by BA and American and other published reports. Under
the proposed alliance, American and BA would jointly market, price and manage
their North Atlantic airline services but neither airline would obtain an
equity position in the other. The joint services would carry the designator
codes of both airlines, and each airline also would code-share behind/beyond
the other's international gateways. In addition, the two airlines would
integrate their world-wide frequent flyer programs and enter into other
cooperative arrangements in other areas, such as marketing, sales, facilities
use and cargo. The BA/American alliance, as proposed, does not prevent either
American or BA from continuing or entering into commercial arrangements with
other airlines, including USAir. The alliance would be effective for a minimum
period of five years, with either airline able to terminate thereafter upon
giving one year's notice with a further five year wind-down period following
any such termination.
The proposed alliance is conditioned upon the grant of antitrust immunity by
the DOT. The DOT also would have to approve the code-share agreements. Other
United States or international regulatory reviews and approvals might be
required, depending on the final structure of the transaction. As of July 10,
1996, USAir believed that no application for approval of any kind had been
filed by American or BA. Both United Kingdom and European Union competition
authorities have announced they are conducting investigations of the proposed
alliance. The Department of Justice is reported to have made preliminary
inquiries and issued civil investigative demands to third parties. Several
airlines serving the North Atlantic have raised strong objections to the
proposed alliance.
USAir's only public statement regarding the proposed alliance was made on
the date BA and American announced the venture at which time USAir stated:
"Today's proposal has the potential to provide USAir with the ability to
pursue new and positive opportunities. In all events, USAir will act in the
best interests of its shareholders, employees and communities served." At
present, USAir is reviewing the proposed alliance and is unable to predict
how, if approved, the BA/American alliance would affect USAir and its
relationship with BA.
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OPERATING STATISTICS
USAir's operating statistics during the years 1991 through 1995 and for the
first quarter of 1996 (compared to first quarter 1995) are set forth in the
following tables (1):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 1994 1993 1992 1991
- ------------------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue Passengers (Thousands)*........ 56,674 59,495 53,678 54,655 55,600
Average Passenger Journey (Miles)*..... 663.7 637.7 656.2 642.2 613.7
Revenue Passenger Miles (Millions)*.... 37,618 37,941 35,221 35,097 34,120
Total Available Seat Miles**........... 58,678 61,540 59,841 60,052 58,574
Available Seat Miles (Millions)*....... 58,163 61,027 59,485 59,667 58,261
Passenger Load Factor(2)*.............. 64.7% 62.2% 59.2% 58.8% 58.6%
Break Even Load Factor(3)(5)**......... 64.9% 67.3% 61.7% 63.2% 62.7%
Passenger Revenue Per ASM*............. 10.78c 9.70c 10.22c 9.70c 9.76c
Total Revenue Per ASM(4)(5)**.......... 11.80c 10.59c 11.04c 10.38c 10.33c
Cost per ASM(4)(5)(6)**................ 11.40c 11.02c 11.12c 10.85c 10.80c
Yield (Revenue Per RPM)*............... 16.66c 15.61c 17.27c 16.49c 16.67c
</TABLE>
- --------
* Scheduled service only (excludes charter flights).
** All service.
c = cents
63--1
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996 1995
- ---------------------------- ------ ------
<S> <C> <C>
Revenue Passengers (Thousands)*................................. 12,938 13,767
Average Passenger Journey (Miles)*.............................. 673 659
Revenue Passenger Miles (Millions)*............................. 8,709 9,079
Total Available Seat Miles**.................................... 13,583 15,334
Available Seat Miles (Millions)*................................ 13,493 15,206
Passenger Load Factor(2)*....................................... 64.6% 59.7%
Break Even Load Factor(3)(5)**.................................. 67.1% 64.0%
Passenger Revenue Per ASM*...................................... 11.50c 9.78c
Total Revenue Per ASM(4)(5)**................................... 12.74c 10.75c
Cost per ASM(4)(5)(6)**......................................... 12.81c 11.08c
Yield (Revenue Per RPM)*........................................ 17.81c 16.37c
</TABLE>
- --------
* Scheduled service only (excludes charter flights).
** All service.
c = cents
(1) Statistics include free frequent travelers and the related miles flown.
(2) Passenger load factor is the percentage of aircraft seating capacity that
is actually utilized (RPMs/ASMs).
(3) Break even load factor represents the percentage of aircraft seating
capacity that must be utilized, based on fares in effect during the
period, for USAir to break even at the pre-tax income level, adjusted to
exclude non-recurring and unusual items.
(4) Adjusted to exclude non-recurring and unusual items.
(5) Financial statistics for 1996, 1995, 1994 and 1993 exclude revenue and
expense generated under the BA wet lease arrangement.
(6) Certain statistics have been recalculated to reflect expense
reclassifications.
FLIGHT EQUIPMENT
At December 31, 1995, USAir operated the following jet aircraft:
<TABLE>
<CAPTION>
PASSENGER AVG. AGE OWNED LEASED
TYPE CAPACITY (YEARS) (1) (2) TOTAL
---- --------- -------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Boeing 767-200ER(3)....................... 214 7.1 4 5 9
Boeing 757-200............................ 182 5.3 23 11 34
Boeing 737-400............................ 146 6.1 19 35 54
McDonnell Douglas MD-80................... 141 13.9 15 16 31
Boeing 737-300............................ 127 8.8 11 74 85
Boeing 737-200............................ 109 13.7 48 16 64
Douglas DC-9-30........................... 101 22.2 48 14 62
Fokker 100................................ 98 5.1 36 4 40
Fokker F28-4000........................... 68 11.2 1 14 15
---- --- --- ---
11.1 205 189 394
==== === === ===
</TABLE>
- --------
(1) Of the owned aircraft, 123 were pledged as collateral for various secured
financing obligations aggregating $2.3 billion at December 31, 1995.
(2) The terms of the leases expire between 1996 and 2015.
(3) The above table excludes one owned and one leased 767-200ER aircraft which
USAir leased to BA under a wet lease arrangement at December 31, 1995.
USAir is a party to purchase agreements with Boeing and Rolls Royce that
provide for the future acquisition of new jet aircraft and jet engines. USAir
maintains inventories of spare engines, spare parts, accessories and other
maintenance supplies sufficient to meet its operating requirements.
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USAir owned or leased the following aircraft as of December 31, 1995, which
were parked in storage facilities and not included in the operating fleet
table presented above.
<TABLE>
<CAPTION>
AVG. AGE
TYPE (YEARS) OWNED LEASED TOTAL
---- -------- ----- ------ -----
<S> <C> <C> <C> <C>
British Aerospace BAe-146-200....................... 10.8 1 14 15
Boeing 727-200...................................... 17.1 -- 6 6
Boeing 737-200...................................... 27.0 4 -- 4
Boeing 767-200ER(1)................................. 5.7 -- 1 1
Douglas DC-9-30..................................... 27.3 10 -- 10
Fokker F28-1000..................................... 24.0 1 -- 1
Fokker F28-4000..................................... 12.1 1 1 2
---- --- --- ---
17.9 17 22 39
==== === === ===
</TABLE>
- --------
(1) The 767-200ER aircraft presented in the above table was returned to USAir
by BA during December 1995 in connection with the phase-out of the wet
lease arrangements with BA (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations"). The aircraft was returned
to USAir's operating fleet in January 1996.
In addition, as of December 31, 1995, USAir leased or subleased 16 owned
F28-1000 aircraft; two leased Embraer EMB-120 aircraft; ten owned 737-200
aircraft; one owned and one leased 767-200ER; two owned
F28-4000 aircraft, and; three leased BAe-146-200 ("BAe-146") aircraft to third
parties. In the first half of 1996, the two 767s were returned to USAir's
operating fleet. USAir also subsequently leased or subleased two F28-4000
aircraft and four BAe-146-200s.
USAir recorded substantial charges in 1994 associated with repair parts,
inventory and future lease payments for certain parked aircraft (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
USAir is a participant in the Civil Reserve Air Fleet ("CRAF"), a voluntary
program administered by the Air Mobility Command (the "AMC"). The General
Services Administration of the United States government also requires that
airlines participate in CRAF in order to receive United States government
business. The United States government is the largest customer of USAir. USAir
will commit at least four 767-200ER aircraft in support of military
operations, probably for aeromedical missions, as specified by the AMC. To
date, the AMC has not requested USAir to activate any of its aircraft under
CRAF.
GROUND FACILITIES
USAir leases the majority of its ground facilities, including executive and
administrative offices in Arlington, Virginia adjacent to Washington National;
its principal operating, overhaul and maintenance bases at the Pittsburgh and
Charlotte/Douglas International Airports; major training facilities in
Pittsburgh and Charlotte; central reservations offices in several cities; and
line maintenance bases and local ticket, cargo and administrative offices
throughout its system. USAir owns a building and vacant land in Fairfax,
Virginia, a training facility in Winston-Salem, North Carolina and
reservations facilities in San Diego, California and Orlando, Florida. USAir's
building in Fairfax, Virginia, which is leased to the U.S. government, and the
vacant land are currently for sale.
TERMINAL CONSTRUCTION PROJECTS
USAir utilizes public airports for its flight operations under lease
arrangements with the government entities that own or control these airports.
Airport authorities frequently require airlines to execute long-term leases to
assist in obtaining financing for terminal and facility construction. Any
future requirements for new or improved
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airport facilities and passenger terminals are likely to require additional
expenditures and long-term commit-ments. Several significant projects which
affect large airports on USAir's route system are discussed below.
The new terminal at Pittsburgh International Airport commenced operation in
October 1992. The construction cost of the new terminal, approximately $800
million, was financed largely through the issuance of airport revenue bonds.
As the principal tenant of the new facility, USAir pays a substantial portion
of the cost of the new terminal through rents and other charges pursuant to a
use agreement which expires in 2018. USAir's terminal rental expense at
Pittsburgh was approximately $44 million annually in 1995. The new facility
has provided additional gate capacity for USAir and has enhanced the
efficiency and quality of its hub services at Pittsburgh. In addition to the
annual terminal rental expense, USAir is recognizing approximately $13 million
in annual rental expense for property and equipment typically owned by USAir
at other airports. The annual terminal rental expense is subject to
adjustment, depending on the actual airport operating costs, among other
factors.
The East End Terminal at LaGuardia, which cost approximately $173 million to
construct, opened in the third quarter of 1992. USAir, USAir Express and the
USAir Shuttle operations at LaGuardia are conducted from this terminal and the
adjoining USAir Shuttle terminal. The East End Terminal has 12 jet gates.
USAir recognizes approximately $31 million in annual rental expense for this
terminal and is responsible for all maintenance and operating costs.
In 1993, USAir and the City of Philadelphia reached an agreement to proceed
with certain capital improvements at Philadelphia International Airport, where
USAir has its third largest hub. The improvements include approximately $109
million in various terminal renovations and a new $220 million commuter
airline runway expansion project, exclusive of financing costs. Depending on
the timing of certain federal environmental reviews, USAir expects
construction on the terminal project will be completed in 1998. The runway
expansion project is not expected to be completed until 2000. USAir expects
that its annual costs of operations at Philadelphia International Airport will
increase by approximately $14 million once construction is complete,
representing more than a 40% increase.
The Washington National Airport Authority is currently undertaking a $1
billion capital development project at Washington National, which includes
construction of a new terminal currently expected to commence operation in the
second quarter of 1997. Based on current projections, USAir estimates that its
annual operating expenses at Washington National will increase by
approximately $10 million to $12 million.
LEGAL PROCEEDINGS
USAir is involved in legal proceedings arising out of its two aircraft
accidents that occurred in July and September 1994 near Charlotte, North
Carolina and Pittsburgh, Pennsylvania, respectively. The National
Transportation Safety Board ("NTSB") held hearings beginning in September 1994
relating to the July accident and January 1995 relating to the September
accident. In April 1995, the NTSB issued its finding of probable causes with
respect to the accident near Charlotte. It assigned as probable causes flight
crew errors and the failure of air traffic control to convey weather and
windshear hazard information. The NTSB has not yet issued its final accident
investigation report for the accident near Pittsburgh. The NTSB, Boeing, the
FAA and USAir jointly conducted flight tests in October 1995 as part of the
ongoing investigation into the cause of this accident. In this regard, USAir
provided a 737-300 aircraft in the collective effort to simulate the
conditions at the time of the accident. More public hearings were conducted in
November 1995. The NTSB has indicated that a determination of the cause of the
accident is not likely until sometime in 1996. USAir expects that it will be
at least two to three years before the accident litigation and related
settlements will be concluded. USAir is unable to estimate the potential
liability arising from such accidents because the determination of liability
and calculation of damages, if any, are subject to numerous factors such as
the responsibility of co- and third-party defendants (ie. aircraft and engine
manufacturers and certain governmental authorities) and the availability of
defenses to the claims. USAir believes, however, that it is fully insured with
respect to the litigation that has arisen or may arise from the Charlotte and
Pittsburgh incidents. Among the factors considered by USAir in making this
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determination are reviews by USAir and by USAir's counsel of applicable
insurance policies (including policy limits and the financial condition of its
insurers) and detailed discussions among USAir, its insurance providers and
litigation counsel. USAir has been specifically advised by litigation counsel
that the magnitude of compensatory damages are not estimable but that for both
the Charlotte and Pittsburgh incidents, aggregate damages will be well within
policy limits. USAir's liability limits are reviewed at least annually by
USAir and its insurance providers and liability insurance for accident
liability is on a "per occurrence" basis. Therefore, USAir believes that the
litigation will not have a material adverse effect on USAir's financial
condition or results of operations, although any finding of fault on USAir's
part could create negative publicity and could tarnish USAir's image.
66--1
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In December 1995, USAir received a Civil Investigative Demand ("CID") from
the DOJ relating to USAir's compliance with the terms of a consent decree
entered into in December 1992, as amended in September 1994. The consent
decree was entered into to resolve litigation concerning USAir's methods of
disseminating fare data to the Airline Tariff Publishing Company. A CID is a
request for information in the course of an antitrust investigation and does
not constitute the institution of a civil or criminal action. The CID issued
in December 1995 seeks information concerning USAir's use of travel dates in
its fare filings, among other things.
On March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a
settlement involving USAir and five other U.S. air carrier defendants in the
Domestic Air Transportation Antitrust Litigation class action lawsuit. The
class action suit, which was filed in July 1990, alleged that the airlines
used ATPCo to signal and communicate carrier pricing intentions and otherwise
limit price competition for travel to and from numerous hub airports. Under
the terms of the settlement, the six air carriers paid $45 million in cash and
issued $396.5 million in certificates valid for purchase of domestic air
travel on any of the six airlines. USAir's share of the cash portion of the
settlement, $5 million, was recorded in results of operations for the second
quarter of 1992. The certificates, mailed to approximately 4.1 million
claimants between December 15 and 31, 1994, provide a dollar-for-dollar
discount against the cost of a ticket generally of up to a maximum of 10% per
ticket, depending on the cost of the ticket. It is possible that this
settlement could have a dilutive effect on USAir's passenger transportation
revenue and associated cash flow. However, due to the interchangeability of
the certificates among the six carriers involved in the settlement, the
possibility that carriers not party to the settlement will honor the
certificates, and the potential stimulative effect on travel created by the
certificates, USAir cannot reasonably estimate the impact of this settlement
on further passenger revenue and cash flows. USAir has employed the
incremental cost method to estimate a range of costs attributable to the
exercise of the certificates, based on the assumption that the estimated
maximum number of certificates to be redeemed for travel on USAir will be
related to USAir's market share relative to the total market share of the six
carriers involved in the settlement. USAir's estimated percentage of such
market share is less than 9%. Incremental costs include unit costs for
passenger food, beverages and supplies, fuel, reservations, communications,
liability insurance, and denied boarding compensation expenses expected to be
incurred on a per passenger basis. USAir has estimated that its incremental
cost will not be material based on the equivalent free trips associated with
the settlement.
On October 11, 1994, USAir and seven other carriers entered into a
settlement agreement with a group of State Attorneys General resolving similar
issues with the states. The settlement entitles passengers traveling within
the United States on state government business to a 10% discount off the
published fares of each of the settling carriers and will be available for 18
months from August 16, 1995, or until the combined discount amount reaches $40
million, whichever first occurs. On May 10, 1995, a U.S. federal district
court judge approved the settlement. USAir does not expect that this
settlement will have a material adverse effect on its financial condition or
results of operations. As was the case with the settlement of the private
antitrust litigation, it is difficult to predict the amount of discounted
state travel that will occur on USAir. Thus, a dollar impact of the settlement
cannot be estimated.
In February and March 1995, several class action lawsuits were filed in
various federal district courts by travel agencies and a travel agency trade
association alleging that most of the major U.S. airlines, including USAir,
violated the antitrust laws when they individually capped travel agent base
commissions at $50 for round-trip domestic tickets with base fares above $500
and at $25 for one-way domestic tickets with base fares above $250. The
lawsuits have been consolidated in the federal district of Minnesota. The
plaintiffs are seeking unspecified treble damages for restraint of trade. The
case is expected to go to a jury trial in 1996. While USAir believes that its
actions in establishing a commission cap were in full compliance with the
antitrust laws, the Company is unable to predict at this time the ultimate
resolution of the litigation or the potential impact on its financial
condition and results of operations.
In March 1992, USAir entered into an agreement with In-Fight Phone-
Corporation ("IFPC") which contemplated the installation of IFPC's telephone
and data system on substantially all of USAir's aircraft (although only 80
aircraft were in fact equipped). The phone system did not perform as required
and IFPC
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<PAGE>
otherwise breached the March 1992 agreement. Accordingly, in October 1995,
USAir terminated its agreement with IFPC for cause. On December 6, 1995, IFPC
filed suit in Cook County (Chicago), Illinois, against USAir seeking equitable
relief and damages in excess of $186 million. On December 7, 1995, USAir
successfully defended IFPC's emergency motion for a temporary restraining
order. On December 13, 1995, IFPC's motion for a preliminary injunction was
denied and IFPC has relinquished its right to appeal that decision. IFPC's
claim for damages remains pending. In June 1996, USAir filed a counterclaim
against IFPC seeking in excess of $25 million in damages. USAir is unable to
predict at this time the ultimate resolution or potential financial impact on
USAir's financial condition and results of operations of this lawsuit. In June
1996, USAir entered into an agreement with GTE Airfone to equip 397 aircraft
with GTE Airfone's on-board telephone system.
During 1995, four members of USAir's FTP filed class action lawsuits against
USAir in Illinois, Pennsylvania, California and New Jersey state courts,
alleging breach of contract relating to changes made to USAir's FTP effective
December 31, 1989 and/or January 1, 1995. A similar lawsuit has been pending
in California state court since 1989. The lawsuits seek unspecified damages
and an injunction against the allegedly objectionable changes to USAir's FTP
and any subsequent retroactive changes to the FTP. USAir denies the
allegations made in the lawsuits and intends to vigorously defend itself. The
ultimate resolution of these lawsuits and their potential impact on the
Company's financial condition or results of operations cannot be predicted at
this time.
USAir has received notices from the U.S. Environmental Protection Agency and
various state agencies that PRPs with respect to the remediation of existing
sites of environmental concern. Only two of these sites have been included on
the Superfund National Priorities List. USAir continues to negotiate with
various governmental agencies concerning known and possible cleanup sites.
USAir has made financial contributions for the performance of remedial
investigations and feasibility studies at sites in Moira, New York; Escondido,
California; and Elkton, Maryland. The contributions totalled approximately
$200 thousand for 1995, 1994 and 1993 combined.
Also, USAir has been identified as a PRP for environmental contamination at
Boston Logan Airport. There are a number of other PRPs at the site. The
Company is presently unable to assess its proportionate share of contribution,
but does not expect any such contribution to have a material adverse effect on
its financial condition or results of operations.
Because of changing environmental laws and regulations, the large number of
other potentially responsible parties and certain pending legal proceedings,
it is not possible to reasonably estimate the amount or timing of future
expenditures related to environmental matters. The Company provides for costs
related to environmental contingencies when a loss is probable and the amount
is reasonably estimable. Although management believes adequate reserves have
been provided for all known contingencies, it is possible that additional
reserves could be required in the future which could have a material effect on
results of operations. However, the Company believes that the ultimate
resolution of known environmental contingencies should not have a material
adverse effect on its financial position or results of operations based on its
experience with similar environmental sites.
The Equal Employment Opportunity Commission and various state and local fair
employment practices agencies are investigating charges by certain job
applicants, employees and former employees of USAir involving allegations of
employment discrimination in violation of Federal and state laws. The
plaintiffs in these cases generally seek declaratory and injunctive relief and
monetary damages, including back pay. In some instances they also seek
classification adjustment, compensatory damages and punitive damages. Such
proceedings are in various stages of litigation and investigation, and the
outcome of these proceedings is difficult to predict. In the Company's
opinion, however, the disposition of these matters is not likely to have a
material adverse effect on its financial condition or results of operations.
68
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of USAir as of May 20, 1996 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bruce R. Aubin.......... 65 Senior Vice President--Maintenance Operations
Robert Ayling........... 49 Director
Robert W. Bogle......... 57 Director
Edwin I. Colodny........ 69 Director
Mathias J. DeVito....... 65 Director
Robert L. Fornaro....... 43 Senior Vice President--Planning
Rakesh Gangwal.......... 42 Director; President and Chief Operating Officer
George J.W. Goodman..... 65 Director
John W. Harper.......... 55 Senior Vice President--Finance and Chief Financial Officer
John W. Harris.......... 48 Director
Edward A. Horrigan, 66 Director
Jr. ...................
W. Thomas Lagow......... 54 Executive Vice President--Marketing
Robert LeBuhn........... 64 Director
John R. Long, III....... 47 Executive Vice President--Human Resources and Training
Roger P. Maynard........ 53 Director
John G. Medlin, Jr. .... 62 Director
Hanne M. Merriman....... 54 Director
Lawrence M. Nagin....... 55 Executive Vice President--Corporate Affairs and General Counsel
Robert C. Oaks.......... 60 Senior Vice President--Operations
Nancy R. Rohrbach....... 50 Senior Vice President--Public & Community Relations
Raymond W. Smith........ 58 Director
Derek M. Stevens........ 57 Director
Stephen M. Wolf......... 54 Director; Chairman of the Board and Chief Executive Officer
</TABLE>
CERTAIN INFORMATION CONCERNING DIRECTORS AND OFFICERS
There are no family relationships among any of the officers listed above. No
officer was selected pursuant to any arrangement between him or her and any
other person. Officers are elected annually to serve for the following year or
until the election and qualification of their successors. All the executive
officers except Ms. Rohrbach and Messrs. Wolf, Gangwal, Nagin, Lagow, Aubin,
Fornaro and Harper have been actively engaged in the business and affairs of
USAir during the past five years.
Each of the Directors of USAir is also a Director of USAir Group. Messrs.
Harper, Nagin and Wolf each holds the same office at USAir Group as each does
at USAir. Ms. Rohrbach is Vice President--Public and Community Relations of
USAir Group. Information with respect to the business experience and
affiliations of the Directors and executive officers of USAir since at least
January 1, 1991 is set forth below:
Mr. Aubin was Executive Advisor to the Vice Chairman, President and Chief
Executive Officer of Air Canada prior to joining USAir and, prior to that
position, he served as Senior Vice President Technical Operations and Chief
Technical Officer of Air Canada. He was elected Senior Vice President--
Maintenance Operations of USAir in January 1994.
Mr. Ayling was appointed Chief Executive of BA in January 1996. He was
Director of Marketing and Operations of BA from September 1991 until his
appointment as Group Managing Director of BA in February 1993 and has been a
member of the BA Board of Directors since 1991. Mr. Ayling is a Director of
Sun Alliance and London Insurance Plc, and is a lawyer by profession.
69
<PAGE>
Mr. Bogle is President and Chief Executive Officer of The Philadelphia
Tribune, the nation's oldest newspaper addressed to the African American
community. He assumed his position in May 1989 and previously held other high-
level positions at the newspaper. In June 1995, Mr. Bogle completed his tenure
as President of the National Newspaper Publishers Association, a trade
association comprising the publishers of 205 Black-owned newspapers from
across the nation. Mr. Bogle is Chairman of the Council of Trustees at Cheyney
University, serves on the Executive Committee of the greater Philadelphia
Chamber of Commerce and is a board advisor to the United Negro College Fund.
He is also a member of the Executive Committee of the Boy Scouts of America, a
member of the Union League of Philadelphia and a life member of Kappa Alpha
Psi fraternity. Mr. Bogle is Vice Chairman of The Hospitals and Higher
Education Authority of Philadelphia and Vice Chairman of Amalgamated
Publishers, Inc. He serves on the Board of Directors of The American Red
Cross, Presbyterian Medical Center of Philadelphia, the Police Athletic
League, the Christian Street YMCA and The American Heart Association. Mr.
Bogle is also a founding member of United Media of Philadelphia, an
organization comprised of media owned and operated by African Americans.
Mr. Colodny is of counsel to the law firm of Paul, Hastings, Janofsky &
Walker. Paul, Hastings, Janofsky & Walker provides legal services to USAir.
Mr. Colodny retired as Chairman of the Board of USAir and USAir Group in July
1992. He served as Chief Executive Officer of USAir from 1975 until retiring
as an employee of USAir in June 1991. Mr. Colodny is a Director of Lockheed
Martin Corporation, Comsat Corporation and Esterline Technologies, Inc., and
is a member of the Board of Trustees of the University of Rochester.
Mr. DeVito is Chairman of the Board of The Rouse Company (real estate
development and management). He also serves as a Director of First Maryland
Bancorp, Allied Irish Bank plc, and subsidiaries of The Rouse Company. He is a
member of the Board of the Maryland Institute, College of Art, Chairman of the
Board of Empower Baltimore Management Corporation and former Chairman of the
Greater Baltimore Committee.
Mr. Fornaro was Vice President--Research of Jesup & Lamont Securities until
February 1988, when he became Senior Vice President--Marketing of Braniff,
Inc. In August 1988, Mr. Fornaro became Senior Vice President--Market Planning
of Northwest, the position he held until February 1992. He was elected Senior
Vice President--Planning of USAir in March 1992.
Mr. Gangwal became President and Chief Operating Officer of USAir and USAir
Group on February 19, 1996. Mr. Gangwal had served as Executive Vice
President--Planning and Development of Air France since November 1994. Mr.
Gangwal previously served in a variety of management roles at United over an
eleven-year period, culminating in the role of Senior Vice President--
Planning.
Mr. Goodman is President of Continental Fidelity, Inc., which provides
editorial and investment services. He is the author of a number of books and
articles on finance and economics under the pen name "Adam Smith" and is the
host of a television series of that name seen on public broadcasting stations
in the U.S. and on other networks abroad. He is a Director of Cambrex
Corporation. Mr. Goodman also serves as a member of the Advisory Committee of
the Center for International Relations at Princeton University and is a
Trustee of the Urban Institute.
Mr. Harper was Senior Vice President--Marketing and Information Systems at
Axe-Houghton Management (investment management) until his election as Vice
President and Controller of USAir in December 1991. He was elected Senior Vice
President--Information Systems of USAir in October 1992 and Senior Vice
President--Finance and Chief Financial Officer of USAir and USAir Group in
1994.
Mr. Harris is President of The Harris Group (real estate development). From
1972 through 1991, he was President of The Bissell Companies, Inc. (real
estate development). He is a Director of Southern Bell Telephone and Telegraph
Company and Dominion Resources, Inc. Mr. Harris is former Chairman of the
Greater Charlotte Chamber of Commerce and a member of the Board of Trustees of
the University of North Carolina and serves on the boards of several community
service organizations.
70
<PAGE>
Mr. Horrigan is the former Chairman of the Board of Directors of Liggett
Group Inc. (consumer products), a position he had held from May 1993 until his
retirement in December 1994. He is also the retired Vice Chairman of the Board
of RJR Nabisco, Inc. and retired Chairman and Chief Executive Officer of R.J.
Reynolds Tobacco Company (consumer products). He is a Director of the Haggai
Foundation.
Mr. Lagow was Senior Vice President--Market Planning of Northwest until
February 1988, when he became Senior Vice President--Planning of United. Mr.
Lagow held that position until he was elected Executive Vice President--
Marketing of USAir in February 1992.
Mr. LeBuhn was the Chairman of Investor International (U.S.), Inc.
(investments) until his retirement in January 1995. He is now a private
investor and is a Director of Acceptance Insurance Companies, Lomas Financial
Corp., Cambrex Corporation and Enzon, Inc. He is Trustee and President of the
Geraldine R. Dodge Foundation, Morristown, New Jersey, and is a member of the
New York Society of Security Analysts.
Mr. Long served as Senior Vice President--Administration of USAir until his
election as Senior Vice President--Customer Operations of USAir in June 1989.
He was elected Senior Vice President--Customer Services in March 1991 and
Executive Vice President--Customer Services in May 1992 and appointed
Executive Vice President--Human Resources and Training in May 1996.
Mr. Maynard has been Director of Investments and Acquisitions of BA since
December 1995. Previously, from 1987, he held various positions at BA,
including Director of Corporate Strategy, Director of Investor Relations &
Marketplace Performance and Executive Vice President North America. Mr.
Maynard is a Director of Qantas Airways Limited.
Mr. Medlin is Chairman of the Board and, until December 31, 1993, was Chief
Executive Officer of Wachovia Corporation (bank holding company). Mr. Medlin
also serves as a Director of BellSouth Corporation, Burlington Industries,
Inc., Media General, Inc., National Services Industries, Inc., RJR Nabisco
Holdings Corp. and Nabisco Holdings Corp.
Mrs. Merriman is the Principal in Hanne Merriman Associates (retail business
consultants). Previously, she served as President of Nan Duskin, Inc.
(retailing), President and Chief Executive Officer of Honeybee, Inc., a
division of Spiegel, Inc., and President of Garfinckel's, a division of Allied
Stores Corporation. Mrs. Merriman is a Director of CIPSCO, Inc., Central
Illinois Public Service Company, State Farm Mutual Automobile Insurance
Company, The Rouse Company, Ann Taylor Stores Corporation and T. Rowe Price
Mutual Funds. She is a member of the National Women's Forum and a Trustee of
The American-Scandinavian Foundation. She was a member of the board of
directors of the Federal Reserve Bank of Richmond, Virginia from 1984 to 1990
and served as Chairman in 1989-1990.
Mr. Nagin practiced law with Skadden, Arps, Slate, Meagher & Flom from
August 1994 until he joined USAir in February 1996. He previously served in
several executive positions at UAL and United from September 1988 to July
1994, culminating in the role of Executive Vice President--Corporate Affairs
and General Counsel of UAL and United. From 1980-1988, Mr. Nagin was Senior
Vice President and General Counsel of Flying Tigers.
General Oaks is a retired United States Air Force General. He was commander
of the Air Training Command, the service's organization responsible for all
initial training, including flight training, prior to his last post in his 35-
year career with the Air Force, as commander of U.S. Air Forces in Europe. He
retired from the Air Force in 1994 and joined USAir in December 1994 as its
Vice President--Corporate Safety and Regulatory Compliance. He was elected to
his present position in February 1995.
Ms. Rohrbach served as a member of the White House legislative liaison team
(1981 to 1986) and as Assistant to the President and Secretary to the Cabinet
(1987 to 1988). In 1989 and 1990, she was a resident fellow at Harvard
University's Institute of Politics and a consultant to the Department of
Energy. She was
71
<PAGE>
Assistant Secretary of Labor for Policy during 1991 and 1992 and a public
policy and communications consultant during 1993. Ms. Rohrbach was elected
Vice President--Public and Community Relations of USAir Group and Senior Vice
President--Public and Community Relations of USAir in January 1994.
Mr. Smith is Chairman of the Board and Chief Executive Officer of Bell
Atlantic Company (telecommunications). Previously, Mr. Smith had served as
Vice Chairman and President of Bell Atlantic and Chairman of The Bell
Telephone Company of Pennsylvania. He is a member of the Board of Directors of
CoreStates Financial Company, a trustee of the Carnegie Mellon University and
is active in many civic and cultural organizations.
Mr. Stevens has been Chief Financial Officer and a Director of BA since
1989. From 1981 to 1989, he was Finance Director of TSB Group plc (financial
institution). He is a Director of Commercial Union Plc.
Mr. Wolf is Chairman of the Board of Directors and Chief Executive Officer
of USAir Group and USAir and was elected to those positions in January 1996.
Immediately prior to joining USAir, Mr. Wolf was a senior advisor to the
investment bank Lazard Freres & Co. From 1987 to July 1994, Mr. Wolf was chief
executive officer of UAL and United and became Chairman of each in 1988. From
1986 to 1987, Mr. Wolf was Chief Executive Officer of Tiger International,
Inc. and Flying Tigers. From 1984 to 1986, Mr. Wolf was President and Chief
Executive Officer of Republic. Prior to that time Mr. Wolf held senior
management positions at Continental, Pan Am and American. Mr. Wolf is a
Director of Philip Morris Companies, R.R. Donnelley & Sons Co. and the
Alzheimer's Disease and Related Disorders Association. He is also a trustee of
Northwestern University and Rush-Presbyterian-St. Luke's Medical Center.
COMPENSATION OF EXECUTIVE OFFICERS
The Summary Compensation Tables below set forth the compensation paid during
the years indicated to each of the Chief Executive Officer and the four
remaining most highly compensated executive officers of USAir Group and USAir:
SUMMARY COMPENSATION TABLES
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
--------------------
ANNUAL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(E)
- --------------------------- ---- -------- -------- ---------------
<S> <C> <C> <C> <C>
Seth E. Schofield................. 1995 $417,908(B) $212,500(D) $228,949
Chairman and Chief Executive 1994 $500,000 $ 0 $116,136
Officer
of USAir Group and USAir 1993 $475,635(C) $ 0 $275,601
Frank L. Salizzoni(A)............. 1995 $335,600(B) $136,000(D) $ 96,970
President and Chief Operating 1994 $385,769 $ 0 $ 11,020
Officer
of USAir Group and USAir 1993 $317,558(C) $ 0 $ 45,374
W. Thomas Lagow................... 1995 $325,000 $ 96,688(D) $ --
Executive Vice President-- 1994 $325,000 $ 0 $ --
Marketing
of USAir 1993 $310,058(C) $ 0 $ --
James T. Lloyd.................... 1995 $275,000 $ 81,813(D) $ 22,417
Executive Vice President, General 1994 $275,000 $ 0 $ 18,705
Counsel and
Secretary of USAir Group; 1993 $257,365(C) $ 0 $ 73,215
Executive Vice President and
General Counsel of USAir
John R. Long III.................. 1995 $275,000 $ 81,813(D) $ 21,847
Executive Vice President-- 1994 $275,000 $ 0 $ 36,458
Customer Services
of USAir 1993 $254,808(C) $ 0 $133,772
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
RESTRICTED
STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR AWARDS(F) OPTIONS COMPENSATION(H)
- --------------------------- ---- ---------- ------- ---------------
<S> <C> <C> <C> <C>
Seth E. Schofield................... 1995 -- -- $ 89,967
Chairman and Chief Executive 1994 -- -- $ 74,821
Officer
of USAir Group and USAir 1993 -- -- $ 64,302
Frank L. Salizzoni(A)............... 1995 -- -- $134,926
President and Chief Operating 1994 -- 100,000(G) $167,160(I)
Officer
of USAir Group and USAir 1993 -- -- $ 52,222
W. Thomas Lagow..................... 1995 $223,125 -- $301,410(J)
Executive Vice President--Marketing 1994 -- -- $286,225(J)
of USAir 1993 -- -- $282,521(J)
James T. Lloyd...................... 1995 $223,125 -- $ 35,441
Executive Vice President, General 1994 -- -- $ 40,424
Counsel and
Secretary of USAir Group; Executive 1993 -- -- $ 36,188
Vice
President and General Counsel of
USAir
John R. Long III.................... 1995 $223,125 -- $ 31,467
Executive Vice President--Customer 1994 -- -- $ 10,693
Services
of USAir 1993 -- -- $ 652
</TABLE>
- --------
(A) Mr. Salizzoni was named President and Chief Operating Officer of the USAir
Group and USAir effective April 1, 1994.
(B) Amounts disclosed reflect a voluntary pay reduction incurred by Messrs.
Schofield and Salizzoni during 1995 of $82,092 and $64,400, respectively.
(C) Amounts disclosed reflect reductions in salary during 1993 of $24,365,
$12,250, $14,942, $10,904 and $7,508 for Messrs. Schofield, Salizzoni,
Lagow, Lloyd and Long, respectively, which were implemented for all USAir
officers for a fifteen-month period commencing on January 1, 1992 and
ending on March 29, 1993 pursuant to a comprehensive cost reduction
program at USAir.
(D) Earned in 1995 but paid in 1996.
(E) Amounts disclosed include for (i) 1995, $221,911, $88,210, $22,417 and
$16,870, (ii) 1994, $108,633, $10,391, $18,705, and $29,410 and (iii)
1993, $271,288, $33,259, $73,215, and $133,772, received by Messrs.
Schofield, Salizzoni, Lloyd and Long, respectively, to cover incremental
tax liability resulting from income derived from the lapsing of
restrictions on the disposition of Restricted Stock. Restricted Stock is
Common Stock subject to certain restrictions on disposition. Any amounts
disclosed in the column that are in excess of the amounts disclosed in the
preceding sentence represent income derived from personal travel on USAir.
(F) On November 28, 1995, each of Messrs. Lagow, Lloyd and Long were awarded
17,500 shares of Restricted Stock. Amount shown is based on closing price
($12.75) on such date.
(G) Non-qualified stock option grant on April 1, 1994, the date Mr. Salizzoni
was named President and Chief Operating Officer of USAir Group and USAir.
(H) Under USAir's split dollar life insurance plan, individual life insurance
coverage is available to the named officers. In 1993, USAir commenced
paying the premium associated with this coverage. In 1993, 1994 and 1995,
USAir paid the remainder of the premium associated with the whole life
component of the coverage. If all assumptions as to life expectancy and
other factors occur in accordance with projections, USAir expects to
recover the premiums it pays with respect to the whole life component of
the coverage. The following amounts reflect the value of the benefits
accrued during the years indicated, calculated on an actuarial basis,
ascribed to the insurance policies purchased on the lives of the named
officers (plus the dollar value of premiums paid by USAir with respect to
term life insurance): 1995 Mr.Schofield--$54,135, Mr. Salizzoni--$38,111,
Mr. Lagow--$36,780, Mr. Lloyd--$25,441 and Mr. Long--$20,794; 1994--Mr.
Schofield--$31,194; Mr. Salizzoni--$27,722; Mr. Lagow--$10,225; Mr.
Lloyd--$18,424 and Mr. Long--
73
<PAGE>
$644; 1993--Mr. Schofield--$29,328, Mr. Salizzoni--$26,010, Mr. Lagow--
$9,716, Mr. Lloyd--$17,291 and Mr. Long--$652. During 1993, 1994 and 1995,
USAir made contributions to the accounts of Messrs. Schofield, Salizzoni,
Lagow, Lloyd and Long in certain defined contribution pension plans in the
following amounts: 1995 $35,652, $96,815, $14,630, $10,000 and $10,673,
respectively, 1994--$43,627, $38,192, $26,000, $22,000 and $10,049,
respectively, and 1993--$34,974, $26,212, $22,805, $18,897 and $0,
respectively.
(I) Amount disclosed also reflects $101,246 for reimbursement of relocation
expenses.
(J) Upon the commencement of his employment, USAir agreed to pay Mr. Lagow $1
million over four years, which amount was intended to compensate him for
restricted stock and stock options which he forfeited when he left his
former employer. The amount disclosed includes the annual installment,
$250,000, of the total payment.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table provides information on the number of USAir Group
options held by the named executive officers at fiscal year-end 1995. None of
the officers exercised any options during 1995. The unexercised options held
by one officer were in-the-money based on the fair market value of the Common
Stock on December 29, 1995 ($13.25).
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS/SARS AT YEAR END
(#)
-------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
Seth E. Schofield................................ 390,569 0
Frank L. Salizzoni............................... 177,800 75,000
W. Thomas Lagow.................................. 153,211 0
James T. Lloyd................................... 169,742 0
John R. Long III................................. 100,722 0
</TABLE>
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS/SARS
AT YEAR END ($)(1)
-------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
Seth E. Schofield................................ $ 0 $ 0
Frank L. Salizzoni............................... $137,500 $412,500
W. Thomas Lagow.................................. $ 0 $ 0
James T. Lloyd................................... $ 0 $ 0
John R. Long III................................. $ 0 $ 0
</TABLE>
RETIREMENT BENEFITS
Prior to 1993, USAir's Retirement Plan (the "Retirement Plan") for its
salaried employees was comprised of two qualified plans. The Retirement Plan
was designed so that the two plans, when aggregated, would provide
noncontributory benefits based upon both years of service and the employee's
highest three-year average annual compensation during the last ten calendar
years of service. The primary plan is a defined benefit plan which provides a
benefit based on the factors mentioned above. The primary plan is integrated
with the Social Security program so that the benefits provided thereunder are
reduced by a portion of the employee's benefits from Social Security. USAir's
contributions to the primary plan are not allocated to the account of any
particular employee. The primary plan was frozen on December 31, 1991, and
accordingly, retirement benefits payable under the plan were determinable on
that date.
The secondary plan is a target benefit defined contribution plan. The
secondary plan was established in 1983 as a result of changes to the Internal
Revenue Code of 1986, as amended (the "Code"), which lowered the maximum
benefit payable from a defined benefit plan. In the event that the benefit
produced under the primary plan formula cannot be accrued for any employee
covered by such plan because of the limit on benefits payable
74
<PAGE>
under defined benefit plans, contributions were made on behalf of such
employee to the secondary plan. Such contributions were calculated to provide
the benefit produced under the formula in the primary plan in excess of such
limit, to the extent permitted under the Code's limitation on the
contributions to defined contribution plans. USAir's contributions to the
secondary plan are allocated to individual employees' accounts. During 1995,
no contributions were made to any executive officer's account. The secondary
plan was also frozen on December 31, 1991.
Under the Retirement Plan, benefits usually begin at the normal retirement
age of 65. The Retirement Plan also provides benefits for employees electing
early retirement from ages 55 through 64. If such an election is made, the
benefits may be reduced to reflect the longer interval over which the benefits
will be paid. Executive officers participate in the Retirement Plan on the
same basis as other employees of USAir.
Contributions to and benefits payable under the Retirement Plan must be in
compliance with the applicable guidelines or maximums established by the Code.
USAir has adopted an unfunded supplemental plan which will provide those
benefits which would otherwise be payable to officers under the Retirement
Plan, but which, under the Code, are not permitted to be funded or paid
through the qualified plans maintained by USAir. Benefit accruals under the
supplemental plan also ceased upon the freezing of the Retirement Plan on
December 31, 1991. Such supplemental plan provides that any benefits under the
unfunded supplemental plan will be paid in the form of a single, lump sum
payment. Such supplemental plans are specifically provided for under
applicable law and have been adopted by many corporations under similar
circumstances. Messrs. Schofield, Salizzoni, Lloyd and Long are currently
entitled to receive retirement benefits in excess of the limitations
established by the Code.
The following table presents the noncontributory benefits payable per year
for life to employees under the Retirement Plan and the unfunded supplemental
plan described above, assuming normal retirement in the current year. The
table also assumes the retiree would be entitled to the maximum Social
Security benefit in addition to the amounts shown.
<TABLE>
<CAPTION>
FINAL
EARNINGS
AS DEFINED NONCONTRIBUTORY PENSION BASED ON YEARS OF SERVICE
IN THE -----------------------------------------------------
PLAN 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
---------- 10 YEARS -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$100,000................ $ 19,507 $ 29,261 $ 39,014 $ 48,768 $ 53,768 $ 53,768
$200,000................ 43,507 65,261 87,014 108,768 118,768 118,768
$300,000................ 67,507 101,261 135,014 168,768 183,768 183,768
$400,000................ 91,507 137,261 183,014 228,768 248,768 248,768
$500,000................ 115,507 173,261 231,014 288,768 313,768 313,768
$600,000................ 139,507 209,261 279,014 348,768 378,768 378,768
$700,000................ 163,507 245,261 327,014 408,768 443,768 443,768
$800,000................ 187,507 281,261 375,014 468,768 508,768 508,768
</TABLE>
The values reflected in the above chart represent the application of the
Retirement Plan formula to the specified amounts of compensation and years of
service. The compensation covered by the Retirement Plan is salary and bonus,
as reported in the Summary Compensation Table. The credited years of service
under the Retirement Plan through the date of freezing of the plan (December
31, 1991) for each of the individuals included in the Summary Compensation
Table are as follows: Mr. Schofield--30 years, Mr. Salizzoni--1 year, Mr.
Lagow--none, Mr. Lloyd--5 years, and Mr. Long--16 years.
USAir has entered into agreements with Messrs. Schofield, Salizzoni, Lagow,
Lloyd and Long which provide for a supplement to their retirement benefits
under the Retirement Plan. This supplement is designed to provide such persons
with those benefits they would have received had they been employed by USAir
for the minimum number of years to be entitled to full retirement benefits
under the Retirement Plan and provides for pension benefits to be calculated
using their salary of record rather than the salary in effect under various
salary reduction programs.
75
<PAGE>
EMPLOYMENT ARRANGEMENTS WITH MESSRS. WOLF, GANGWAL AND NAGIN
Under his employment arrangements with USAir Group, Mr. Wolf is entitled to
an annual base salary of $500,000. In addition, Mr. Wolf is eligible for an
annual bonus pursuant to the terms of the Executive Incentive Plan. Bonus
eligibility will be based on performance criteria established by the Human
Resources Committee or payable at the Committee's discretion if they believe
performance and circumstances are appropriate for such payment. If Mr. Wolf
achieves his target, he will receive a bonus of 50% of annual base salary,
which may be increased for results in excess of the target up to a maximum
bonus of 100% of base salary.
Mr. Wolf is entitled to an award of stock options and restricted stock, as
follows: (i) 1,300,000 stock options effective January 16, 1996, at an
exercise price based on the fair market value of the stock on January 16, 1996
($12.1875) with 500,000 options vesting immediately on January 16, 1996,
575,000 options vesting on January 16, 1997, 75,000 options vesting on January
16, 1998, 75,000 options vesting on January 16, 1999, and the remaining 75,000
options vesting on January 16, 2000, and (ii) 325,000 shares of restricted
stock, effective January 16, 1996, vesting ratably on the first through fourth
anniversaries of the effective grant date.
USAir Group has entered into a supplemental retirement agreement with Mr.
Wolf which will provide him with a pension benefit under the formula contained
in USAir's frozen defined benefit pension plan for salaried employees, on the
basis that he had "deemed credited service" under the plan for all of his 29
years of service within the airline industry and without regard to certain
limitations set forth in the Code. Benefits will be calculated on the
assumption that Mr. Wolf's annual compensation has been and will remain at the
rate of the annual base salary set forth above and the maximum bonus described
above has been earned. Mr. Wolf became vested in 25% of this supplemental
benefit on the date of his employment and will become incrementally vested in
the remainder of this supplemental benefit ratably over a period of three
years from the date of his employment. This benefit is subject to an offset
for benefits payable as a result of contributions from USAir to the tax-
qualified and non-qualified defined contribution retirement program for
salaried employees of USAir.
Under their employment arrangements with USAir Group, Messrs. Gangwal and
Nagin are entitled to annual base salaries of $400,000 and $340,000,
respectively. Upon employment, Mr. Gangwal became entitled to the purchase and
assignment by USAir of an annuity with an after-tax value of $1 million and
Mr. Nagin received a $275,000 signing bonus. Both Mr. Gangwal and Mr. Nagin
are eligible for an annual bonus pursuant to the terms of USAir Group's
Executive Incentive Plan. Bonus eligibility will be based on performance
criteria to be established by the Human Resources Committee or payable at the
Committee's discretion if they believe performance and circumstances are
appropriate for such payment. If Mr. Gangwal and Mr. Nagin achieve their
targets, they will receive a bonus of 50% and 35% of their annual base salary,
respectively, which may be increased for results in excess of the target up to
a maximum bonus of 100% and 70% of their base salaries, respectively. Messrs.
Gangwal and Nagin are entitled to awards of 850,000 and 225,000 stock options,
respectively, effective January 31, 1996, at an exercise price of $14.875 (the
fair market value on January 31, 1996), with 20% of the respective options
vesting immediately on such dates and an additional 20% vesting on the first
through fourth anniversaries of such dates.
Messrs. Gangwal and Nagin received 250,000 and 50,000 shares, respectively,
of restricted stock, with 50,000 and 10,000 shares, respectively, vesting
immediately on February 19 and 6, 1996, respectively, and 20% of each such
grant vesting on the first through fourth anniversaries of such dates.
USAir has entered into supplemental retirement agreements with Messrs.
Gangwal and Nagin which will provide each with a pension benefit under the
formula contained in USAir's frozen defined benefit pension plan for salaried
employees, on the basis that each had "deemed credited service" under the plan
accruing at the rate of: (1) five (Mr. Gangwal) or four (Mr. Nagin) years of
"deemed service" for each year of actual service up through the fifth year of
employment of each; and (2) one year of service for each year of actual
service after five years of employment; up to a maximum of 30 years of
credited service. The benefits will be calculated on actual base salary and
the assumption that the maximum bonus described above has been earned. This
benefit is
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subject to an offset for benefits payable as a result of contributions from
USAir to the tax-qualified and non-qualified defined contribution retirement
program for salaried employees of USAir.
In connection with their employment arrangements, each of Messrs. Wolf,
Gangwal and Nagin also received relocation assistance (and, in the case of
Messrs. Gangwal and Nagin, tax reimbursement related thereto) and became
entitled to reimbursement of fees for certain tax and financial planning
advice. Each of Messr. Wolf's, Gangwal's and Nagin's stock options and
restricted stock and benefits under the supplemental retirement agreement will
vest immediately upon a change-of-control, a termination of employment without
cause or upon resignation for good reason.
USAir Group will enter into agreements substantially similar to the
Employment Contracts (described below) with each of Messrs. Wolf, Gangwal and
Nagin.
ARRANGEMENTS CONCERNING TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
In connection with their respective retirements, USAir Group entered into
certain arrangements with Messrs. Schofield, Salizzoni and Lloyd.
Pursuant to an agreement approved by the Board of Directors, in
consideration for his past services to USAir and for services between the date
of the letter agreement and the time of his retirement, USAir agreed to
provide Mr. Schofield with (i) payments required under his employment
agreement with USAir Group for termination upon mutual agreement paid as if
such termination was by Mr. Schofield for "good reason", (ii) a six-month
consulting arrangement and (iii) supplemental pension benefits based on his
salary of record, as described below.
Upon his retirement, Mr. Schofield received an aggregate of $1,719,231
pursuant to the terms of his Employment Agreement and became entitled to
receive payment for his six-month consulting arrangement at his salary rate in
effect on the date of his retirement ($500,000).
Mr. Schofield's supplemental pension benefit will be calculated as follows:
(a) the pension benefit calculated under the benefit formula set forth in the
USAir Retirement Plan as if the Retirement Plan had not been frozen in 1991
and using Mr. Schofield's salary of record, rather than reduced salary, for
the years 1992, 1993, 1994 and 1995, less (b) the benefits payable to Mr.
Schofield in the aggregate under any qualified and non-qualified pension plans
of USAir (the "Pension Plans"), to the extent such benefits are attributable
to contributions made by USAir, and (c) without regard to certain limitations
set forth in the Code. The supplemental benefit payable shall be unfunded and
shall be paid directly from USAir's general assets.
In connection with their resignations as executive officers effective
February 19, 1996 and February 5, 1996, respectively, Mr. Salizzoni and Mr.
Lloyd agreed to remain employees of USAir through March 31, 1996 and April 4,
1996, respectively, to assist their successors in transition. During the
period of employment from February 19 through March 31, 1996 in the case of
Mr. Salizzoni and February 5, 1996 through April 4, 1996 in the case of Mr.
Lloyd, each received (or will receive) his base salary and all other
compensation and benefits applicable to his previous position as a senior
officer. Upon their retirements, Mr. Salizzoni received an amount equal to his
base salary payable from April 1, 1996 through the remainder of the
"employment period" ending on November 12, 1999 (an aggregate of $1,446,000)
and Mr. Lloyd received an amount equal to his base salary payable from April
4, 1996 through the remainder of the "employment period" ending on June 29,
1999 (an aggregate of $953,077).
USAir agreed to provide Mr. Salizzoni and Mr. Lloyd with (a) service credit,
(b) age credit, and (c) earnings credit at their respective 1996 base salary
rates, through the remainder of the Employment Period under their Employment
Agreements (i.e., through November 12, 1999 for Mr. Salizzoni and June 29,
1999 for Mr. Lloyd) under their respective supplemental pension arrangements.
In addition, certain options held by Mr. Salizzoni lapsed and certain unvested
options (with respect to 75,000 shares) vested and certain shares of
restricted stock
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<PAGE>
held by Mr. Lloyd were forfeited and the restrictions on certain shares of
restricted stock (with respect to 5,250 shares) lapsed.
USAir currently has employment contracts (the "Employment Contracts") with
the executive officers (the "Executives") named in the Summary Compensation
Table who remain employees of USAir Group. The terms of the Employment
Contracts extend until the earlier of the fourth anniversary thereof or the
Executive's normal retirement date and are subject to automatic one-year
annual extensions on each anniversary date (to the fourth anniversary of such
anniversary date) unless advance written notice is given by USAir. In exchange
for each Executive's commitment to devote his or her full business efforts to
USAir, the agreements provide that each Executive will be re-elected to a
responsible executive position with duties substantially similar to those in
effect during the prior year and will receive (1) an annual base salary at a
rate not less than that in effect during the previous year, (2) incentive
compensation as provided in the contract and (3) insurance, disability,
medical and other benefits generally granted to other officers. In the event
of a change of control, as defined in each Employment Contract, the term of
each Employment Contract is automatically extended until the earlier of the
fourth anniversary of the change of control date or the Executive's normal
retirement date.
The Employment Contracts provide that, should USAir or any successor fail to
re-elect the Executive to his or her position, assign the Executive to
inappropriate duties which result in a diminution in the Executive's position,
authority or responsibilities, fail to compensate the Executive as provided in
the Employment Contract, transfer the Executive in violation of the Employment
Contract, fail to require any successor to USAir to comply with the Employment
Contract or otherwise terminate the Executive's employment in violation of the
Employment Contract, the Executive may elect to treat such failure as a breach
of the Employment Contract if the Executive then terminates employment. As
liquidated damages as the result of an event not following a change of control
that is deemed to be a breach of the Employment Contracts, USAir or its
successor would be required to pay the Executive a lump sum equal to his or
her annual base salary for the then remaining term of the Employment Contract,
and to continue granting certain employee benefits for the then remaining term
of the Executive's Employment Contract. If the breach follows a change of
control, the Executive would be entitled to receive (i) an amount equal to the
product of three times the sum of the Executive's annual base salary plus an
annual bonus, (ii) a lump sum equal to the actuarial equivalent of the pension
benefits which the Executive would have received had he or she remained
employed by USAir until the end of the term of the Employment Contract, (iii)
medical benefits until such time as the Executive qualifies for group medical
benefits from another employer, (iv) travel benefits for the Executive's life,
(v) reimbursement of reductions in salary sustained by the Executive as a
result of a comprehensive cost reduction program initiated by USAir in October
1991, and (vi) continuation of certain other benefits during the remainder of
the term of the Employment Contract. In addition, except under certain
circumstances, during the 30-day period immediately following the first
anniversary of a change of control any Executive could elect to terminate his
or her Employment Contract for any reason and receive the liquidated damages
described in the immediately preceding sentence. Each Employment Contract
provides that if USAir breaches the Employment Contract, as described above,
each Executive shall be entitled to recover from USAir reasonable attorney's
fees in connection with enforcement of such Executive's rights under the
Employment Contract. Each Employment Contract also provides that any payments
the Executive receives in the event of a termination after a change of control
shall be increased, if necessary, such that, after taking into account all
taxes he or she would incur as a result of such payments, the Executive would
receive the same after-tax amount he or she would have received had no excise
tax been imposed under Section 4999 of the Code.
Currently, under USAir Group's 1984 Stock Option and Stock Appreciation
Rights Plan (the "1984 Plan") and 1988 Stock Incentive Plan (the "1988 Plan,"
and together with the 1984 Plan, the "Plans"), pursuant to which employees of
USAir Group and its subsidiaries have been awarded stock options and stock
appreciation rights with respect to Common Stock and, in the case of the 1988
Plan, shares of Restricted Stock, the occurrence of a change of control, as
defined, would make all granted options immediately exercisable without regard
to the vesting provisions thereof. In addition, grantees would be able, during
the 60-day period immediately following a change of control, to surrender all
unexercised stock options under the Plans to USAir Group for a cash payment
equal to, in the case of options not issued in tandem with stock appreciation
rights, the excess, if any,
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<PAGE>
of the fair market value of the Common Stock over the exercise prices of such
stock options or, in the case of options issued in tandem with stock
appreciation rights, the positive value of such stock appreciation rights.
BENEFICIAL SECURITY OWNERSHIP
USAir Group owns all the outstanding stock of USAir. The following
information pertains to Common Stock, Series A Preferred Stock, Series F
Preferred Stock, Series T Preferred Stock and Depositary Shares ("Depositary
Shares"), each representing 1/100 of a share of USAir Group's $437.50 Series B
Cumulative Convertible Preferred Stock, without par value ("Series B Preferred
Stock"), beneficially owned by all directors, nominees for director and
executive officers of USAir Group as of January 31, 1996. Unless indicated
otherwise, the information refers to ownership of Common Stock of USAir Group.
Unless indicated otherwise by footnote, the owner exercises sole voting and
investment power over the securities (other than unissued securities, the
ownership of which has been imputed to such owner).
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
OWNER SHARES CLASS(1)
----- ----------- ----------
<S> <C> <C>
DIRECTORS
Robert J. Ayling................. -- (2) (2)
Robert W. Bogle.................. 1,500
Edwin I. Colodny................. 84,512(3)
Mathias J. DeVito................ 700
Rakesh Gangwal................... -- (4)
George J. W. Goodman............. 200 Depositary Shares (5)
John W. Harris................... 400
Edward A. Horrigan, Jr. ......... 500
Robert LeBuhn.................... 8,000
Roger P. Maynard................. -- (2) (2)
John G. Medlin, Jr. ............. 2,000
Hanne M. Merriman................ 1,500
Raymond W. Smith................. 500
Derek M. Stevens................. -- (2) (2)
Stephen M. Wolf.................. -- (6)
EXECUTIVE OFFICERS
Seth E. Schofield................ 482,889(7)
Frank L. Salizzoni............... 192,800(8)
W. Thomas Lagow.................. 185,711(9)
James T. Lloyd................... 208,992(10)
John R. Long III................. 129,539(11)
25 directors and executive
officers of USAir Group as a
group........................... 1,687,872.5(12) 2.7%
</TABLE>
- --------
(1) Percentages are shown only where they exceed one percent of the number of
shares outstanding and, in the case of Common Stock holdings, are based
on shares of Common Stock outstanding on January 31, 1996.
(2) A wholly-owned subsidiary of BA is recordholder of 30,000 or 100% of the
outstanding shares of Series F Preferred Stock, 152.1 or 100% of the
outstanding shares of the Series T-1 Preferred Stock and 9,919.8 or 100%
of the outstanding shares of the Series T-2 Preferred Stock pursuant to
the Investment Agreement dated as of January 21, 1993 with USAir Group
(as amended, the "Investment Agreement"). Messrs. Ayling, Maynard and
Stevens are Chief Executive, Director of Investments and Acquisitions and
Chief Financial Officer, respectively, of BA and have been designated by
BA to act as directors of USAir and USAir Group pursuant to the
Investment Agreement. Messrs. Ayling, Maynard and Stevens each disclaims
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<PAGE>
beneficial ownership of Series F Preferred Stock and Series T Preferred
Stock. See the following table for information concerning the voting power
of Series F Preferred Stock and Series T Preferred Stock.
(3) The listing of Mr. Colodny's holding includes 40,000 shares of Common
Stock issuable within 60 days of January 31, 1996 upon exercise of stock
options.
(4) See "--Employment Arrangements with Messrs. Wolf, Gangwal and Nagin" for
a description of Mr. Gangwal's shares of Common Stock subject to certain
restrictions upon disposition ("Restricted Stock") and stock options.
(5) Mr. Goodman's holding of Depositary Shares is convertible into 498.5
shares of Common Stock.
(6) See "--Employment Arrangements with Messrs. Wolf, Gangwal and Nagin" for
a description of Mr. Wolf's shares of Restricted Stock and stock options.
(7) The listing of Mr. Schofield's holdings includes 390,569 shares of Common
Stock issuable within 60 days of January 31, 1996 upon exercise of stock
options.
(8) The listing of Mr. Salizzoni's holdings includes 177,800 shares of Common
Stock issuable within 60 days of January 31, 1996 upon exercise of stock
options.
(9) The listing of Mr. Lagow's holding includes 153,211 shares of Common
Stock issuable within 60 days of January 31, 1996 upon exercise of stock
options.
(10) The listing of Mr. Lloyd's holding includes 163,992 shares of Common
Stock issuable within 60 days of January 31, 1996 upon exercise of stock
options.
(11) The listing of Mr. Long's holding includes 96,472 shares of Common Stock
issuable within 60 days of January 31, 1996 upon exercise of stock
options.
(12) The listing of all directors' and officers' holdings includes, in the
case of Depositary Shares, the number of shares of Common Stock into
which the Depositary Shares are convertible, and also includes 1,292,893
shares of Common Stock issuable within 60 days of January 31, 1996 upon
exercise of stock options and 135,500 shares of Restricted Stock.
Effective December 31, 1995 the retirement Plan for Outside Directors of
USAir Group was terminated and the value of the accrued benefits for past
service was converted into units of phantom stock of the Corporation
("Deferred Stock Units") based on the average price of the stock in the month
of December 1995. Set forth below are the number of Deferred Stock Units held
by each director and nominee for director. Although each Deferred Stock Unit
represents the economic equivalent of a share of Common Stock, no voting
rights are attached thereto and the Deferred Stock Units lack certain other
attributes of Common Stock.
The only persons known to USAir (from Company records and reports on
Schedules 13D and 13G filed with the Commission which owned, as of April 26,
1996, more than 5% of USAir Group's Common Stock, Series A Preferred Stock,
Series F Preferred Stock and Series T Preferred Stock are listed below:
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS OF BENEFICIAL NATURE OF BENEFICIAL PERCENT OF
TITLE OF CLASS OWNER OWNERSHIP CLASS(1)
- -------------- ------------------------------ -------------------- ----------
<S> <C> <C> <C>
Series A Preferred
Stock.................. Berkshire Hathaway Inc. 358,000(2) 100%(3)
1440 Kiewit Plaza
Omaha, Nebraska 68131
Series F Preferred
Stock.................. BritAir Acquisition Corp. Inc. 30,000(4) 100%(5)
75-20 Astoria Blvd.
Jackson Heights, NY 11370
Series T Preferred
Stock.................. BritAir Acquisition Corp. Inc. 9,919.8(6) 100%(5)
75-20 Astoria Blvd.
Jackson Heights, NY 11370
Common Stock............ Tiger Management Corp. 6,000,000 9.36%
101 Park Avenue, 48th Floor
New York, New York 10178
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF BENEFICIAL PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
- -------------- ------------------------------------ -------------------- ----------
<S> <C> <C> <C>
Common Stock............ FMR Corp. 4,147,883(7) 6.47%
82 Devonshire Street
Boston, Massachusetts 02109
Common Stock............ Waddell & Reed 4,766,800(8) 7.44%
6300 Lamar
Shawnee Mission, Kansas 66201
Common Stock............ The Equitable Companies Incorporated 5,657,125(9) 9.0%
787 Seventh Avenue
New York, New York 10019
Series B Preferred
Stock.................. Ryback Management 427,900 10.0%
7711 Carondelet
St. Louis, Missouri 63105
Series B Preferred
Stock.................. Global Bermuda Limited/Merced Partners, MN 408,000 9.57%
601 Carlson Parkway, Ste. 200
Minnetonka, Minnesota 55305
Series B Preferred
Stock.................. Everest Capital Limited 252,399 5.92%
Comer House
20 Parliament Street
P.O. Box HM 2458
Hamilton, Bermuda HMJX
Series B Preferred
Stock.................. Soros Fund Management 218,600 5.13%
888 Seventh Avenue, 32nd Flr.
Suite 3300
New York, New York 10106
</TABLE>
- --------
(1) Represents percent of class of stock outstanding on April 26, 1996.
(2) Number of shares as to which such person has shared voting power--358,000;
shared dispositive power--358,000.
(3) These shares of Series A Preferred Stock are owned directly by affiliates
of Berkshire, are convertible, under certain circumstances and subject to
certain antidilution adjustments, into 9,239,944 shares of Common Stock
and represent approximately 10.2% of the combined voting power of the
outstanding Common Stock, Series A Preferred Stock, Series F Preferred
Stock and Series T Preferred Stock, voting as a single class, at the
meeting. A number of Rights, equal to the number of shares of Common Stock
into which the Series A Preferred Stock is convertible, is also owned by
this person.
(4) Number of shares as to which BA has sole voting power and sole dispositive
power--30,000.
(5) BritAir Acquisition Corp. Inc. is a wholly-owned subsidiary of BA and owns
Series F Preferred Stock and Series T Preferred Stock pursuant to the
Investment Agreement. Series F Preferred Stock and Series T Preferred
Stock are convertible, under certain circumstances on or after January 21,
1997 and subject to certain antidilution adjustments and Foreign Ownership
Restrictions, into a total of 15,458,851 and 3,831,695 shares of Common
Stock, respectively. Together, the Series F Preferred Stock and Series T
Preferred Stock represent approximately 21.2% of the combined voting power
of the outstanding Common Stock, Series A Preferred Stock, Series F
Preferred Stock and Series T Preferred Stock, voting as a single class, at
the meeting. A number of Rights, equal to the number of shares of Common
Stock into which the Series F Preferred Stock and Series T Preferred Stock
are convertible, are also owned by this person. As disclosed above, three
directors of the Company, Messrs. Ayling, Maynard and Stevens, have been
designated by BA to act as directors of USAir and USAir Group pursuant to
the Investment Agreement and disclaim beneficial ownership of Series F
Preferred Stock and Series T Preferred Stock.
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<PAGE>
(6) Reflects 152.1 or 100% of the outstanding shares of Series T-1 Preferred
Stock and 9,919.8 or 100% of the outstanding shares of Series T-2
Preferred Stock. BA has sole voting power and sole dispositive power as to
all these outstanding shares of Series T Preferred Stock.
(7) As set forth in a Schedule 13D amendment dated February 28, 1996, FMR
beneficially owns, through Fidelity Management & Research Company
("Fidelity"), as advisor to fifteen investment companies and other funds
(the "Fidelity Funds"), 6,418,794 shares (including shares issuable upon
the conversion of 71,000 Depositary Shares), and through Fidelity
Management Trust Company, as trustee or managing agent for various private
investment accounts (the "Accounts"), 733,218 shares (including shares
issuable upon the conversion of 238,500 Depositary Shares). FMR has the
sole power to dispose of the shares held by the Fidelity Funds and the
Accounts. The power to vote or direct the voting of the shares held by the
Fidelity Funds resides within the boards of trustees of such funds.
Fidelity carries out the voting of such shares under written guidelines
established by such trustees. FMR has sole power to vote or direct the
voting of the shares held by the Accounts.
(8) As set forth in a Schedule 13G dated February 14, 1996, as of December 31,
1995, Waddell & Reed Investment Management Company has sole voting power
and sole dispositive power over 3,880,300 of these shares. Each of Waddell
& Reed, Inc., Waddell & Reed Financial Services, Inc., United Investors
Management Company, Liberty National Life Insurance Company and Torchmark
Corporation claims sole voting and dispositive power over 5,385,301
shares.
(9) As set forth in a Schedule 13G dated February 9, 1996, as of December 31,
1995, the Equitable Life Assurance Society of the United States has sole
voting power and sole dispositive power over 1,379,300 of these shares and
Alliance Capital Management L.P. has sole voting power and sole
dispositive power over 4,277,825 of these shares. Each of the Equitable
Life Assurance Society of the United States and Alliance Capital
Management L.P. is an indirect subsidiary of The Equitable Companies
Incorporated.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were originally issued and sold on February 16, 1996 to the
Initial Purchasers (as defined in the Collateral Agency Agreement) who resold
the Old Notes to "qualified institutional buyers" (as defined in Rule 144A
under the Securities Act). In connection with the sale of the Old Notes, USAir
and the Initial Purchasers entered into the Registration Rights Agreement
pursuant to which, USAir agreed to file with the Commission a registration
statement relating to an exchange offer pursuant to which new notes covered by
such registration statement and containing terms identical in all respects to
the terms of the Old Notes would be offered in exchange for Old Notes tendered
at the option of the holders thereof or, if applicable interpretations of the
staff of the Commission did not permit USAir to effect such an exchange offer,
USAir agreed, at its cost, to file a shelf registration statement covering
resales of the Notes (the "Shelf Registration Statement") and use best efforts
to have such Shelf Registration Statement declared effective and kept
effective for a period of three years from the effective date thereof.
The purpose of the Exchange Offer is to fulfill the Company's obligations
with respect to the Registration Rights Agreement. Except as otherwise noted
herein, this Prospectus may not be used by any holder of the Old Notes or any
holder of the New Notes to satisfy the registration and prospectus delivery
requirements under the Securities Act that may apply in connection with any
resale of such Old Notes or New Notes. See "--Terms of the Exchange" below.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000
in principal amount of New Class A Notes for each $1,000 in principal amount
of Old Class A Notes, $1,000 in principal amount of New Class B Notes for each
$1,000 in principal amount of Old Class B Notes and $1,000 in principal amount
of New Class C Notes for each $1,000 in principal amount of Old Class C Notes.
The terms of the New Notes are identical in all respects to the terms of
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<PAGE>
the Old Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the New Notes will generally be freely transferable by holders
thereof and will not be subject to any covenant regarding registration. The
New Notes will evidence the same debt as the Old Notes and will be entitled to
the benefits of the applicable Indenture. See "Description of the Notes".
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
USAir has not requested, and does not intend to request, an interpretation
by the staff of the Commission with respect to whether the New Notes issued
pursuant to the Exchange Offer in exchange for the Old Notes may be offered
for sale, resold or otherwise transferred by any holder without compliance
with the registration and prospectus delivery provisions of the Securities
Act. Instead, based on an interpretation by the staff of the Commission set
forth in a series of no-action letters issued to third parties, USAir believes
that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for sale, resold and otherwise transferred by any holder of
such New Notes (other than any such holder which is an "affiliate" of USAir
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Any holder who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes cannot rely on such interpretation by the staff
of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered.
Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on , 1996, unless USAir in its
sole discretion extends the period during which the Exchange Offer is open, in
which event the term "Expiration Date" shall mean the latest time and date on
which the Exchange Offer, as so extended by USAir, shall expire. USAir
reserves the right to extend the Exchange Offer at any time and from time to
time by giving oral or written notice to Wilmington Trust Company (the
"Exchange Agent") and by timely public announcement communicated, unless
otherwise required by applicable law or regulation, by making a release to an
appropriate news agency. During any extension of the Exchange Offer, all Old
Notes previously tendered pursuant to the Exchange Offer will remain subject
to the Exchange Offer.
The Exchange Date will be the first business day following the Expiration
Date. USAir expressly reserves the right to (i) terminate the Exchange Offer
and not accept for exchange any Old Notes if any of the events set forth below
under "--Conditions to the Exchange Offer" shall have occurred and shall not
have been waived by USAir and (ii) amend the terms of the Exchange Offer in
any manner which, in its good faith judgment, is advantageous to the holders
of the Old Notes, whether before or after any tender of the Old Notes. Unless
the Company terminates or extends the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date, USAir will exchange the New Notes for
the Old Notes on the Exchange Date.
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<PAGE>
HOW TO TENDER
The tender to USAir of Old Notes by a Noteholder pursuant to one of the
procedures set forth below will constitute an agreement between such holder
and USAir in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
A Noteholder may tender the same by (i) properly completing and signing the
Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or
certificates representing the Notes being tendered and any required signature
guarantees, to the Exchange Agent at its address set forth in the Letter of
Transmittal on or prior to the Expiration Date (or complying with the
procedure for book-entry transfer described below) or (ii) complying with the
guaranteed delivery procedures described below.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the New Notes to be issued in exchange therefor are to be
issued in the name of the registered holder (which term, for the purposes
described herein, shall include any participant in The Depository Trust
Company (also referred to as a "book-entry transfer facility") whose name
appears on a security listing as the owner of Old Notes), the signature of
such signer need not be guaranteed. In any other case, the tendered Old Notes
must be endorsed or accompanied by written instruments of transfer in form
satisfactory to USAir and duly executed by the registered holder and the
signature on the endorsement or instrument of transfer must be guaranteed by a
commercial bank or trust company located or having an office, branch, agency
or correspondent in the United States, or by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc. (any of the foregoing, an "Eligible Institution"). If the New
Notes are to be delivered to an address other than that of the registered
holder appearing on the note register for the Old Notes, the signature in the
Letter of Transmittal must be guaranteed by an Eligible Institution.
The method of delivery of Old Notes and all other documents is at the
election and risk of the Noteholder. If sent by mail, it is recommended that
registered mail, return receipt requested, be used, proper insurance obtained,
and the mailing be made sufficiently in advance of the Expiration Date to
permit delivery to the Exchange Agent on or before the Expiration Date.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Notes at the book-entry
transfer facility for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of Old Notes by causing such book-entry transfer facility to transfer
such Old Notes into the Exchange Agent's accounts with respect to the Old
Notes at the book entry transfer facility in accordance with the book entry
transfer facility's procedures for such transfer. Although delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth on the back cover page of this
Prospectus on or prior to the Expiration Date, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures.
If a Noteholder desires to accept the Exchange Offer and time will not
permit a Letter of Transmittal or Old Notes to reach the Exchange Agent before
the Expiration Date or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if the Exchange Agent
has received at its office listed on the back cover hereof on or prior to the
Expiration Date a letter, telegram or facsimile transmission (receipt
confirmed by telephone and an original delivered by guaranteed overnight
courier) from an Eligible Institution setting forth the name and address of
the tendering holder, the names in which the Old Notes are registered and, if
possible, the certificate numbers of the Old Notes to be tendered, and stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange trading days after the date of execution of such letter,
telegram or facsimile transmission by the Eligible Institution, the Old Notes,
in proper form for
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transfer (or a confirmation of book-entry transfer of such Old Notes into the
Exchange Agent's account at the book-entry transfer facility), will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Old Notes being tendered by the above-described method are deposited with the
Exchange Agent with the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required
documents), USAir may, at its option, reject the tender. Copies of a Notice of
Guaranteed Delivery which may be used by Eligible Institutions for the
purposes described in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering Noteholder's properly completed and duly signed Letter of
Transmittal accompanied by the Old Notes (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the book-entry
transfer facility) is received by the Exchange Agent, or (ii) a Notice of
Guaranteed Delivery or letter, telegram, or facsimile transmission to similar
effect (as provided above) from an Eligible Institution is received by the
Exchange Agent. Issuances of New Notes in exchange for Old Notes tendered
pursuant to a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) by an Eligible Institution
will be made only against deposit of the Letter of Transmittal (and any other
required documents) and the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by USAir, whose determination will be final and binding. USAir
reserves the absolute right to reject any or all tenders not in proper form or
the acceptance for exchange of which may, in the opinion of USAir, be
unlawful. USAir also reserves the absolute right to waive any condition to the
Exchange Offer or any defect or irregularity in the tender of any Old Notes.
None of USAir, the Exchange Agent or any other person will be under any duty
to give notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to USAir and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire New Notes issuable
upon the exchange of such tendered Old Notes, and that, when the same are
accepted for exchange, USAir will acquire good and unencumbered title to the
tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also
warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or USAir to be necessary or desirable
to complete the exchange, assignment and transfer of tendered Old Notes or
transfer ownership of such Old Notes on the account books maintained by a
book-entry transfer facility. The Transferor further agrees that acceptance of
any tendered Old Notes by USAir and the issuance of New Notes in exchange
therefor shall constitute performance in full by USAir of its obligations
under the Registration Rights Agreement and that USAir shall have no further
obligations or liabilities thereunder. All authority conferred by Transferor
will survive the death or incapacity of the Transferor and every obligation of
the Transferor shall be binding upon the heirs, legal representatives,
successors, assigns, executors and administrators of such Transferor.
The Transferor certifies that it is not an "affiliate" of USAir within the
meaning of Rule 405 under the Securities Act and that it is acquiring the New
Notes offered herein in the ordinary course of such Transferor's business and
that such Transferor has no arrangement with any person to participate in the
distribution of such New Notes. Each transferor which is a broker-dealer
receiving New Notes for its own account must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. By so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may
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<PAGE>
be used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities.
USAir will, for a period of 90 days after the Expiration Date, make this
Prospectus available to any broker-dealer for use in connection with any such
resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes pursuant to the Exchange Offer are irrevocable, except
that Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
To be effective, a written, telegraphic, telex or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent, and with
respect to a facsimile transmission, must be confirmed by telephone and an
original delivered by guaranteed overnight delivery. Any such notice of
withdrawal must specify the person named in the Letter of Transmittal as
having tendered Old Notes to be withdrawn, the certificate numbers of Old
Notes to be withdrawn, the principal amount of Old Notes to be withdrawn, a
statement that such holder is withdrawing his election to have such Old Notes
exchanged, and the name of the registered holder of such Old Notes, and must
be signed by the Noteholder in the same manner as the original signature on
the Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to USAir that the person withdrawing the
tender has succeeded to the beneficial ownership of the Old Notes being
withdrawn. The Exchange Agent will return the properly withdrawn Old Notes
promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Old Notes or otherwise
comply with the book-entry transfer facility procedure. Any questions as to
the validity of notice of withdrawals, including time of receipt, will be
determined by USAir, and such will be final and binding on all parties.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Notes validly tendered and not withdrawn and
issuance of the New Notes will be made on the Exchange Date. For the purposes
of the Exchange Offer, the Company shall be deemed to have accepted for
exchange validly tendered Old Notes when, as and if USAir has given oral or
written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Old Notes
for the purposes of receiving New Notes from USAir and causing Old Notes to be
assigned, transferred and exchanged. Upon the terms and subject to the
conditions of the Exchange Offer, delivery of New Notes to be issued in
exchange for accepted Old Notes will be made by the Exchange Agent promptly
after acceptance of the tendered Old Notes. Tendered Old Notes not accepted
for exchange by USAir will be returned without expense to the tendering
Noteholders promptly following the Expiration Date or, USAir terminates the
Exchange Offer prior to the Expiration Date, promptly after the Exchange Offer
is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company will not be required to accept for exchange
or exchange Old Notes for New Notes and may terminate the Exchange Offer (by
oral or written notice to the Exchange Agent and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to any appropriate news agency), or, at its option, modify or
otherwise amend the Exchange Offer, if any of the following events shall
occur, which occurrence, in the sole judgment of the Company and regardless of
the circumstances (including any action or inaction by the Company) giving
rise to any such event, makes it inadvisable to proceed with the Exchange
Offer or with such acceptance for exchange or such exchange:
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<PAGE>
(i) any injunction, order, or decree shall have been issued by any court
or governmental agency or other governmental regulatory or administrative
agency or commission of competent jurisdiction that would be violated by
(ii) any statute, rule or regulation (including, without limitation, any
applicable interpretation of the Staff of the Commission) shall be enacted,
promulgated or deemed applicable to the Exchange Offer by any domestic or
foreign government or governmental authority or any action shall have been
taken, proposed or threatened by any domestic or foreign government or
governmental authority that would be violated by the Exchange Offer.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions. In addition, the Company may amend the Exchange Offer at
any time prior to the Expiration Date if any of the conditions set forth above
occur. Moreover, regardless of whether any of such conditions has occurred,
the Company may amend the Exchange Offer in any manner which, in its good
faith judgment, is advantageous to holders of the Old Notes.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in its sole discretion. Any
determination made by the Company concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
Wilmington Trust Company has been appointed as the Exchange Agent for the
Exchange Offer. All correspondence in connection with the Exchange Offer and
the Letter of Transmittal should be addressed as follows: By Hand, Overnight
Courier or Mail: Wilmington Trust Company, 1100 North Market Street, Rodney
Square North, Wilmington, Delaware 19890, Attention: David A. Vanaskey, Jr.,
Corporate Trust Administration.
SOLICITATION OF TENDERS; EXPENSES
USAir has not retained any dealer-manager or similar agent in connection
with the Exchange Offer and will not make any payments to brokers, dealers or
others for soliciting acceptances of the Exchange Offer. USAir will, however,
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse it for reasonable out-of-pocket expenses in connection therewith.
USAir will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this and related documents to the beneficial owners of
the Old Notes and in handling or forwarding tenders for their customers.
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by USAir.
Neither the delivery of this Prospectus nor any exchange made hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of USAir since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be
in compliance with the laws of such jurisdiction. However, USAir may, at its
discretion, take such action as it may deem necessary to make the Exchange
Offer in any such jurisdiction and extend the Exchange Offer to holders of Old
Notes in such jurisdiction. In any jurisdiction in which the securities laws
or blue sky laws of which require the Exchange Offer to be made by a licensed
broker or dealer, the Exchange Offer is being made on behalf of USAir by one
or more registered brokers or dealers which are licensed under the laws of
such jurisdiction.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Noteholders are urged to consult their
financial and tax advisors in making their own decisions on what action to
take.
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As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange offer,
USAir will have fulfilled a covenant contained in the Registration Rights
Agreement. Noteholders who do not tender their certificates in the Exchange
Offer will continue to hold such certificates and will be entitled to all the
rights, and limitations applicable thereto, under the Indentures, except for
any such rights under the Registration Rights Agreement which by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. See "Description of the Notes". All untendered Old Notes
will continue to be subject to the restrictions on transfer set forth in the
Indentures. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered Old Notes could be adversely
affected.
USAir may in the future seek to acquire untendered Old Notes in open market
or privately negotiated transactions, through subsequent exchange offers or
otherwise. USAir has no present plan to acquire any Old Notes which are not
tendered in the Exchange Offer.
DESCRIPTION OF THE NOTES
The following summaries of certain provisions of the Notes, the Indentures,
the Collateral Agency Agreement, the Liquidity Agreements and the Registration
Rights Agreement do not purport to be complete and are subject to reference to
the specific provisions thereof. Copies of the foregoing documents have been
filed with the Commission as exhibits to the Exchange Offer Registration
Statement.
PAYMENT OF PRINCIPAL AND INTEREST
The outstanding principal amount of each class of Notes will be due and
payable on the Legal Maturity Date. Based upon the expected principal payments
described below, it is expected that the principal amount of the Notes will
have been paid in full on or prior to April 15, 2008. Interest on each Note
will accrue from February 16, 1996 or the most recent date to which interest
has been paid or provided for and will be payable on each Interest Payment
Date. Payments of principal of the Notes are expected to be made on each
Principal Payment Date. Payments by USAir of principal of and interest and
premium, if any, on the Notes will be made by wire transfer in immediately
available funds to the Collateral Agent. If any Payment Date is not a Business
Day, payments to be made on such Payment Date will be made on the next
Business Day, without additional interest.
Except as provided in the applicable Indenture or in the Collateral Agency
Agreement, all payments to be made by USAir, including all payments in respect
of principal, interest, premium, Events of Loss and redemptions of the Notes,
are payable to the Collateral Agent for application in accordance with the
Collateral Agency Agreement. All payments on the Notes will be made in the
order of priority described below under "--Priority of Distributions."
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PRINCIPAL AMORTIZATION OF CLASS A, CLASS B AND CLASS C NOTES
Principal of the Notes of each Class will be due and payable on the
applicable Legal Maturity Date, although it is expected that payments of
principal will be made prior to such date on the dates and in the amounts set
forth below (to the extent that the Collateral Agent receives funds therefor
from USAir):
<TABLE>
<CAPTION>
CLASS A
EXPECTED NOTES CLASS A NOTES
PRINCIPAL PRINCIPAL EXPECTED POOL
PAYMENT DATE PAYMENTS FACTOR
------------ ------------ -------------
<S> <C> <C>
April 15, 1996................................. $ 0 1.0000000
October 15, 1996............................... 3,697,000 0.9740379
April 15, 1997................................. 1,691,500 0.9621594
October 15, 1997............................... 1,691,500 0.9502809
April 15, 1998................................. 1,522,350 0.9395902
October 15, 1998............................... 1,522,350 0.9288996
April 15, 1999................................. 1,379,890 0.9192093
October 15, 1999............................... 1,379,890 0.9095191
April 15, 2000................................. 1,011,840 0.9024135
October 15, 2000............................... 1,011,840 0.8953079
April 15, 2001................................. 834,663 0.8894465
October 15, 2001............................... 1,660,300 0.8777871
April 15, 2002................................. 1,154,304 0.8696810
October 15, 2002............................... 861,775 0.8636292
April 15, 2003................................. 2,353,758 0.8471000
October 15, 2003............................... 1,341,440 0.8376798
April 15, 2004................................. 5,650,400 0.7980000
October 15, 2004............................... 3,281,400 0.7749565
April 15, 2005................................. 6,430,280 0.7298000
October 15, 2005............................... 7,115,916 0.6798287
April 15, 2006................................. 7,950,004 0.6240000
October 15, 2006............................... 9,052,800 0.5604270
April 15, 2007................................. 6,650,400 0.5137247
October 15, 2007............................... 9,506,400 0.4469663
April 15, 2008................................. 63,648,000 0.0000000
------------
$142,400,000
============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CLASS B
NOTES
EXPECTED EXPECTED CLASS B NOTES
PRINCIPAL PRINCIPAL EXPECTED POOL
PAYMENT DATE PAYMENTS FACTOR
------------ ----------- -------------
<S> <C> <C>
April 15, 1996.................................. $ 0 1.0000000
October 15, 1996................................ 1,422,722 0.9740379
April 15, 1997.................................. 650,942 0.9621594
October 15, 1997................................ 650,942 0.9502809
April 15, 1998.................................. 585,848 0.9395902
October 15, 1998................................ 585,848 0.9288996
April 15, 1999.................................. 531,025 0.9192093
October 15, 1999................................ 531,025 0.9095191
April 15, 2000.................................. 389,388 0.9024135
October 15, 2000................................ 389,388 0.8953079
April 15, 2001.................................. 321,205 0.8894465
October 15, 2001................................ 638,936 0.8777871
April 15, 2002.................................. 444,212 0.8696810
October 15, 2002................................ 331,638 0.8636292
April 15, 2003.................................. 905,800 0.8471000
October 15, 2003................................ 516,228 0.8376798
April 15, 2004.................................. 2,174,452 0.7980000
October 15, 2004................................ 1,262,786 0.7749565
April 15, 2005.................................. 2,474,574 0.7298000
October 15, 2005................................ 2,738,428 0.6798287
April 15, 2006.................................. 3,059,412 0.6240000
October 15, 2006................................ 3,483,802 0.5604270
April 15, 2007.................................. 2,559,283 0.5137247
October 15, 2007................................ 3,658,362 0.4469663
April 15, 2008.................................. 24,493,754 0.0000000
-----------
$54,800,000
===========
</TABLE>
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<TABLE>
<CAPTION>
CLASS C
NOTES
EXPECTED EXPECTED CLASS C NOTES
PRINCIPAL PRINCIPAL EXPECTED POOL
PAYMENT DATE PAYMENTS FACTOR
------------ ----------- -------------
<S> <C> <C>
April 15, 1996.................................. $ 0 1.0000000
October 15, 1996................................ 1,708,305 0.9740379
April 15, 1997.................................. 781,606 0.9621594
October 15, 1997................................ 781,606 0.9502809
April 15, 1998.................................. 703,445 0.9395902
October 15, 1998................................ 703,445 0.9288996
April 15, 1999.................................. 637,618 0.9192093
October 15, 1999................................ 637,618 0.9095191
April 15, 2000.................................. 467,550 0.9024135
October 15, 2000................................ 467,550 0.8953079
April 15, 2001.................................. 385,680 0.8894465
October 15, 2001................................ 767,189 0.8777871
April 15, 2002.................................. 533,379 0.8696810
October 15, 2002................................ 398,208 0.8636292
April 15, 2003.................................. 1,087,621 0.8471000
October 15, 2003................................ 619,851 0.8376798
April 15, 2004.................................. 2,610,929 0.7980000
October 15, 2004................................ 1,516,265 0.7749565
April 15, 2005.................................. 2,971,295 0.7298000
October 15, 2005................................ 3,288,113 0.6798287
April 15, 2006.................................. 3,673,527 0.6240000
October 15, 2006................................ 4,183,106 0.5604270
April 15, 2007.................................. 3,073,008 0.5137247
October 15, 2007................................ 4,392,704 0.4469663
April 15, 2008.................................. 29,410,382 0.0000000
-----------
$65,800,000
===========
</TABLE>
RATINGS OF THE OLD NOTES
At the time of issuance, the Old Class A Notes were rated A2 by Moody's and
A+ by S&P, the Old Class B Notes were rated Baa1 by Moody's and A- by S&P and
the Old Class C Notes were rated Ba2 by Moody's and BBB- by S&P. The ratings
of the Notes address the likelihood of the timely payment of interest on and
the ultimate repayment of principal of the Notes. The ratings of the Notes
were based primarily on the collateral value of the Aircraft, the availability
of the Liquidity Facilities, the subordination provisions described herein,
the protections afforded creditors under Section 1110 of the Bankruptcy Code
and the ability of USAir to make expected payments of principal of and
interest on the Notes. Ratings of Notes are not a recommendation to purchase,
hold or sell Notes and do not comment as to market price or suitability for a
particular investor. There is no assurance that the ratings of any Class of
Notes will remain for any given period of time or that such ratings will not
be lowered or withdrawn entirely by either rating agency. In the event that
the rating initially assigned to any Note is subsequently lowered for any
reason, there is no obligation for USAir to provide any additional credit
enhancement. The reduction, suspension or withdrawal of the ratings of the
Notes will not, in and of itself, constitute a Collateral Access Event.
REDEMPTION
Upon 30 days' written notice to the Collateral Agent and the applicable
Indenture Trustee, USAir may redeem, in whole or from time to time in part,
any Class of Notes at a redemption price equal to the outstanding principal
amount of such Class together with premium, if any, and accrued interest
thereon if, on the redemption date, there is no Event of Loss with respect to
an Aircraft and no Collateral Access Event has occurred and
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is continuing. Each partial redemption shall be effected by a pro rata
reduction of the remaining principal payments of the Class of Notes being
redeemed. The redemption price of any Notes redeemed before February 20, 2006
will include a Make Whole Premium. Thereafter, the Notes shall be redeemable at
par.
"Make Whole Premium" means, with respect to any Note (or portion thereof),
the amount (as determined by an independent investment banker) by which (a) the
present value of the remaining expected payments of principal and interest to
the Final Expected Payment Date of such Note (or portion thereof) computed by
discounting such payments on a semiannual basis on each Interest Payment Date
(assuming a 360-day year of twelve 30-day months) using a discount rate equal
to the Treasury Yield exceeds (b) the outstanding principal amount of such Note
(or portion thereof) plus accrued interest.
For purposes of determining the Make Whole Premium, "Treasury Yield" means,
at the time of determination with respect to any Note (or portion thereof), the
interest rate (expressed as a semiannual 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 semiannual yield to maturity
for United States Treasury securities maturing on the Average Life Date of such
Note (or portion thereof), as defined below, and trading in the public
securities markets either as determined by interpolation between the most
recent weekly average yields 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 Note
(or portion thereof) and (B) the other maturing as close as possible to, but
later than, the Average Life Date of such Note (or portion thereof), 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 Note (or portion thereof) is reported in 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 Premium 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.
The "Average Life Date" for any Note shall be the date which follows the time
of determination by a period equal to the Remaining Weighted Average Life. The
"Remaining Weighted Average Life" on a given date with respect to any Note
shall be the number of days which is 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 expected payment of principal of such Note by (ii) the
number of days from and including such determination date to but excluding the
date on which such payment of principal is expected to be made by (b) the then
outstanding principal amount of such Note.
Following an Event of Loss and so long as no Collateral Access Event has
occurred and is continuing, Notes of every Class shall be redeemed, at par plus
accrued interest, in a pro rata amount (based upon the ratio borne by the
initial Appraised Value of the Aircraft subject to such Event of Loss to the
initial Aggregate Appraised Value) resulting from such Event of Loss.
All amounts paid to any Class of Notes in connection with any partial
redemption shall be applied (i) to each Note within each Class pro rata in
accordance with the then outstanding principal amount thereof and (ii) pro rata
to each of the then unpaid installments of principal of such Notes expected to
be paid on each Principal Payment Date.
Prior to any redemption (whether optional or after an Event of Loss), all
amounts (if any) then owing to the Liquidity Providers shall be paid in full.
If a Collateral Access Event has occurred and is continuing, the proceeds may
be subject to distribution as provided in the second paragraph of "--Priority
of Distributions."
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SUBSTITUTION OF COLLATERAL
On five days' notice to the Collateral Agent and so long as, on the date of
substitution, no Collateral Access Event has occurred and is continuing, USAir
shall have the option to replace one or more Aircraft as Collateral under the
Collateral Agency Agreement by substituting either cash or United States
Treasury obligations (the "Alternative Collateral") for such replaced
Aircraft, provided that the ratings of the Notes at such time are affirmed or
raised by S&P and Moody's after taking into account such substitution. Upon
any such substitution, the Alternative Collateral shall be deemed to be
Collateral under the Collateral Agency Agreement. The amount of Alternative
Collateral to be substituted for each Aircraft shall be equal to (i) an amount
sufficient to pay expected principal, interest and Make Whole Premium until
the Final Expected Payment Date of the Notes (or redemption date, if
applicable), divided by (ii) the quotient obtained by dividing (x) the sum of
the initial Appraised Values of the Aircraft then comprising the Collateral by
(y) the initial Appraised Value of the Aircraft for which the Alternative
Collateral is being substituted.
LIQUIDITY FACILITIES
USAir has entered into three separate Liquidity Agreements (one for each
Class of Notes) with a Liquidity Provider pursuant to which such Liquidity
Provider has agreed to make advances from time to time in an aggregate
outstanding amount not to exceed three times the amount of interest due on the
respective class of Notes on the next Interest Payment Date. Except as
otherwise provided below, the Liquidity Facilities will enable the Collateral
Agent to request Interest Advances on the fifth day following any Interest
Payment Date in an amount sufficient to pay interest due on such Interest
Payment Date on the applicable Class of Notes to the extent that the amount,
if any, received by the Collateral Agent on or prior to such fifth day from
USAir is not sufficient to pay such interest. The amounts initially available
under the Class A, the Class B and the Class C Liquidity Facilities was
$14,439,360, $6,165,000 and $8,813,910, respectively. Each Interest Advance by
a Liquidity Provider under the applicable Liquidity Facility will reduce pro
tanto the amount available to be advanced under such Liquidity Facility, until
such Interest Advance is repaid by USAir thereunder. The available amount of
the Liquidity Facility for each Class of Notes will be automatically reduced
following a payment of principal of the Notes of such Class to an amount equal
to three times the next interest payment due on such Class of Notes.
The Collateral Agency Agreement provides that if at any time the short-term
unsecured debt obligations of a Liquidity Provider are then revised to a
rating lower than A-1 by S&P or lower than P-1 by Moody's, such Liquidity
Provider must be replaced by a new liquidity provider whose short-term
unsecured debt obligations are rated at least A-1 by S&P and P-1 by Moody's.
In the event that any such Liquidity Facility is not replaced within 30 days
of such downgrading and as otherwise provided in the Collateral Agency
Agreement, the Collateral Agent shall request a Downgrade Advance in an amount
equal to all available amounts under such Liquidity Facility and shall hold
the proceeds thereof in the Cash Collateral Account for the same purposes and
under the same circumstances as Interest Advances under the Liquidity Facility
are to be used.
The Collateral Agency Agreement will also provide for the replacement of
each Liquidity Facility (other than a Liquidity Facility that expires no
earlier than 15 days after the Legal Maturity Date of the applicable Class of
Notes) in the event that it is not extended at least 30 days prior to its then
scheduled expiration. In the event a Liquidity Facility is not so extended or
replaced within 30 days prior to its then scheduled expiration date, the
Collateral Agent shall request a Non-Extension Advance in an amount equal to
all available amounts thereunder and hold the proceeds thereof in the Cash
Collateral Account to be used for the same purposes and under the same
circumstances as Interest Advances under the Liquidity Facilities are to be
used.
Each of the Liquidity Facilities provides that the Liquidity Provider's
obligations thereunder will expire on the earliest of (i) February 14, 1997;
(ii) the date on which such Liquidity Provider is provided with certification
from the Collateral Agent that all of the Notes of such Class shall have been
paid in full; (iii) the date on which the applicable Liquidity Provider is
provided with certification from the Collateral Agent that a replacement
liquidity facility has been substituted for the applicable Liquidity Facility;
and (iv) the date on which no amount is, or may become, available for
borrowing under such Liquidity Facility, due to unreimbursed utilization
thereof
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in accordance with the terms of such Liquidity Facility. Each Liquidity
Facility provides that the scheduled expiration thereof may be extended, by
agreement of the applicable Liquidity Provider and USAir, for additional
periods of 364 days.
Any replacement liquidity facility shall be an irrevocable liquidity
facility for the same amount and in substantially the form of the Liquidity
Facility being replaced thereby, or in such other form as shall permit Moody's
and S&P to confirm their respective ratings of the Notes (before downgrading
of such ratings, if any, as a result of a downgrading of a Liquidity
Provider). The short-term unsecured debt of any replacement liquidity provider
will be rated not lower than the above-described minimums for the Liquidity
Facilities.
Upon payment by a Liquidity Provider of the amount specified in any
borrowing under a Liquidity Facility, such Liquidity Provider will be fully
discharged of its obligations under the Liquidity Facility with respect to
such advance and will not thereafter be obligated to make any further payments
under such Liquidity Facility in respect of such advance to the Collateral
Agent or any other person or entity who makes a demand for payment in respect
of interest on the Notes.
In the event of an acceleration of any Class of Notes, the Liquidity
Provider for such Class of Notes shall advance the entire available amount
under such Liquidity Agreement as an Acceleration Advance. The proceeds of an
Acceleration Advance shall be held in the Cash Collateral Account as cash
collateral to be used for the same purposes and under the same circumstances
as Interest Advances under such Liquidity Facility are to be used.
Amounts borrowed under a Liquidity Facility as an Interest Advance or
Acceleration Advance will accrue interest at a rate equal to the sum of (i)
2.00% per annum and (ii) an interest rate determined on a daily basis pursuant
to the terms of such Liquidity Facility or, at the option of USAir upon an
Interest Advance, LIBOR, until repaid as specified therein. Amounts borrowed
under a Liquidity Facility as a Downgrade Advance or a Non-Extension Advance
will, until applied by the Collateral Agent in payment of interest due but
unpaid on the applicable Notes, bear interest at a rate equal to LIBOR or, if
greater, at a rate equivalent to the investment yield earned thereon while on
deposit in the Cash Collateral Account. Any amounts in the Cash Collateral
Account that are applied in payment of interest due but unpaid on the
applicable Notes will, upon being so applied, bear interest until repaid at
the rate described in the first sentence of this paragraph.
The right of the Liquidity Providers to be repaid for Interest Advances and,
following an acceleration of the Notes, Downgrade Advances, Non-Extension
Advances and Acceleration Advances will rank senior in right of payment and
distributions to the Notes, except to the extent described under "Priority of
Distributions."
The Liquidity Facilities are intended to enhance the likelihood of timely
receipt by the Noteholders of the full amount of interest due on the Notes.
The Liquidity Facilities will not provide protection against risks of loss
with respect to the Collateral and will not provide for payment of any
principal of or premium on the Notes, or more than three times the amount of
interest due on the Notes on the next Interest Payment Date. If interest
payment defaults occur which exceed the amount covered by or available under
the Liquidity Facilities or the Cash Collateral Account, Noteholders will bear
their allocable share of the deficiencies to the extent that there are no
other sources of funds (including proceeds arising from the exercise of
remedies under the Collateral Agency Agreement) and would need to pursue other
remedies against USAir.
LIQUIDITY PROVIDER
Westdeutsche Landesbank Girozentrale ("WestLB"), provides commercial and
investment banking services regionally, nationally and internationally to
public, corporate and bank customers. WestLB is the largest of the German
State Banks and, on the basis of total assets at December 31, 1994, was the
third largest bank in Germany. At December 31, 1994, WestLB had total assets
of approximately DM 276.3 billion ($178.4 billion).
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WestLB New York is licensed and subject to supervision and regulation by the
Superintendent of Banks of the State of New York. WestLB New York 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.
COLLATERAL
Under the Collateral Agency Agreement, USAir's obligations to the
Noteholders and to the Liquidity Providers is secured by a security interest
in, among other things, (i) each of the Aircraft; (ii) all insurance and
requisition proceeds and other similar payments with respect to each of the
Aircraft; (iii) all monies and securities deposited or required to be
deposited with the Collateral Agent; (iv) the purchase agreements and related
documentation to the extent assignable for each of the Aircraft; (v) all logs,
records and data relating to the Aircraft; and (vi) all proceeds of the
foregoing. See "Description of the Aircraft and Appraisals" and "--Collateral
Agency Agreement."
REGISTRATION
USAir is required, except under certain circumstances, to keep the Aircraft
registered under the provisions of the Act, and to record the Collateral
Agency Agreement at the FAA registry or the aircraft registry of other
Aeronautics Authorities. The Collateral Agency Agreement was filed at the FAA
on February 16, 1996. Such recordation of the Collateral Agency Agreement and
certain other documents (including supplements to the Collateral Agency
Agreement) afforded the Collateral Agent a perfected first priority security
interest in each of the Aircraft whenever any such Aircraft is located in the
United States or any of its territories and possessions and, with certain
exceptions, in those jurisdictions that have ratified or adhered to the
Convention on the International Recognition of Rights in Aircraft (the
"Convention"). There are no general geographical restrictions on the operation
of the Aircraft by USAir (or by any lessee of USAir). Although USAir has no
current intention to do so, USAir will also have the right, subject to certain
conditions, to register, at its own expense, any of the Aircraft in certain
countries other than the United States. Prior to any such change in the
jurisdiction of registry, the Collateral Agent shall have received an opinion
of counsel to the effect that (i) the laws of the new country of registration
will recognize USAir's right of ownership and repossession and will give
effect to the security interest in the Aircraft created by the Collateral
Agency Agreement and (ii) the right to repossession by the Collateral Agent
upon the exercise of remedies is valid under the laws of the country of
registration. In addition, subject to certain limitations, the Aircraft may
also be operated by persons other than USAir under lease or interchange
arrangements with USAir in countries that are not parties to the Convention.
In the case of a Collateral Access Event, the ability of the Collateral Agent
to realize upon its security interest in any such Aircraft could be adversely
affected as a legal or practical matter if such Aircraft is registered or
located outside the United States. See "--Collateral Agency Agreement--
Registration, Leasing and Possession." The extent to which the Collateral
Agent's security interest would be recognized in an Aircraft located in a
country that is not a party to the Convention, and the extent to which such
security interest would be recognized in a jurisdiction adhering to the
Convention (including the United States) if such Aircraft is registered in a
jurisdiction not a party to the Convention, is uncertain. Certain
jurisdictions may not accord recognition to, or recognize the priority of, the
Collateral Agency Agreement or may have no specific laws providing for the
creation, recognition or registration of mortgages over aircraft such as the
Collateral Agency Agreement, or may accord higher priority to certain other
liens or other third party rights over the Aircraft. See "Risk Factors--
Foreclosure."
INTERCREDITOR RIGHTS
At any time, only the Controlling Party may direct and control the exercise
of remedies in respect of the Collateral. Such control will include the
ability to direct the Collateral Agent or applicable Indenture Trustee as to
when and in what manner to exercise remedies under the applicable Indenture or
the Collateral Agency Agreement, including the remedy of foreclosing on the
Collateral, for the benefit of the Noteholders or the Liquidity Providers. The
New Class A Indenture Trustee will be the Controlling Party until all amounts
outstanding and owing in respect of the New Class A Notes and any Old Class A
Notes shall have been paid in
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full, whereupon the Class B Indenture Trustee shall be the Controlling Party
until all amounts outstanding and owing in respect of the New Class B Notes and
any Old Class B Notes shall have been paid in full, whereupon the Class C
Indenture Trustee will be the Controlling Party. Notwithstanding the foregoing,
if none of the Indenture Trustees acting as Controlling Party has taken action
to exercise remedies in respect of the Collateral within 24 months following
the earlier of the acceleration of the Notes and the unreimbursed utilization
of the entire available amount under any of the Liquidity Facilities, the
Liquidity Provider for the New Class A Notes shall thereupon become the
Controlling Party for all purposes under the Collateral Agency Agreement until
all amounts outstanding in respect of the Liquidity Facility for the New Class
A Notes and any Old Class A Notes shall have been paid in full, whereupon the
Liquidity Provider for the New Class B Notes shall become the Controlling Party
until all amounts outstanding in respect of the Liquidity Facility for the New
Class B Notes and any Old Class B Notes shall have been paid in full, whereupon
the Liquidity Provider for the New Class C Notes shall become the Controlling
Party until all amounts outstanding in respect of the Liquidity Facility for
the New Class C Notes and any Old Class C Notes shall have been paid in full,
whereupon the Controlling Party shall be the appropriate Indenture Trustee.
For a period of nine months after the acceleration of the Notes, without the
consent of the holders of a majority of the aggregate unpaid principal amount
of each Class, if the Indenture Trustee for such Class is not the Controlling
Party, no Aircraft may be sold if the net proceeds from such sale would be less
than the Minimum Sale Price for such Aircraft.
PRIORITY OF DISTRIBUTIONS
Amounts received by the Collateral Agent from USAir shall be promptly
distributed on each Payment Date in the following order or priority:
(i) such payments as shall be required to pay all accrued and unpaid fees
owed to the Liquidity Providers; (ii) such payments as shall be required to
pay in full the aggregate amount of interest accrued under the Liquidity
Agreements; (iii) such payments as shall be required to reimburse the
Liquidity Providers for any Interest Advances or, if applicable, to
replenish the Cash Collateral Account up to their maximum required amounts;
(iv) such payments as shall be required to pay in full the amount of
interest then due on or in respect of the New Class A Notes and any Old
Class A Notes and the amount of principal expected to be paid in respect of
the New Class A Notes and any Old Class A Notes; (v) such payments as shall
be required to pay in full the amount of interest then due on or in respect
of the New Class B Notes and any Old Class B Notes and the amount of
principal expected to be paid in respect of the New Class B Notes and any
Old Class B Notes; (vi) such payments as shall be required to pay in full
the amount of interest then due on or in respect of the New Class C Notes
and any Old Class C Notes and the amount of principal expected to be paid
in respect of the New Class C Notes and any Old Class C Notes; (vii) such
payments as shall be required to pay in full the aggregate unpaid amounts
of fees and expenses then payable to the Collateral Agent and each
Indenture Trustee pursuant to the terms of the Collateral Agency Agreement
and the applicable Indenture, as the case may be; and (viii) the balance,
if any, to USAir.
Amounts held or received by the Collateral Agent after the Collateral Agent
shall have received a Notice of Acceleration shall be promptly distributed in
the following order of priority:
(i) such payments as shall be required to reimburse the Collateral Agent
for any tax, expense, charge or other loss incurred by the Collateral Agent
in its capacity as such; (ii) such payment as shall be required to pay all
accrued and unpaid fees owed to the Liquidity Providers; (iii) such payment
as shall be required to pay in full the aggregate amount of interest owed
to the Liquidity Providers; (iv) such payments as shall be required to pay
in full all other amounts owed under the Liquidity Agreements; (v) such
payments as shall be required to reimburse (a) the Indenture Trustees for
any tax, expense, charge or other loss incurred by the Indenture Trustees
in their capacity as such and (b) the Noteholders for certain payments owed
under the Indenture; (vi) such payments as shall be required to pay in full
the aggregate amount of fees and expenses payable to the Collateral Agent
and each Indenture Trustee pursuant to the terms of the Collateral Agency
Agreement and the Indentures, other than those amounts referred to under
(i) and (v) above; (vii) such payments as shall be required to pay in full
the aggregate amount of all accrued and unpaid interest on the New Class A
Notes and any Old Class A Notes and then to pay in full the aggregate
outstanding principal of the New Class A Notes and any Old Class A Notes
and all other amounts due and owing to the Class A
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Noteholders; (viii) such payments as shall be required to pay in full the
aggregate amount of all accrued and unpaid interest on the New Class B
Notes and any Old Class B Notes and then to pay in full the aggregate
outstanding principal of the New Class B Notes and any Old Class B Notes
and all other amounts due and owing to the Class B Noteholders; and (ix)
such payments as shall be required to pay in full the aggregate amount of
all accrued and unpaid interest on the New Class C Notes and to pay in full
the aggregate outstanding principal of the New Class C Notes and any Old
Class C Notes and to pay in full the aggregate outstanding principal of the
New Class C Notes and any Old Class C Notes and all other amounts due and
owing to the Class C Noteholders. The balance, if any, shall be distributed
to USAir.
Interest Advances under the Liquidity Facilities and withdrawals from the
Cash Collateral Account in respect of interest on the Notes will be
distributed to the Noteholders notwithstanding the priority of distributions
set forth above and otherwise described herein.
Under certain circumstances, USAir shall have the right to redeem all or a
portion of any Class of Notes without giving effect to the above-described
priority of distributions. Upon the occurrence of an Event of Loss, Notes of
each Class shall, except under certain circumstances, be redeemed on a pro
rata basis. See "--Redemption."
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
USAir will be prohibited from consolidating with or merging into any other
corporation or conveying, transferring or leasing substantially all its assets
as an entirety to any corporation or person, unless, among other things, (i)
such corporation or person is a U.S. citizen and a U.S. certificated air
carrier within the meaning of the Act; (ii) such corporation or person assumes
the due and punctual performance and observance of each agreement and
condition of the Operative Documents to be performed or observed by USAir;
(iii) no Collateral Access Event would arise as a result of such transaction;
and (iv) USAir shall have delivered to the Collateral Agent an opinion of
counsel concerning certain matters. There are no provisions in the Indentures,
Collateral Agency Agreement or other documents that would afford the
Noteholders additional 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 of control of USAir.
COLLATERAL ACCESS EVENTS
Collateral Access Events under each Indenture include: (a) the failure by
USAir to make an expected payment of principal or any payment of interest or
premium when due, and the continuation of such failure unremedied for 15 days,
(b) the failure to procure and maintain property and liability insurance in
accordance with the provisions of the Collateral Agency Agreement and the
continuation of such failure, in the case of maintenance of such insurance,
until the earlier of (i) 30 days after notice to USAir or the Collateral Agent
that such insurance is subject to lapse or cancellation or (ii) the date such
lapse or cancellation is effective as to the Collateral Agent, (c) operation
of the Aircraft after receipt of notice that the insurance required by the
Collateral Agency Agreement has been canceled, (d) the failure by USAir to
perform any covenants contained in the Collateral Agency Agreement and the
continuation of such failure for a period of 30 days after notice to USAir by
the Indenture Trustee or by holders of 25% of outstanding Notes under such
Indenture, unless such failure is curable and USAir is diligently proceeding
to correct such failure and shall in fact correct such failure within 180 days
after delivery of such notice, (e) any representation or warranty made by
USAir in any Indenture, the Collateral Agency Agreement or any Liquidity
Agreement or in any document or certificate furnished to the Collateral Agent,
an Indenture Trustee or the Noteholders under such Indenture shall be
incorrect in any material respect as of the date made and shall be material at
the time of determination and shall not have been remedied within 30 days
after notice has been given to USAir by the Indenture Trustee or holders of
25% of outstanding Notes under such Indenture, (f) the occurrence of certain
events of bankruptcy, reorganization or insolvency of USAir and (g) a
Collateral Access Event under any other Indenture.
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EVENTS OF DEFAULT
Events of Default under each Indenture are (i) the failure to pay the
principal outstanding on the relevant Class of Notes on the Legal Maturity
Date thereof and the continuation of such failure for 15 days and (ii) the
failure to pay interest on any Interest Payment Date on such Class of Notes
and the continuation of such failure unremedied for 15 days (unless the
Collateral Agent shall have borrowed an Interest Advance with respect
thereto).
REMEDIES
Each Indenture provides that upon the occurrence and during the continuance
of any Collateral Access Event under such Indenture, the applicable Indenture
Trustee may, or upon the instruction of the holders of a majority in aggregate
principal amount of the relevant Class of Notes shall, declare the unpaid
principal of all of the Notes of such Class outstanding at such date to be
immediately due and payable, together with all accrued but unpaid interest
thereon and all other amounts due in respect thereof (such declaration being
an "acceleration" of the relevant Class of Notes). Each Indenture provides
that upon any acceleration of either of the other Classes of Notes, the Notes
issued under such Indenture shall be automatically accelerated. The Collateral
Agency Agreement provides that upon the Collateral Agent's receipt of a Notice
of Acceleration the Collateral Agent shall, upon the direction of the
Controlling Party, exercise such remedies available to it under applicable
law, including any of the remedies of a secured party under applicable law or
otherwise provided in the applicable Indenture, as may be directed by the
Controlling Party.
Section 1110 of the Bankruptcy Code provides, among other things, that the
right of a holder of a security interest in aircraft first placed in service
after October 22, 1994 (such as the Aircraft) granted by a person that is a
citizen of the United States holding an air carrier operating certificate,
such as USAir, to repossess such aircraft in compliance with the terms of the
security agreement is not affected in a Chapter 11 bankruptcy reorganization
case with respect to such person by the automatic stay provisions of the
Bankruptcy Code or any power of the bankruptcy court to enjoin such
repossession unless, within 60 days after commencement of the case, the debtor
agrees, with the court's approval, to perform obligations under the security
agreement and cures all outstanding defaults, including Collateral Access
Events, other than defaults, including Collateral Access Events, relating to
financial condition or bankruptcy. USAir has been advised by Fulbright &
Jaworski L.L.P. that, in the opinion of such counsel, the Collateral Agent,
for the benefit of the Noteholders, would be entitled to the benefits of
Section 1110 of the Bankruptcy Code with respect to the Aircraft. It is
unclear whether, after an Event of Loss of an engine subject to the lien of an
Indenture or a voluntary substitution of an engine subject to the lien of an
Indenture by USAir, any replacement engine subject to the lien of the related
Indenture would have the benefits of Section 1110 of the Bankruptcy Code if
such aircraft or engine had been first placed into service on or before
October 22, 1994. The right of the Company to substitute an aircraft upon an
Event of Loss with respect to an Aircraft is subject to the receipt of an
opinion of counsel that the benefits of Section 1110 of the Bankruptcy Code
would continue to be applicable.
PURCHASE RIGHTS OF NOTEHOLDERS
At any time after the delivery to the Collateral Agent of a Notice of
Acceleration which has not been rescinded or withdrawn, the Class B
Noteholders shall have the right to purchase all, but not less than all, of
the New Class A Notes and any Old Class A Notes and the Class C Noteholders
shall have the right to purchase all, but not less than all, of the New Class
A Notes, any Old Class A Notes, the New Class B Notes and any Old Class B
Notes. The purchase price for any Class of Notes shall be equal to the
aggregate principal amount of all Notes of such Class then outstanding,
together with all accrued and unpaid interest (but without premium, if any)
then due and payable to the holders of such Notes under the applicable
Indenture and the other Operative Documents.
REPORTS TO NOTEHOLDERS
Under the terms of the Collateral Agency Agreement and the Indentures, as
applicable, the following reports are required to be filed with the Collateral
Agent and promptly transmitted to the related Class of Noteholders
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until the Notes are paid in full: (i) an annual report of USAir containing its
financial statements audited by its independent certified public accountant,
within 120 days after the end of each of its fiscal years and (ii) quarterly
reports of USAir containing its unaudited financial statements, within 60 days
after the end of each of the first three quarters of each of its fiscal years.
MODIFICATION OF AGREEMENTS
Without the consent of the holders of 50% of the unpaid principal amount of
the Notes under the applicable Indenture and, if required by the Liquidity
Agreements, the applicable Liquidity Provider, the provisions of the
Collateral Agency Agreement or the applicable Indenture may not be amended or
modified, except that (i) certain provisions of each Indenture and the
Collateral Agency Agreement may be supplemented, amended or modified without
the consent of the Noteholders thereunder to the extent such supplement,
amendment or modification, among other things, cures an ambiguity or subjects
other collateral to the lien of the Collateral Agency Agreement and (ii) each
Indenture Trustee may consent to any modification or amendment of, addition to
or deletion from the Collateral Agency Agreement or applicable Indenture if
such modification, amendment, addition or deletion does not materially
adversely affect the interests of the Noteholders represented by such
Indenture Trustee. Without the consent of each Noteholder in an affected Class
of Notes, the Collateral Agent may not agree to any amendments or
modifications of any of the Liquidity Agreements which are materially adverse
to the Noteholders. Without the consent of each Noteholder in an affected
Class of Notes and, if required by the Liquidity Agreements, the applicable
Liquidity Provider, no amendment or modification of the applicable Indenture
may, among other things, (i) reduce the percentage of the aggregate principal
amount of the Notes of such Class necessary to modify or amend any provision
of such Indenture or other Operative Document or to waive compliance
therewith, (ii) reduce the principal amount of or interest payable on such
Note or extend the time when any such principal or interest is due and payable
or otherwise affect the terms of payment of such Note or (iii) make such Note
payable in a currency other than U.S. dollars. Without the consent of each
Noteholder in an affected Class and each applicable Liquidity Provider, no
amendment or modification of the Collateral Agency Agreement may, among other
things, modify certain provisions of the Collateral Agency Agreement relating
to the distribution of principal, interest or premium or other monies received
or realized by the Collateral Agent from the Collateral.
USAir may from time to time be a Noteholder with respect to any of the
Notes, but shall not be entitled to vote such Notes in respect of any matters
coming before Noteholders.
CERTAIN PAYMENTS TO NOTEHOLDERS
(a) No payment or distribution shall be made on or in respect of any
obligation owed to a Noteholder under the Operative Documents, including any
payment or distribution of cash, property or securities after commencement of
a bankruptcy case involving USAir, except directly to the Collateral Agent for
application as provided in the Collateral Agency Agreement. See "--Redemption"
and "--Priority of Distributions."
(b) In the event that a Noteholder shall receive any payment or distribution
on or in respect of any such obligation which it is not entitled to receive
under the applicable Indenture or the Collateral Agency Agreement, it will
hold any amount so received in trust for the Senior Holders (as defined below)
and will forthwith turn over such payment to the Collateral Agent in the form
received to be applied or held as provided in the Collateral Agency Agreement.
See "--Redemption" and "--Priority of Distributions."
(c) In connection with any foreclosure sale of all or any part of the
Collateral, no Noteholder may "bid-in" or purchase any part of such Collateral
with any Notes held by such Noteholder unless prior to or contemporaneously
with any such purchase by such Noteholder, the obligations owed to the Senior
Holders under the Operative Documents have been or are being paid in full in
dollars and in immediately available funds (or in such other form as shall be
acceptable to the Senior Holders).
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(d) Each Noteholder (and the applicable Indenture Trustee on behalf of such
Noteholder) shall be entitled to receive and retain any and all amounts paid
or payable to such Noteholder with the proceeds of an Interest Advance under
the Liquidity Facilities or a withdrawal from the Cash Collateral Account to
the extent permitted by the terms of the Collateral Agency Agreement. See "--
Redemption" and "--Priority of Distribution."
The term "Senior Holder" means, until the Liquidity Obligations (as defined
in Appendix A to the Collateral Agency Agreement) have been paid in full and
the commitment to make advances under the Liquidity Facilities and the
Liquidity Agreements has expired or terminated, the Liquidity Providers, and
(i) with respect to the Class B Noteholders, thereafter, until the Class A
Obligations (as defined in Appendix A to the Collateral Agency Agreement) have
been paid in full, the Class A Noteholders and (ii) with respect to the Class
C Noteholders, thereafter, until the Class A and the Class B Obligations (as
defined in Appendix A to the Collateral Agency Agreement) have been paid in
full, the Class A Noteholders and the Class B Noteholders.
COLLATERAL AGENCY AGREEMENT
Registration, Possession, Leasing
USAir may lease an Aircraft to any United States certificated air carrier or
to foreign air carriers duly organized and operating pursuant to a license
issued under the laws of certain countries with which the United States
government maintains normal diplomatic relations (and Taiwan) (such United
States and foreign air carriers being the "Permitted Air Carriers"). In
addition, subject to certain limitations, USAir may lease any of the Aircraft
to foreign air carriers that are not Permitted Air Carriers and may transfer
possession of an Aircraft other than by lease, including transfers in
connection with normal interchange and pooling arrangements with any air
carrier, charters, transfers to the United States government or foreign
governments and transfers in connection with maintenance or modifications. If
the Aircraft are leased or the possession is otherwise transferred, such
Aircraft will remain subject to the lien of the Collateral Agency Agreement.
USAir is required, except under certain circumstances, to keep each Aircraft
registered under the Act. USAir is also required to record the Collateral
Agency Agreement at the FAA aircraft registry or the aircraft registry of
permitted foreign aeronautical authorities. Such recordation of the Collateral
Agency Agreement (including Collateral Agency Agreement supplements) provided
the Collateral Agent a perfected security interest in the related Aircraft
whenever it is located in the United States or any of its territories and
possessions; 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. Although USAir has no current intention
to do so, USAir will have the right, subject to certain conditions, at its own
expense to register any Aircraft in countries other than the United States.
Prior to any such change in the jurisdiction of registry, the Collateral Agent
shall have received an opinion of counsel that, among other things, the
Collateral Agency Agreement and the Collateral Agent's right to repossession
thereunder are valid and enforceable under the laws of such country in each
case subject, in certain cases, to certain filings, recordations or other
actions. Subject to certain limitations, each Aircraft may also be operated by
USAir or under lease or interchange arrangements in countries that are not
parties to the Convention. The extent to which the related Collateral Agent's
security interest would be recognized in an Aircraft located in a country that
is not a party to the Convention, and the extent to which such security
interest would be recognized in a jurisdiction adhering to the Convention if
the Aircraft is registered in a jurisdiction not a party to the Convention, is
uncertain. Moreover, in the case of a Collateral Access Event, the ability of
the Collateral Agent to realize upon its security interest in an Aircraft
could be adversely affected as a legal or practical matter if such Aircraft
were registered or located outside the United States.
Liens
The Aircraft will be maintained by USAir free of any liens, other than the
rights of the Collateral Agent and certain limited liens permitted under the
Collateral Agency Agreement, including liens for taxes either not yet due and
payable or being contested in good faith; suppliers', mechanics' and other
similar liens arising in the ordinary course of business and either not yet
due and payable or being contested in good faith; judgment liens whose
enforcement has been stayed; salvage and similar rights of insurers of the
Aircraft; and any other lien
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with respect to which USAir shall have provided a bond or other security in an
amount and under terms reasonably satisfactory to the Collateral Agent.
Insurance
USAir will, at its expense, maintain or cause to be maintained all-risk
aircraft hull insurance covering the Aircraft, and, to the extent available at
reasonable cost, all-risk property damage insurance covering engines and parts
while temporarily removed from an Aircraft pending replacement, at all times
in an amount not less than the sum of (i) the aggregate outstanding principal
amount of the Notes and (ii) the scheduled amount of interest payable on the
Notes on the next Interest Payment Date. During any period when an Aircraft is
on the ground and not in operation USAir may carry or cause to be carried in
lieu of the insurance required by the previous sentence, insurance otherwise
conforming with the provisions of said sentence except that the scope of the
risks covered and the type of insurance shall be the same as are from time to
time applicable to aircraft owned or leased by USAir of the same type as such
Aircraft similarly on the ground and not in operation, provided that in all
cases full amounts shall not be less than that described in the immediately
preceding sentence. All policies covering loss of or damage to an Aircraft
shall be made payable to the Collateral Agent for any loss in excess of
$5,000,000. USAir may self-insure a portion of these risks, but in no case
will the self-insurance with respect to all of the aircraft in USAir's fleet
(including the Aircraft) exceed the lesser of 50% of the largest replacement
value of any single aircraft in USAir's fleet or 1 1/2% of the average
aggregate insurable value (during the preceding calendar year) of all aircraft
on which USAir carries insurance, unless an insurance broker of national
standing selected by USAir and reasonably satisfactory to the Collateral Agent
shall certify that the standard among all other major United States airlines
is a higher level of self-insurance, in which case USAir may self-insure to
such higher level. In addition, USAir will, at its expense, maintain or cause
to be maintained comprehensive airline liability (including, without
limitation, passenger, contractual, bodily injury and property damage
liability) insurance (exclusive of manufacturer's product liability insurance)
and cargo liability insurance with respect to each Aircraft (i) in amounts
that are not less than the comprehensive airline liability insurance as is
from time to time applicable to aircraft owned and operated by USAir of the
same type as such Aircraft and (ii) of the types and covering the same risks
as are from time to time applicable to aircraft owned or operated by USAir of
the same type as such Aircraft and which is maintained in effect with insurers
of recognized responsibility; provided that USAir need not maintain cargo
liability insurance, or may maintain such insurance in an amount less than
that specified above for the respective Aircraft as long as the amount of
cargo liability insurance, if any, maintained with respect to such Aircraft is
the same as the cargo liability insurance, if any, maintained for other
aircraft of the same model as such Aircraft owned or operated by USAir. During
any period when an Aircraft is on the ground and not in operation USAir may
carry or cause to be carried, in lieu of the insurance required by the
previous sentence, insurance otherwise conforming with the provisions of said
sentence except that the amounts of coverage shall not be required to exceed
the amounts of comprehensive airline liability insurance, and the scope of
risks covered and type of insurance shall be the same, as are from time to
time in effect with respect to aircraft owned or leased by USAir of the same
type as such Aircraft similarly on the ground and not in operation. USAir may
also self-insure a portion of these risks by means of a deductible or premium
adjustment provisions subject to the same limitations described above for
insurance for risks of loss or damage to such Aircraft. USAir is also
permitted a deductible per occurrence not in excess of the prevailing standard
market deductible for similar aircraft. The Collateral Agent, the Indenture
Trustees and the Liquidity Providers will each be named as additional insured
parties under all liability insurance policies required with respect to the
Aircraft. In addition, the insurance policies will provide that, in respect of
the respective interests of the Collateral Agent, the Indenture Trustees and
the Liquidity Providers, the insurance shall not be invalidated by any action
or inaction of USAir and shall insure the respective interests of the
Collateral Agent, the Indenture Trustees and the Liquidity Providers as they
appear, regardless of any breach or violation of any warranty, declaration or
condition contained in such policies by USAir. If and to the extent that USAir
or a lessee operates an Aircraft (A) on routes where it maintains war risk
insurance in effect with respect to other similar equipment, or (B) on routes
other than routes within or between the United States, Canada, Mexico, Bermuda
and islands other than Cuba in the Caribbean Basin where the custom in the
industry is to carry such insurance, USAir or such lessee shall maintain such
insurance with respect to the Aircraft in an amount not less than the lesser
of the
101
<PAGE>
aggregate unpaid principal of, together with accrued interest on, a ratable
portion of the Notes of all Classes (based on the initial Appraised Value of
such Aircraft) and the amount of such insurance customarily carried by
corporations engaged in the same or similar business similarly situated with
USAir and with respect to similar equipment on similar routes; provided that
if the requirement to maintain war risk insurance arises solely by reason of
clause (A) of this sentence, such insurance shall be maintained in an amount
not less than that maintained by USAir or such lessee on other similar
aircraft in its fleet. Unless an Aircraft is operated or used under a contract
with the United States government pursuant to which the United States
government assumes liability for damage or loss to such Aircraft and to other
property or persons, USAir may not operate or locate any Aircraft outside the
United States and Canada (i) in any war zone or recognized or, in USAir's
reasonable judgment, threatened area of hostilities, unless such Aircraft is
fully covered by war risk insurance, or (ii) in any area excluded from the
insurance coverage required under the Collateral Agency Agreement. Insurance
proceeds, if any, held from time to time by the Collateral Agent with respect
to any Aircraft, prior to the distribution thereof, will be invested and
reinvested by the Collateral Agent at the direction of USAir (except after the
occurrence and during the continuance of a Collateral Access Event) in certain
investments described in the Collateral Agency Agreement. The net amount of
any loss resulting from any such investments will be paid by USAir.
Events of Loss
If an Event of Loss occurs with respect to an Aircraft, USAir shall either
redeem a pro rata amount of the outstanding principal amount of the Notes or
USAir shall subject a replacement aircraft to the lien created by the
Collateral Agency Agreement. In the event USAir elects to replace an Aircraft,
it must do so within 120 days of the Event of Loss with a Boeing 757 aircraft
of the same or a more advanced model having a value and utility at least equal
to, and in as good operating condition and repair and as airworthy as, the
Aircraft subject to the Event of Loss, assuming such Aircraft was in the
condition and repair required by the Collateral Agency Agreement immediately
prior to the occurrence of the Event of Loss. In the event USAir elects not to
replace such Aircraft, USAir is required to redeem, not later than 165 days
after the occurrence of such Event of Loss, a pro rata amount (based on the
ratio borne by the initial Appraised Value of such Aircraft to the initial
Aggregate Appraised Value) of the outstanding principal amount of the Notes
together with accrued and unpaid interest thereon. Upon such payment the lien
of the Collateral Agency Agreement with respect to such Aircraft shall
terminate. The payments made by USAir shall be deposited with the Collateral
Agent.
If an Event of Loss occurs with respect to an Engine (as defined in the
Collateral Agency Agreement) alone, USAir shall replace such Engine with
another engine of the same or an improved model of the same or another
manufacturer and suitable for installation and use on the Aircraft.
An Event of Loss with respect to the Aircraft or Engine means any of the
following events: (i) payment of an insurance settlement with respect to such
property on the basis of an actual or constructive total loss; (ii)
destruction or damage beyond repair; provided that if it is not clear whether
damage constitutes damage beyond repair, an Event of Loss will be deemed to
occur when it is determined by USAir that such damage is beyond repair; (iii)
theft or disappearance for a period in excess of 120 days, unless the location
of the Aircraft is known and USAir is diligently pursuing its recovery; (iv)
the condemnation or taking of title to such Aircraft by the United States
government or any foreign government or instrumentality or agency thereof; (v)
the requisition or taking of use of such Aircraft or airframe by a foreign
government or instrumentality or agency for a continuous period of more than
six months; (vi) with respect to an Engine only, the requisition for use by
any government or the divestiture of title resulting from the installation of
such Engine on an airframe leased to USAir or purchased by USAir subject to a
conditional sale agreement; or (vii) "grounding" of such Aircraft for a period
of twelve consecutive months (or such shorter period determined by USAir) due
to an action by a governmental body, unless prior to the expiration of such
period USAir is diligently carrying forward all necessary steps to permit
normal use or in any event, if such "grounding" is for a period of more than
24 consecutive months.
102
<PAGE>
INDEMNIFICATION
Subject to certain exceptions, USAir has agreed to indemnify the Collateral
Agent, the Liquidity Providers and the Indenture Trustees for certain
liabilities, losses, fees and expenses and for certain other matters arising
out of the transactions described herein or relating to the Aircraft.
THE INDENTURE TRUSTEES
Wilmington Trust Company is the Indenture Trustee under each of the
Indentures. USAir and its affiliates may from time to time enter into banking
and trustee relationships with the Indenture Trustees and their affiliates.
Wilmington Trust Company and its affiliates may hold Notes in their own names.
The Indenture Trustee's address is Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust
Administration. For purposes of meeting the legal requirements of any
jurisdictions in which any part of the Collateral may at the time be located,
each of the Indenture Trustees will have the power to appoint a co-trustee or
separate trustee of all or any part of the Collateral. To the extent permitted
by law, all rights, powers, duties and obligations conferred or imposed upon
such Indenture Trustee will be conferred or imposed upon and exercised or
performed by such Indenture Trustee and such separate trustee or co-trustee
jointly, or, in any jurisdiction in which such Indenture Trustee will be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers,
duties and obligations solely at the direction of such Indenture Trustee. Any
Indenture Trustee may resign at any time, in which event a successor Indenture
Trustee will be appointed as provided in the applicable Indenture. USAir may
also remove any Indenture Trustee, if such Indenture Trustee ceases to be
eligible to continue as such under the applicable Indenture or if the
Indenture Trustee becomes insolvent. In such circumstances, a successor
Indenture Trustee will be appointed as provided in the applicable Indenture.
Any resignation or removal of any Indenture Trustee and appointment of a
successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
The Indenture Trustee has not participated in the preparation of this
Prospectus and assumes no liability for its contents.
THE COLLATERAL AGENT
Wilmington Trust Company is the Collateral Agent under the Collateral Agency
Agreement. USAir and its affiliates may from time to time enter into banking
and trustee relationships with the Collateral Agent and its affiliates.
Wilmington Trust Company and its affiliates may hold Notes in their own names.
The Collateral Agent's address is Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust
Administration.
For purposes of meeting the legal requirements of any jurisdictions in which
any part of the Collateral may at the time be located, the Collateral Agent
will have the power to appoint a co-trustee or separate trustee of all or any
part of the Collateral. To the extent permitted by law, all rights, powers,
duties and obligations conferred or imposed upon the Collateral Agent will be
conferred or imposed upon and exercised or performed by the Collateral Agent
and such separate trustee or co-trustee jointly, or, in any jurisdiction in
which the Collateral Agent will be incompetent or unqualified to perform
certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Collateral Agent.
The Collateral Agent may resign at any time, in which event a successor
Collateral Agent will be appointed as provided in the Collateral Agency
Agreement. The Liquidity Providers and the Indenture Trustees, acting
together, may remove the Collateral Agent. USAir may also remove the
Collateral Agent. In such circumstances, a successor Collateral Agent will be
appointed as provided in the Collateral Agency Agreement. Any resignation or
removal of the Collateral Agent and appointment of a successor Collateral
Agent will not become effective until acceptance of the appointment by the
successor Collateral Agent.
103
<PAGE>
The Collateral Agent has not participated in the preparation of this
Prospectus and assumes no liability for its contents.
GOVERNING LAW
Each Indenture, the Old Notes, the Collateral Agency Agreement, the
Liquidity Facilities and the Registration Rights Agreement are governed by,
and construed in accordance with, New York State law. The New Notes will be
governed by, and construed in accordance with, New York State law.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such New Notes were acquired as a result of market-making activities or other
trading activities. USAir will, for a period of 90 days after the Expiration
Date, make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
USAir will not receive any proceeds from any sale of New Notes by broker-
dealers. New Notes received by broker-dealers for their own account pursuant
to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of new Notes and any commission or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a Prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 90 days after the Expiration Date, USAir will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. USAir has agreed in the Registration Rights Agreement to pay all
expenses incident to the Exchange Offer other than commissions or concessions
of any brokers or dealers and to indemnify any broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer as a result of market
making or other trading activities against certain liabilities including
liabilities under the Securities Act.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
consequences of the exchange of Old Notes for New Notes as of the date hereof.
Except where noted, it deals only with New Notes held as "capital assets" and
does not deal with special situations, such as those of dealers in securities,
financial institutions, life insurance companies or foreign holders.
Furthermore, the discussion below is based upon the provisions of the Internal
Revenue Code of 1986 (the "Code") and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. Persons considering the
exchange of Old Notes for New Notes should consult their own tax advisors
concerning the federal income tax consequences in
104
<PAGE>
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction.
EXCHANGE OF NOTES
USAir has been advised by its tax counsel, Ginsburg, Feldman & Bress,
Chartered, that the exchange of Old Notes for New Notes in the Exchange Offer
should not constitute a taxable event to Noteholders. Consequently, in such
firm's opinion, no gain or loss should be recognized by a Noteholder upon
receipt of a New Note, the holding period of the New Note should include the
holding period of the Old Note and the basis of the New Note should be the
same as the basis of the Old Note immediately before the exchange.
LEGAL MATTERS
The validity of the New Notes will be passed upon for USAir by Lawrence M.
Nagin, Executive Vice President--Corporate Affairs and General Counsel of
USAir. Mr. Nagin's compensation arrangements with USAir are discussed in
"Management--Compensation of Executive Officers."
INDEPENDENT AUDITORS
The consolidated financial statements of USAir as of December 31, 1995 and
1994, and for each of the three years in the period ended December 31, 1995,
appearing in this Prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein. The report of KPMG Peat Marwick LLP covering the aforementioned
consolidated financial statements refers to a change in the method of
accounting for post-employment benefits effective January 1, 1993.
EXPERTS
The references to AirClaims, AISI, and BK, and to their respective appraisal
reports, each dated December 31, 1995, 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.
105
<PAGE>
USAIR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS AS OF MARCH 31, 1996 (UNAUDITED)
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 1996 and 1995........................................... F-2
Condensed Consolidated Balance Sheets as of March 31, 1996 and December
31, 1995................................................................ F-3
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1995........................................... F-4
Notes to Condensed Consolidated Financial Statements..................... F-5
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995
Independent Auditors' Report............................................. F-6
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1994 and 1993..................................................... F-7
Consolidated Balance Sheets as of December 31, 1995 and 1994............. F-8
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993..................................................... F-9
Consolidated Statements of Changes in Stockholder's Equity (Deficit) for
the Three Years Ended December 31, 1995, 1994 and 1993.................. F-10
Notes to Consolidated Financial Statements............................... F-11
</TABLE>
F-1
<PAGE>
USAIR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Operating Revenues
Passenger transportation............................. $1,551,579 $1,486,590
Cargo and freight.................................... 37,308 40,071
Other................................................ 150,728 137,829
---------- ----------
Total Operating Revenues........................... 1,739,615 1,664,490
Operating Expenses
Personnel costs...................................... 713,751 693,564
Aviation fuel........................................ 155,795 155,637
Commissions.......................................... 123,535 134,924
Aircraft rent........................................ 102,415 100,831
Other rent and landing fees.......................... 96,357 102,004
Aircraft maintenance................................. 86,539 74,927
Depreciation and amortization........................ 77,738 83,659
Other, net........................................... 392,395 369,248
---------- ----------
Total Operating Expenses........................... 1,748,525 1,714,794
---------- ----------
Operating Income (Loss)................................ (8,910) (50,304)
Other Income (Expense)
Interest income...................................... 13,410 7,154
Interest expense..................................... (71,447) (73,105)
Interest capitalized................................. 1,449 4,165
Equity in earnings of affiliates..................... 11,262 9,650
Other, net........................................... (402) 616
---------- ----------
Other Income (Expense), Net........................ (45,728) (51,520)
---------- ----------
Income (Loss) Before Taxes............................. (54,638) (101,824)
Income Tax Provision (Credit).......................... 292 --
---------- ----------
Net Income (Loss).................................. $ (54,930) $ (101,824)
========== ==========
</TABLE>
See accompanying Note to condensed consolidated financial statements.
F-2
<PAGE>
USAIR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNT)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 782,712 $ 879,613
Short-term investments............................. 45,487 19,831
Receivables, net................................... 444,680 321,755
Materials and supplies, net........................ 213,359 222,245
Prepaid expenses and other......................... 120,647 97,922
----------- -----------
Total current assets............................. 1,606,885 1,541,366
Property and Equipment
Flight equipment................................... 4,998,231 5,021,520
Ground property and equipment...................... 1,056,173 1,052,706
Less accumulated depreciation and amortization..... (2,259,371) (2,222,814)
----------- -----------
3,795,033 3,851,412
Purchase deposits.................................. 24,361 17,026
----------- -----------
Property and equipment, net...................... 3,819,394 3,868,438
Other Assets
Goodwill, net...................................... 506,550 510,562
Other intangibles, net............................. 312,792 312,539
Other assets, net.................................. 611,833 590,622
----------- -----------
Total other assets............................... 1,431,175 1,413,723
----------- -----------
$ 6,857,454 $ 6,823,527
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current maturities of long-term debt............... $ 83,874 $ 77,496
Accounts payable................................... 301,061 325,079
Payable to parent company.......................... 176,122 100,344
Traffic balances payable and unused tickets........ 875,442 638,019
Accrued expenses................................... 1,308,529 1,435,194
----------- -----------
Total current liabilities........................ 2,745,028 2,576,132
Long-term Debt, Net of Current Maturities
Long-term debt..................................... 2,657,587 2,674,376
Note payable--parent company....................... -- 67,556
----------- -----------
Total Long-term debt, net of current maturities.. 2,657,587 2,741,932
Deferred Credits and Other Liabilities
Deferred gains, net................................ 376,392 382,995
Postretirement benefits other than pensions, non-
current........................................... 1,034,176 1,015,373
Non-current employee benefit liabilities and
other............................................. 410,374 418,268
----------- -----------
Total deferred credits and other liabilities..... 1,820,942 1,816,636
Stockholder's Equity (Deficit)
Common stock, par value $1 per share, authorized
1,000 shares, issued and outstanding 1,000
shares............................................ 1 1
Paid-in capital.................................... 2,416,131 2,416,131
Retained earnings (deficit)........................ (2,704,240) (2,649,310)
Adjustment for minimum pension liability........... (77,995) (77,995)
----------- -----------
Total stockholder's equity (deficit)............. (366,103) (311,173)
----------- -----------
$ 6,857,454 $ 6,823,527
=========== ===========
</TABLE>
See accompanying Note to condensed consolidated financial statements.
F-3
<PAGE>
USAIR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents beginning of period........... $ 879,613 $ 428,925
Cash flows from operating activities
Net income (loss)....................................... (54,930) (101,824)
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities
Depreciation and amortization......................... 77,738 83,659
Loss (gain) on disposition of property................ 3,466 (1,329)
Amortization of deferred gains and credits............ (6,603) (6,603)
Other................................................. (3,448) (1,876)
Changes in certain assets and liabilities
Decrease (increase) in receivables.................... (122,925) (119,762)
Decrease (increase) in materials, supplies, prepaid
expenses and intangible pension assets............... (11,564) (13,675)
Increase (decrease) in traffic balances payable and
unused tickets....................................... 237,423 161,493
Increase (decrease) in accounts payable and accrued
expenses............................................. (150,880) (16,575)
Increase (decrease) in postretirement benefits other
than pensions,
non-current.......................................... 18,803 17,174
--------- ---------
Net cash provided by (used for) operating activities.. (12,920) 682
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net...... (3,385) (20,531)
Additions to other property........................... (27,979) (17,337)
Proceeds from disposition of property................. 3,483 36,617
Change in short-term investments...................... (25,695) --
Change in restricted cash and investments............. 985 2,565
Other................................................. (11,903) 177
--------- ---------
Net cash provided by (used for) investing activities.. (64,494) 1,491
Cash flows from financing activities
Issuance of debt...................................... 103,002 --
Reduction of debt..................................... (122,489) (15,240)
--------- ---------
Net cash provided by (used for) financing activities.. (19,487) (15,240)
--------- ---------
Net increase (decrease) in cash and cash equivalents.... (96,901) (13,067)
--------- ---------
Cash and cash equivalents end of period................. $ 782,712 $ 415,858
========= =========
Noncash investing and financing activities
Issuance of debt--refinancing of debt secured by
aircraft............................................. $ 159,998 $ --
========= =========
Reduction of debt--refinancing of debt secured by
aircraft............................................. $ 154,422 $ --
========= =========
Reduction of parent company debt--aircraft
acquisitions......................................... $ 68,641 $ --
========= =========
Issuance of debt--aircraft acquisitions............... $ 4,585 $ 101,215
========= =========
Underwriter's fees--refinancing of debt secured by
aircraft............................................. $ 2,488 $ --
========= =========
</TABLE>
See accompanying Note to condensed consolidated financial statements.
F-4
<PAGE>
USAIR, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include the
accounts of USAir and its wholly-owned subsidiary USAM Corp. USAir is a
wholly-owned subsidiary of USAir Group.
Management believes that all adjustments necessary for a fair statement of
results have been included in the Condensed Consolidated Financial Statements
for the interim periods presented, which are unaudited. All significant
intercompany accounts and transactions have been eliminated. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain 1995 amounts have been reclassified to conform with 1996
classifications.
These interim period Condensed Consolidated Financial Statements should be
read in conjunction with the audited Consolidated Financial Statements that
follow for the year ended December 31, 1995.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder and Board of Directors
USAir, Inc.:
We have audited the consolidated balance sheets of USAir, Inc. and
subsidiary ("USAir") as of December 31, 1995 and 1994, and the related
consolidated statements of operations, cash flows, and changes in
stockholder's equity (deficit) for each of the years in the three-year period
ended December 31, 1995. These consolidated financial statements are the
responsibility of USAir's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of USAir,
Inc. and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, effective
January 1, 1993, USAir changed its method of accounting for postemployment
benefits.
KPMG PEAT MARWICK LLP
Washington, D. C.
February 28, 1996
F-6
<PAGE>
USAIR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenues
Passenger transportation................ $6,267,762 $5,922,223 $6,081,788
Cargo and freight....................... 153,651 160,364 170,500
Other................................... 563,463 496,006 370,760
---------- ---------- ----------
Total operating revenues.............. 6,984,876 6,578,593 6,623,048
Operating Expenses
Personnel costs......................... 2,751,437 2,753,269 2,698,039
Aviation fuel........................... 605,027 642,305 677,859
Commissions............................. 527,058 549,192 559,793
Aircraft rent........................... 398,063 521,395 431,616
Other rent and landing fees............. 388,866 422,190 431,591
Aircraft maintenance.................... 295,594 335,791 308,890
Depreciation and amortization........... 337,066 387,211 325,214
Other, net.............................. 1,447,114 1,484,212 1,339,152
---------- ---------- ----------
Total operating expenses.............. 6,750,225 7,095,565 6,772,154
---------- ---------- ----------
Operating income (loss)............... 234,651 (516,972) (149,106)
Other Income (Expense)
Interest income......................... 51,122 28,044 24,794
Interest expense........................ (301,923) (285,846) (238,628)
Interest capitalized.................... 8,781 13,760 17,754
Equity in earnings (loss) of
affiliates............................. 34,546 26,535 (13,104)
Other, net.............................. 10,221 18,296 (16,758)
---------- ---------- ----------
Other income (expense), net........... (197,253) (199,211) (225,942)
---------- ---------- ----------
Income (loss) before taxes and cumulative
effect of accounting changes............. 37,398 (716,183) (375,048)
Income tax provision (credit)............. 4,408 -- --
---------- ---------- ----------
Income (loss) before cumulative effect of
accounting changes....................... 32,990 (716,183) (375,048)
Cumulative effect of change in method of
accounting for postemployment benefits in
1993..................................... -- -- (43,749)
---------- ---------- ----------
Net income (loss)..................... $ 32,990 $ (716,183) $ (418,797)
========== ========== ==========
</TABLE>
See accompanying Notes to consolidated financial statements.
F-7
<PAGE>
USAIR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNT)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................ $ 879,613 $ 428,925
Short-term investments........................... 19,831 22,133
Receivables, net................................. 321,755 326,012
Materials and supplies, net...................... 222,245 238,481
Prepaid expenses and other....................... 97,922 77,111
------------ ------------
Total current assets........................... 1,541,366 1,092,662
Property and Equipment
Flight equipment................................. 5,021,520 4,914,776
Ground property and equipment.................... 1,052,706 1,040,329
Less accumulated depreciation and amortization... (2,222,814) (2,006,041)
------------ ------------
3,851,412 3,949,064
Purchase deposits................................ 17,026 195,701
------------ ------------
Property and equipment, net...................... 3,868,438 4,144,765
Other Assets
Goodwill, net.................................... 510,562 526,615
Other intangibles, net........................... 312,539 319,229
Other assets, net................................ 590,622 592,689
------------ ------------
Total other assets............................. 1,413,723 1,438,533
------------ ------------
$ 6,823,527 $ 6,675,960
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt............. $ 77,496 $ 80,714
Accounts payable................................. 325,079 263,243
Payable to parent company........................ 100,344 85,175
Traffic balances payable and unused tickets...... 638,019 591,154
Accrued expenses................................. 1,435,194 1,297,574
------------ ------------
Total current liabilities...................... 2,576,132 2,317,860
Long-Term Debt, Net of Current Maturities
Long-term debt................................... 2,674,376 2,849,488
Note payable--parent company..................... 67,556 --
------------ ------------
Total long-term debt, net of current
maturities.................................... 2,741,932 2,849,488
Deferred Credits and Other Liabilities
Deferred gains, net.............................. 382,995 409,091
Postretirement benefits other than pensions, non-
current......................................... 1,015,373 958,706
Non-current employee benefit liabilities and
other........................................... 418,268 414,000
------------ ------------
Total deferred credits and other liabilities... 1,816,636 1,781,797
Stockholder's Equity (Deficit)
Common stock, par value $1 per share, authorized
1,000 shares, issued and outstanding 1,000
shares.......................................... 1 1
Paid-in capital.................................. 2,416,131 2,416,131
Retained earnings (deficit)...................... (2,649,310) (2,682,300)
Adjustment for minimum pension liabilities....... (77,995) (7,017)
------------ ------------
Total stockholder's equity (deficit)........... (311,173) (273,185)
------------ ------------
$ 6,823,527 $ 6,675,960
============ ============
</TABLE>
See accompanying Notes to consolidated financial statements.
F-8
<PAGE>
USAIR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents beginning of year.... $ 428,925 $ 367,835 $ 295,432
Cash flows from operating activities
Net income (loss)............................. 32,990 (716,183) (418,797)
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating
activities
Depreciation and amortization............... 337,066 387,211 325,214
Loss (gain) on disposition of property...... (16,654) (16,671) 10,405
Amortization of deferred gains and credits.. (26,411) (26,382) (26,439)
Other....................................... (2,787) (8,080) 26,052
Changes in certain assets and liabilities
Decrease (increase) in receivables......... 4,257 127,902 (59,916)
Decrease (increase) in materials, supplies,
prepaid expenses and intangible pension
assets.................................... (68,415) 70,750 32,069
Increase (decrease) in traffic balances
payable and unused tickets................ 46,865 (68,452) 37,178
Increase (decrease) in accounts payable and
accrued expenses.......................... 214,707 326,855 80,838
Increase (decrease) in postretirement
benefits other than pensions, non-
current................................... 56,667 51,613 65,833
--------- --------- ---------
Net cash provided by (used for) operating
activities............................... 578,285 128,563 72,437
Cash flows from investing activities
Aircraft acquisitions and purchase deposits,
net.......................................... (61,689) (46,022) (125,981)
Additions to other property................... (80,644) (128,874) (150,793)
Proceeds from disposition of property......... 219,762 55,540 176,019
Change in short-term investments.............. 2,430 (21,994) --
Change in restricted cash and investments..... 71,980 2,578 (14,221)
Other......................................... (1,134) 1,110 (4,378)
--------- --------- ---------
Net cash provided by (used for) investing
activities............................... 150,705 (137,662) (119,354)
Cash flows from financing activities
Issuance of debt.............................. -- 172,156 329,556
Reduction of debt............................. (278,302) (101,967) (210,236)
--------- --------- ---------
Net cash provided by (used for) financing
activities............................... (278,302) 70,189 119,320
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 450,688 61,090 72,403
--------- --------- ---------
Cash and cash equivalents end of year.......... $ 879,613 $ 428,925 $ 367,835
========= ========= =========
Noncash investing and financing activities
Issuance of debt for aircraft acquisitions,
net.......................................... $ 169,725 $ 224,614 $ 343,188
Issuance of parent company debt for aircraft
acquisitions................................. $ 68,640 $ -- $ 76,094
Issuance of debt for other property
acquisitions................................. $ -- $ -- $ 669
Reduction of debt-aircraft purchase deposits.. $ 70,837 $ -- $ --
Reduction of debt-aircraft related............ $ -- $ -- $ 47,685
Reduction of parent company debt applied to
inter-company receivable..................... $ -- $ -- $ 79,539
Aircraft acquisitions-transfer from affiliated
company...................................... $ -- $ 3,569 $ 70,700
Other property acquisitions-transfer from
affiliated company........................... $ -- $ 7,925 $ --
Aircraft dispositions--transfer to affiliated
company...................................... $ -- $ 81,913 $ --
Supplemental Information
Cash paid during the year for interest, net of
amounts capitalized.......................... $ 290,560 $ 254,199 $ 221,811
========= ========= =========
Cash received during the year for income tax
refunds, net of taxes paid................... $ (6,329) $ -- $ --
========= ========= =========
</TABLE>
See accompanying Notes to consolidated financial statements.
F-9
<PAGE>
USAIR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1995
---------------------------------------------------
ADJUSTMENT
FOR
RETAINED MINIMUM
COMMON PAID-IN EARNINGS PENSION
STOCK CAPITAL (DEFICIT) LIABILITY TOTAL
------ ---------- ----------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Dec. 31, 1992.... $ 1 $2,416,131 $(1,547,320) $ (6,820) $ 861,992
Net income (loss)........ -- -- (418,797) -- (418,797)
Adjustment for minimum
pension liability....... -- -- -- (35,144) (35,144)
--- ---------- ----------- -------- ---------
Balance Dec. 31, 1993.... 1 2,416,131 (1,966,117) (41,964) 408,051
Net income (loss)........ -- -- (716,183) -- (716,183)
Adjustment for minimum
pension liability....... -- -- -- 34,947 34,947
--- ---------- ----------- -------- ---------
Balance Dec. 31, 1994.... 1 2,416,131 (2,682,300) (7,017) (273,185)
Net income (loss)........ -- -- 32,990 -- 32,990
Adjustment for minimum
pension liability....... -- -- -- (70,978) (70,978)
--- ---------- ----------- -------- ---------
Balance Dec. 31, 1995.... $ 1 $2,416,131 $(2,649,310) $(77,995) $(311,173)
=== ========== =========== ======== =========
</TABLE>
See accompanying Notes to consolidated financial statements.
F-10
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Nature of Operations
The accompanying consolidated financial statements include the accounts of
USAir, Inc. ("USAir") and its wholly-owned subsidiary USAM Corp. ("USAM").
USAir is a wholly-owned subsidiary of USAir Group, Inc. ("USAir Group" or the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
USAir is a major United States air carrier whose primary business is
transporting passengers, property and mail. USAir operates predominantly in
the eastern United States with primary hubs at the major airports in
Pittsburgh, Pennsylvania, Charlotte, North Carolina, Philadelphia,
Pennsylvania and at Baltimore/Washington International Airport. USAir also
maintains significant operations at the major airports in Boston,
Massachusetts, New York, New York and Washington, D.C. USAir enplaned more
than 57 million passengers during 1995 and is currently the fifth largest
domestic air carrier, as measured by revenue passenger miles ("RPMs").
In the fourth quarter of 1995, USAir and a subsidiary of British Airways plc
("BA") formed Airline Technical Services, LLC ("ATS"), a Delaware limited
liability company, offering joint aviation maintenance, and technical and
engineering expertise in the Americas. ATS will receive a commission on the
contracts it brokers for USAir and BA. USAir accounts for ATS using the equity
method because it is owned equally by each parent company. No material
activity occurred in 1995.
At December 31, 1992, USAM owned 11% of the Covia Partnership ("Covia")
which owned and operated a computerized reservation system ("CRS"). In
September 1993, Covia purchased the assets of the corporation that owned and
operated the Galileo CRS which provided services to travel agent subscribers
in Europe. Covia was immediately separated into three new entities and, as a
result, USAM owns 11% of the Galileo International Partnership which owns and
operates the Galileo CRS, approximately 11% of the Galileo Japan Partnership
which markets the Galileo CRS in Japan and approximately 21% of the Apollo
Travel Services Partnership which markets the Galileo CRS in the U.S. and
Mexico. USAM accounts for these investments using the equity method because it
is represented on the board of directors of each of the partnerships and
therefore participates in policy making processes.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain 1994 and 1993 amounts have been reclassified to conform with 1995
classifications.
(b) Cash and Cash Equivalents and Short-Term Investments
For financial statement purposes, USAir considers all highly liquid
investments purchased within three months of maturity to be cash equivalents.
Cash and cash equivalents are stated at cost, which approximates market value.
Short-term investments consist of certificates of deposit and commercial paper
purchased with maturities greater than three months but less than one year.
Short-term investments are stated at cost plus accrued interest, which
approximates market value.
(c) Materials and Supplies
Inventories of materials and supplies are valued at average cost and are
charged to operations as consumed. An allowance for obsolescence is provided
for flight equipment expendable and repairable parts.
F-11
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Property and Equipment
Property and equipment is stated at cost or, if acquired under capital
leases, at the lower of the present value of minimum lease payments or fair
market value at the inception of the lease. Maintenance and repairs, including
the overhaul of aircraft components, are charged to operating expense as
incurred and costs of major improvements are capitalized for both owned and
leased assets. Interest related to deposits on aircraft purchase contracts and
facility and equipment construction projects is capitalized as additional cost
of the asset or as leasehold improvement if the asset is leased. Depreciation
and amortization for principal asset classifications is provided on a
straight-line basis to estimated residual values over estimated depreciable
lives. USAir periodically reviews estimated depreciable lives and residual
values for reasonableness and revises its estimates, if necessary.
<TABLE>
<CAPTION>
DEPRECIABLE
ASSETS LIVES RESIDUAL VALUES
------ ----------- ---------------
(YEARS) (IN MILLIONS)
<S> <C> <C>
Aircraft
Boeing 767-200ER................. 20 $14.0
Boeing 757-200................... 20 8.0
Boeing 737-300/400............... 20 7.5
Boeing 737-200................... 5-17 0.6-5.0
McDonnell Douglas MD-80.......... 20 7.5
Douglas DC-9-30.................. 17 3.0
Fokker 100....................... 20 5.0
Fokker F28-4000.................. 8 2.0
Fokker F28-1000.................. 6 1.0
Turboprop aircraft............... 15 1.5
Improvements to leased aircraft.. life of lease --
Ground property, equipment and
leasehold improvements............ 1-10 or life of lease --
Buildings.......................... 30 --
</TABLE>
Property acquired under capital lease is amortized on a straight-line basis
over the term of the lease and charged to Depreciation and Amortization
Expense. When property and equipment is sold or retired, the cost and
accumulated depreciation is removed from the accounts and any gain or loss
recognized as Other Income (Expense).
(e) Goodwill and Other Intangibles
Goodwill, the cost in excess of fair value of identified net assets
acquired, is being amortized on a straight-line basis over 40 years. The $629
million goodwill resulting from the acquisition of Pacific Southwest Airlines
("Pacific Southwest") and Piedmont Aviation, Inc. ("Piedmont Aviation"), both
in 1987, is being amortized as Depreciation and Amortization Expense.
Accumulated amortization at December 31, 1995 and 1994 related to the Pacific
Southwest and Piedmont Aviation acquisitions was $128 million and $113
million, respectively. The $11 million goodwill resulting from USAM's CRS
investments is being amortized as other non-operating expense, consistent with
the classification of income or loss on the investments. USAM's related
accumulated amortization at December 31, 1995 and 1994 was approximately $2
million. USAir evaluates whether or not goodwill is impaired by comparing the
goodwill balances with estimated future undiscounted cash flows which, in
USAir's judgment, are attributable to the goodwill. This analysis is performed
separately for the goodwill which resulted from each acquisition.
F-12
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible assets consist mainly of purchased operating rights at various
airports, purchased route authorities, capitalized software costs and the
intangible assets associated with the underfunded amounts of certain pension
plans. The operating rights, valued at purchase cost or appraised value if
acquired from Pacific Southwest or Piedmont Aviation, are being amortized over
periods ranging from ten to 25 years as Depreciation and Amortization Expense.
The purchased route authorities are being amortized over 25 years as
Depreciation and Amortization Expense. Capitalized software costs are being
amortized as Depreciation and Amortization Expense over five years, the
expected period of benefit. Accumulated amortization related to intangible
assets at December 31, 1995 and 1994 was $104 million and $80 million,
respectively.
Based on the most recent analyses, USAir believes that goodwill and other
intangible assets were not impaired at December 31, 1995.
(f) Other Assets, net
Other Assets, net consists primarily of non-current pension assets, the
unamortized balance of deferred compensation, restricted cash and investments
and a long-term receivable from BA. Deferred compensation resulted mainly from
USAir's establishment of an Employee Stock Ownership Plan in 1989 (see Note
8). Restricted cash and investments are deposits in trust accounts to
collateralize letters of credit and workers' compensation policies and the
long-term receivable from BA resulted from the relinquishment by USAir of two
U.S. to London routes.
In November 1995, USAir entered into a five-year transaction with a third
party pursuant to which USAir agreed to pledge to such third party from time
to time certain flight equipment and simulators as collateral for up to $70
million aggregate principal amount of letters of credit to be issued by the
third party with respect to certain workers' compensation obligations of
USAir. On December 15, 1995, USAir pledged ten aircraft to the third party,
resulting in the release of $67.2 million in cash and securities that had been
previously pledged by USAir to letter of credit providers.
(g) Deferred Gains on Sale and Leaseback Transactions
Gains on aircraft sale and leaseback transactions are deferred and amortized
over the term of the leases as a reduction of rental expense.
(h) Passenger Revenue Recognition
Passenger ticket sales are recognized as revenue when the transportation
service is rendered or the ticket otherwise expires. At the time of sale, a
liability is established (Traffic Balances Payable and Unused Tickets) and
subsequently eliminated either through carriage of the passenger, through
billing from another carrier which renders the service or by refund to the
passenger. Approximately $31 million and $23 million of amounts owed to
wholly-owned subsidiaries of USAir Group for passenger transportation revenue
are included in Traffic Balances Payable and Unused Tickets at December 31,
1995 and 1994, respectively.
(i) Frequent Traveler Awards
USAir accrues the estimated incremental cost of providing outstanding travel
awards earned by participants in its Frequent Traveler Program ("FTP") when
participants accumulate sufficient miles to be entitled to claim award
certificates for travel.
F-13
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(j) Investment Tax Credit
Investment tax credit benefits have been recorded using the "flow-through"
method as a reduction of the Federal income tax provision.
(k) Advertising Costs
Advertising costs are expensed when incurred as other operating expense.
Advertising expense for 1995, 1994 and 1993 was $67 million, $63 million and
$59 million, respectively.
2. FINANCIAL INSTRUMENTS
(a) Terms of Certain Financial Instruments
USAir has entered into hedging arrangements designed to reduce its exposure
to fluctuations in the price of jet fuel. Net settlements are recorded as
adjustments to Aviation Fuel expense. The total notional number of gallons
under these agreements was 38 million and 86 million at December 31, 1995 and
1994, respectively. Under these arrangements, USAir will pay $0.499 to $0.548
per notional gallon in 1996 and receive a floating rate per notional gallon
based on current market prices. In 1995 USAir paid $0.496 to $0.521 per
notional gallon and received a floating rate per notional gallon based on
current market prices. Decreases in the market price of fuel to levels below
the fixed prices require cash payments by USAir and cause an increase in
USAir's Aviation Fuel expense. The hedging arrangements represented
approximately 8% of USAir's actual 1995 fuel consumption. USAir is party to
such hedging arrangements with several entities. Although the agreements,
which expire in 1996, expose USAir to credit loss in the event of non-
performance by the other parties to the agreements, USAir does not anticipate
such non-performance because of the favorable creditworthiness status of the
other parties. USAir may continue to enter into such arrangements, depending
on market conditions.
An aggregate of $32 million of future principal payments of the Equipment
Financing Agreements due 1998 through 2000 are payable in Japanese Yen. This
foreign currency exposure has been hedged to maturity by participation in
foreign currency contracts. Net settlements will be recorded as adjustments to
interest expense. Although USAir is exposed to credit loss in the event of
non-performance by the counterparty to the contracts, USAir does not
anticipate such non-performance because of the favorable credit-worthiness
status of the other party.
(b) Fair Value of Financial Instruments
Unless a quoted market price indicates otherwise, the fair values of cash
and cash equivalents, short-term investments and other investments generally
approximates carrying values because of the short maturity of these
instruments. USAir has estimated the fair value of long-term debt based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of similar remaining maturities. The fair
values of energy swap agreements and foreign currency contracts are obtained
from dealer quotes whereby these values represent the estimated amount USAir
would receive or pay to terminate such agreements.
F-14
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of USAir's financial instruments, none of which are
held for trading purposes, are summarized as follows (brackets denote a
liability):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash
equivalents.............. $ 879,613 $ 879,613 $ 428,925 $ 428,925
Short-term investments.... 19,831 19,822 22,133 22,078
Restricted cash and
investments*............. 98,742 98,539 170,686 170,581
Long-term note
receivable*.............. 45,433 33,277 47,000 31,537
Other long-term
investments*............. 4,607 4,008 1,633 1,144
Long-term debt (excludes
capital lease
obligations)............. (2,753,932) (2,564,514) (2,847,878) (2,435,786)
Energy swap agreements:
In a net receivable
position............... -- 1,845 -- 259
Foreign currency
contracts:
In a net receivable
position............... -- 4,050 -- 5,352
</TABLE>
- --------
* Amounts are included in Other Assets on USAir's consolidated balance sheets.
3. LONG-TERM DEBT
Details of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Senior Debt:
12 7/8% Senior Debentures due 2000................. $ -- $ 77,000
10% Senior Notes due 2003.......................... 300,000 300,000
9 5/8% Senior Notes due 2001....................... 175,000 175,000
12.15% to 15.23% U.S. Government Guaranteed
Obligations....................................... -- 3,090
5.7% to 12% Equipment Financing Agreements,
Installments due 1996 to 2016..................... 2,180,430 2,090,064
8.4% Intercompany Aircraft Loan with USAir Group
due 1996 to 2014.................................. 68,640 --
8.6% Airport Facility Revenue Bond due 2022........ 27,620 27,620
4.0% to 7.1% Aircraft Purchase Deposit Financing... -- 172,301
Other.............................................. 2,242 2,803
---------- ----------
2,753,932 2,847,878
Capital Lease Obligations............................ 65,496 82,324
---------- ----------
Total.............................................. 2,819,428 2,930,202
Less Current Maturities.............................. 77,496 80,714
---------- ----------
$2,741,932 $2,849,488
========== ==========
</TABLE>
F-15
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of long-term debt and debt under capital leases for the next five
years are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996............................... $ 77,496
1997............................... 88,637
1998............................... 157,287
1999............................... 80,732
2000............................... 125,820
Thereafter......................... 2,289,456
</TABLE>
Interest rates on $492 million principal amount of long-term debt at
December 31, 1995 are subject to adjustment to reflect prime rate and other
rate changes.
Equipment financings totaling $2.3 billion were collateralized by aircraft
and engines with a net book value of approximately $2.4 billion at December
31, 1995.
In February 1996, USAir sold $263 million principal amount of Enhanced
Equipment Notes ("Enhanced Notes") through a private placement offering under
Securities and Exchange Commission Regulation 144A. The Enhanced Notes are
secured by nine 757-200 aircraft. The Enhanced Notes are not reflected in the
above table because they were sold after December 31, 1995.
4. COMMITMENTS AND CONTINGENCIES
(a) Operating Environment
USAir's financial results for 1995 represent a significant improvement over
1994 results. The improvement is mainly attributable to a stable domestic
economic climate, favorable capacity trends in USAir's markets, less fare
discounting and low fare competition and the positive influence of USAir's
cost-reduction efforts. However, USAir's financial condition, results of
operations and future prospects are more susceptible to an economic downturn
and competitive influences than most of its major competitors due to USAir's
high cost structure amid the low cost, low fare environment which
characterizes the domestic airline industry.
Most of USAir's operations are in competitive markets, predominately in the
Eastern United States. In recent years, air carriers with low costs of
operations and fare structures have initiated and or expanded into markets
served by USAir. In addition, several of the larger, mature air carriers have
developed or indicated their intention to develop similar low cost, low fare
service. In an effort to preserve market share, USAir has typically responded
to the entry of a low cost, low fare competitor into its markets by matching
fares and increasing the frequency of service in related markets, generally
with the result of diluting USAir's yield in these markets. USAir currently
has the highest operating costs among the major domestic air carriers and the
growth and expansion of low cost, low fare carriers in USAir's markets has put
considerable pressure on USAir to reduce operating costs in order to maintain
competitiveness.
USAir was able to significantly reduce certain non-labor related operating
costs during 1995 through re-engineering efforts, structural changes and
reducing or eliminating capacity in unprofitable markets, however, USAir has
not been successful to date in achieving meaningful reductions in personnel
costs. USAir believes that its long-term future depends on its success in
further reducing its cost of operations, including personnel costs.
At December 31, 1995, USAir employed approximately 39,900 full-time
equivalent employees. Approximately 65% of USAir's workforce is covered by
collective bargaining agreements with various unions, or will be covered by
collective bargaining agreements for which initial negotiations are in
progress. USAir's
F-16
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contract with the International Association of Machinists and Aerospace
Workers ("IAM"), which represents USAir's machinists group, is currently open
for negotiation and USAir and the IAM have commenced the collective bargaining
process. USAir's contract with the unions which represent its pilot's and
flight attendant's groups become open for negotiations within the next year.
USAir cannot predict the ultimate outcome of its negotiations with the IAM or
if it will be successful in achieving meaningful wage and benefit concessions
from the IAM and its other organized labor groups.
Although a competitive strength, the concentration of significant operations
in the eastern U.S. leaves USAir susceptible to certain regional conditions
that may have an adverse affect on the USAir's results of operations and
financial condition. For example, geographically isolated inclement weather
and the recent partial Federal government shutdowns adversely effected
operating revenues and expenses to a greater degree than some of USAir's
competitors.
The nature of USAir's operations results in reliance on the availability of
aviation fuel. The availability and price of aviation fuel is largely
dependent on the actions of the countries which compose the Oil Producing and
Exporting Countries ("OPEC") cartel. OPEC, which currently controls a
significant amount of the world's known crude oil reserves, can effect the
availability and price of jet fuel through its production and price-targeting
actions. In addition, jet fuel prices are affected by political events,
seasonal factors and other factors that are generally outside of USAir's
control. USAir has a diversified fuel supplier network and participates in
fuel hedging transactions (see Note 2. Fair Value of Financial Instruments for
additional information related to USAir's participation in fuel hedging
contracts) in order to ensure fuel availability and partially protect USAir
from temporary jet fuel price fluctuations.
(b) Leases
USAir leases certain aircraft, engines, computer and ground equipment, in
addition to the majority of its ground facilities. Ground facilities include
executive offices, overhaul and maintenance bases and ticket and
administrative offices. Public airports are utilized for flight operations
under lease arrangements with the municipalities or agencies owning or
controlling such airports. Substantially all leases provide that the lessee
shall pay taxes, maintenance, insurance and certain other operating expenses
applicable to the leased property. Some leases also include renewal and
purchase options.
In addition, USAir subleases certain leased aircraft and ground facilities
under noncancelable operating leases expiring in various years through 2021.
The following amounts applicable to capital leases are included in property
and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Flight equipment........................................ $192,775 $216,600
Ground property and equipment........................... 4,767 10,961
-------- --------
197,542 227,561
Less accumulated amortization........................... 140,212 151,217
-------- --------
$ 57,330 $ 76,344
======== ========
</TABLE>
F-17
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, obligations under capital and noncancelable operating
leases for future minimum lease payments were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
(IN THOUSANDS)
<S> <C> <C>
1996.................................................. $21,886 $ 712,087
1997.................................................. 21,697 724,473
1998.................................................. 10,687 689,645
1999.................................................. 10,687 655,665
2000.................................................. 7,586 645,943
Thereafter............................................ 20,094 6,621,172
------- ----------
Total minimum lease payments........................ 92,637 10,048,985
Less sublease rental receipts....................... -- 178,901
------- ----------
Total minimum operating lease payments.............. $9,870,084
==========
Less amount representing interest................... 27,141
-------
Present value of future minimum capital lease
payments............................................. 65,496
Less current obligations under capital leases......... 14,085
-------
Long-term obligations under capital leases............ $51,411
=======
</TABLE>
Rental expense under operating leases for 1995, 1994 and 1993 was $680
million, $703 million and $739 million, respectively. The $680 million rental
expense for 1995 excludes a credit of $4.1 million related to the leasing of
three of USAir's parked BAe-146 aircraft, recorded in the fourth quarter of
1995. The $703 million rental expense for 1994 excludes charges of $103
million related to USAir's grounded BAe-146 fleet and $13 million primarily
related to USAir's decision to cease operations of its remaining Boeing 727-
200 aircraft in 1995. See Note 14.--Non-Recurring and Unusual Items.
USAir also leases certain owned aircraft under noncancelable operating
leases which expire in various years through 2002 to both third and related
parties, primarily subsidiaries of USAir Group. See Note 11.--Related Party
Transactions. The minimum future rentals to be received by USAir on these
leases are: $24.4 million-- 1996; $16.1 million--1997; $8.0 million--1998;
$6.2 million--1999; $5.4 million--2000; and $6.0 million--thereafter. The
following amounts are applicable to aircraft leased under such agreements as
reflected in flight equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Flight equipment........................................ $192,198 $152,956
Less accumulated depreciation........................... 75,089 43,283
-------- --------
$117,109 $109,673
======== ========
</TABLE>
(c) Legal Proceedings
USAir is involved in legal proceedings arising out of its two aircraft
accidents that occurred in July and September 1994 near Charlotte, North
Carolina and Pittsburgh, Pennsylvania, respectively. The National
Transportation Safety Board ("NTSB") held hearings beginning in September 1994
relating to the July accident and January 1995 relating to the September
accident. In April 1995, the NTSB issued its finding of probable
F-18
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
causes with respect to the accident near Charlotte. It assigned as probable
causes the failure of air traffic control to convey weather and windshear
hazard information and flight crew errors. The NTSB has not yet issued its
final accident investigation report for the accident near Pittsburgh. The
NTSB, The Boeing Company ("Boeing"), the Federal Aviation Administration
("FAA") and USAir jointly conducted flight tests in October 1995 as part of
the ongoing investigation into the cause of this accident. In this regard,
USAir provided a 737-300 aircraft in the collective effort to simulate the
conditions at the time of the accident. More public hearings were conducted in
November 1995. The NTSB has indicated that a determination of the cause of the
accident is not likely until sometime in 1996. USAir expects that it will be
at least two to three years before the accident litigation and related
settlements will be concluded. USAir is unable to estimate the potential
liability arising from such accidents because the determination of liability
and calculation of damages, if any, are subject to numerous factors such as
the responsibility of co- and third-party defendants (ie. aircraft and engine
manufacturers and certain governmental authorities) and the availability of
defenses to the claims. USAir believes, however, that it is fully insured with
respect to the litigation that has arisen or may arise from the Charlotte and
Pittsburgh incidents. Among the factors considered by USAir in making this
determination are reviews by USAir and by USAir's counsel of applicable
insurance policies (including policy limits and the financial condition of its
insurers) and detailed discussions among USAir, its insurance providers and
litigation counsel. USAir has been specifically advised by litigation counsel
that the magnitude of compensatory damages are not estimable but that for both
the Charlotte and Pittsburgh incidents, aggregate damages will be well within
policy limits. USAir's liability limits are reviewed at least annually by
USAir and its insurance providers and liability insurance for accident
liability is on a "per occurrence" basis. Therefore, USAir believes that the
litigation will not have a material adverse effect on USAir's financial
condition or results of operations, although any finding of fault on USAir's
part could create negative publicity and could tarnish USAir's image.
In 1989 and 1990, a number of U.S. air carriers, including USAir, received
two Civil Investigative Demands ("CIDs") from the Department of Justice
("DOJ") related to investigations of price fixing in the domestic airline
industry. A CID is a request for information in the course of an antitrust
investigation and does not constitute the institution of a civil or criminal
action.
The investigations by the DOJ culminated in the filing of a lawsuit against
Airline Tariff Publishing Company ("ATPCo") and eight major air carriers,
including USAir, alleging that the defendants had agreed to fix prices in
violation of Section 1 of the Sherman Act through the methods used to
disseminate fare data to ATPCo, an airline-owned fare publishing service. To
avoid the costs associated with protracted litigation and an uncertain
outcome, USAir and another carrier decided to settle the lawsuit by entering
into a consent decree to modify their fare-filing practices in certain
respects and to implement compliance programs that would include education of
employees regarding the carrier's responsibilities under the consent decree.
Accordingly, the consent decree and the U.S. government's complaint were filed
contemporaneously in the United States District Court for the District of
Columbia in December 1992. On November 1, 1993, after it had reviewed comments
filed regarding the consent decree, the court entered the decree. In March
1994, the remaining six air carrier defendants agreed to the entry of a
separate consent decree to settle the lawsuit. USAir petitioned the Court to
have its consent decree amended to conform with the other settlement and the
Court entered an amended consent decree on September 21, 1994. USAir has
recently received a CID from the DOJ relating to USAir's compliance with the
terms of the consent decree.
On March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a
settlement involving USAir and five other U.S. air carrier defendants in the
Domestic Air Transportation Antitrust Litigation class action lawsuit. The
class action suit, which was filed in July 1990, alleged that the airlines
used ATPCo to signal and communicate carrier pricing intentions and otherwise
limit price competition for travel to and from numerous hub airports. Under
the terms of the settlement, the six air carriers paid $45 million in cash and
issued $396.5 million in certificates valid for purchase of domestic air
travel on any of the six airlines. USAir's share of the
F-19
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
cash portion of the settlement, $5 million, was recorded in results of
operations for the second quarter of 1992. The certificates, mailed to
approximately 4.1 million claimants between December 15 and 31, 1994, provide
a dollar-for-dollar discount against the cost of a ticket generally of up to a
maximum of 10% per ticket, depending on the cost of the ticket. It is possible
that this settlement could have a dilutive effect on USAir's passenger
transportation revenue and associated cash flow. However, due to the
interchange-ability of the certificates among the six carriers involved in the
settlement, the possibility that carriers not party to the settlement will
honor the certificates, and the potential stimulative effect on travel created
by the certificates, USAir cannot reasonably estimate the impact of this
settlement on further passenger revenue and cash flows. USAir has employed the
incremental cost method to estimate a range of costs attributable to the
exercise of the certificates, based on the assumption that the estimated
maximum number of certificates to be redeemed for travel on USAir will be
related to USAir's market share relative to the total market share of the six
carriers involved in the
F-19--1
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
settlement. USAir's estimated percentage of such market share is less than 9%.
Incremental costs include unit costs for passenger food, beverages and
supplies, fuel, reservations, communications, liability insurance, and denied
boarding compensation expenses expected to be incurred on a per passenger
basis. USAir has estimated that its incremental cost will not be material
based on the equivalent free trips associated with the settlement.
On October 11, 1994, USAir and seven other carriers entered into a
settlement agreement with a group of State Attorneys General resolving similar
issues with the states. The settlement entitles passengers traveling within
the United States on state government business to a 10% discount off the
published fares of each of the settling carriers and will be available for 18
months from August 16, 1995, or until the combined discount amount reaches $40
million, whichever first occurs. On May 10, 1995, a U.S. federal district
court judge approved the settlement. USAir does not expect that this
settlement will have a material adverse effect on its financial condition or
results of operations. As was the case with the settlement of the private
antitrust litigation, it is difficult to predict the amount of discounted
state travel that will occur on USAir. Thus, a dollar impact of the settlement
cannot be estimated.
In February and March 1995, several class action lawsuits were filed in
various federal district courts by travel agencies and a travel agency trade
association alleging that most of the major U.S. airlines, including USAir,
violated the antitrust laws when they individually capped travel agent base
commissions at $50 for round-trip domestic tickets with base fares above $500
and at $25 for one-way domestic tickets with base fares above $250. The
lawsuits have been consolidated in the federal district of Minnesota. The
plaintiffs are seeking unspecified treble damages for restraint of trade. The
case is expected to go to a jury trial in 1996. While USAir believes that its
actions in establishing a commission cap were in full compliance with the
antitrust laws, USAir is unable to predict at this time the ultimate
resolution of the litigation or the potential impact on USAir's financial
condition and results of operations.
In March 1995, a number of U.S. carriers, including USAir, received CIDs
from the DOJ related to an investigation of incentives paid to travel agents
over and above the base commission payments. USAir responded to an earlier CID
on this topic during 1994. USAir has complied with the requirements of the CID
by producing documents and responding to interrogatories. Because this matter
is in the investigatory stage, USAir is unable to predict at this time its
ultimate resolution or potential impact on USAir's financial condition or
results of operations.
In May 1995, a number of U.S. air carriers, including USAir, received CIDs
from the DOJ relating to its investigation of incentive payments to travel
agencies and a possible agreement among these carriers to implement a cap on
travel agent base commissions, which is the subject matter of the suits
recently brought by travel agencies, as discussed above. One of the CIDs
received by USAir sought the production of transcripts of depositions of any
USAir employees taken in connection with the private litigation relating to
the commission caps, together with annexed exhibits. USAir has complied with
the requirements of the CIDs. USAir does not expect these investigations to
have a material effect on its financial condition and results of operations.
In October 1995, USAir terminated for cause an agreement with In-Flight
Phone Corporation ("IFPC"). IFPC was USAir's provider of on-board telephone
and interactive data systems (the "IFPC System"). The agreement contemplated
the eventual installation of the IFPC System on substantially all of USAir's
aircraft. The IFPC System had been installed on approximately 80 aircraft
prior to the date of termination of the agreement. On December 6, 1995, IFPC
filed suit against USAir seeking equitable relief and damages in excess of
$186 million. USAir believes that its termination of its agreement with IFPC
was appropriate and that it is owed in excess of $5 million by IFPC. On
December 7, 1995, USAir successfully defended IFPC's emergency motion for a
temporary restraining order. On December 13, 1995, IFPC's motion for a
preliminary injunction
F-20
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
was denied and IFPC has relinquished its right to appeal that decision. IFPC's
claim for damages remains pending and USAir is presently preparing a
counterclaim for amounts it is owed by IFPC. USAir is unable to predict at
this time the ultimate resolution or potential financial impact on USAir's
financial condition and results of operations of this lawsuit. USAir is
presently in negotiations with other vendors of on-board telephone systems and
currently expects to finalize an agreement in the first quarter of 1996.
During 1995, four members of USAir's FTP filed class action lawsuits against
USAir in Illinois, Pennsylvania, California and New Jersey state courts,
alleging breach of contract relating to changes made to USAir's FTP effective
December 31, 1989 and/or January 1, 1995. A similar lawsuit has been pending
in California state court since 1989. The lawsuits seek unspecified damages
and an injunction against the allegedly objectionable changes to USAir's FTP
and any subsequent retroactive changes to the FTP. USAir denies the
allegations made in the lawsuits and intends to vigorously defend itself. The
ultimate resolution of these lawsuits and their potential impact on USAir's
financial condition and results of operations cannot be predicted at this
time.
In May 1995, USAir Group, USAir and the Retirement Income Plan for Pilots of
USAir, Inc. (the "Pilots' Pension Plan") were sued in federal district court
for the District of Columbia by 469 active and retired USAir pilots. The
lawsuit alleges that USAir has breached its fiduciary duty under the Employee
Retirement Income Security Act ("ERISA") and otherwise violated ERISA by
erroneously calculating benefits under the Pilots' Pension Plan. The
plaintiffs seek, among other things, an injunction restraining USAir and the
Pilots' Pension Plan from allegedly improperly calculating benefits under the
Pilots' Pension Plan and payments to plaintiffs of benefits allegedly
improperly withheld in an amount alleged to be equal to approximately $70
million, plus interest. USAir believes that it has properly calculated
benefits under the Pilots' Pension Plan and intends to vigorously defend
itself against the allegations made in the lawsuit. Because this lawsuit is in
an early stage of litigation, USAir is unable to predict at this time its
ultimate resolution or potential impact on USAir Group's pension liability or
future funding requirements.
USAir has received notices from the U.S. Environmental Protection Agency and
various state agencies that it is a potentially responsible party with respect
to the remediation of existing sites of environmental concern. Only two of
these sites have been included on the Superfund National Priorities List.
USAir continues to negotiate with various governmental agencies concerning
known and possible cleanup sites. USAir has made financial contributions for
the performance of remedial investigations and feasibility studies at sites in
Moira, New York; Escondido, California; and Elkton, Maryland.
Also, USAir has been identified as a potentially responsible party ("PRP")
for environmental contamination at Boston Logan Airport. There are a number of
other PRPs at the site. USAir is presently unable to assess its proportionate
share of contribution, but do not expect any such contribution to have a
material adverse effect on its financial condition or results of operations.
Because of changing environmental laws and regulations, the large number of
other potentially responsible parties and certain pending legal proceedings,
it is not possible to reasonably estimate the amount or timing of future
expenditures related to environmental matters. USAir provides for costs
related to environmental contingencies when a loss is probable and the amount
is reasonably estimable. Although management believes adequate reserves have
been provided for all known contingencies, it is possible that additional
reserves could be required in the future which could have a material effect on
results of operations. However, USAir believes that the ultimate resolution of
known environmental contingencies should not have a material adverse effect on
USAir's financial position or results of operations based on USAir's
experience with similar environmental sites.
The Equal Employment Opportunity Commission and various state and local fair
employment practices agencies are investigating charges by certain job
applicants, employees and former employees of the Company's
F-21
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subsidiaries involving allegations of employment discrimination in violation
of Federal and state laws. The plaintiffs in these cases generally seek
declaratory and injunctive relief and monetary damages, including back pay. In
some instances they also seek classification adjustment, compensatory damages
and punitive damages. Such proceedings are in various stages of litigation and
investigation, and the outcome of these proceedings is difficult to predict.
In the Company's opinion, however, the disposition of these matters is not
likely to have a material adverse effect on its financial condition or results
of operations.
(d) Aircraft Commitments
In June 1995, USAir entered into agreements with Boeing and Rolls Royce plc
("Rolls Royce") deferring the delivery of eight 757-200 aircraft from 1996 to
1998. As part of these agreements, the due dates for progress payments
associated with the 1996 deliveries were likewise rescheduled. Accordingly,
approximately $71 million of progress payments that had been paid by USAir
were refunded to USAir in the third quarter of 1995. The related long-term
debt which financed the deposits was dissolved.
The following schedule of USAir's new aircraft deliveries and scheduled
payments at December 31, 1995 (including progress payments, payments at
delivery, buyer furnished equipment, spares, and capitalized interest)
reflects USAir's agreements with Boeing and Rolls Royce discussed above:
<TABLE>
<CAPTION>
DELIVERY PERIOD--FIRM ORDERS
--------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER TOTAL
---- ---- ---- ----- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Boeing
757-200.......................... -- -- 8 -- -- -- 8
737-Series....................... -- -- -- -- -- 40 40
--- --- ---- ----- ----- ------ ------
Total.......................... -- -- 8 -- -- 40 48
=== === ==== ===== ===== ====== ======
Payments (millions)................ $63 $74 $254 $ -- $ -- $1,855 $2,246
=== === ==== ===== ===== ====== ======
</TABLE>
In addition, USAir has a commitment to purchase hush kits for certain of its
DC-9-30 aircraft and a substantial portion of its 737-200 aircraft. The
installation of these hush kits will bring the aircraft into compliance with
FAA Stage 3 noise level requirements. The projected payments associated with
the purchase of the hush kits are: $43 million--1996; $30 million--1997; $30
million--1998; and $17.0 million--1999.
USAir has the option of purchasing any other Boeing commercial aircraft type
in satisfaction of its obligation to purchase forty 737-Series aircraft. Such
satisfaction would be accomplished on an "equivalent-seat" basis.
(e) Concentration of Credit Risk
USAir invests available cash in money market securities of various banks,
commercial paper of financial institutions and other companies with high
credit ratings and securities backed by the United States government.
At December 31, 1995, most of USAir's receivables related to tickets sold to
individual passengers through the use of major credit cards (44%) or to
tickets sold by other airlines (16%) and used by passengers on USAir or its
regional airline affiliates. These receivables are short-term, generally being
settled within 14 days after sale. Bad debt losses, which have been minimal in
the past, have been considered in establishing allowances for doubtful
accounts. USAir does not believe it is subject to any significant
concentration of credit risk.
F-22
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Guarantees
At December 31, 1995, USAir guaranteed payments of debt and lease
obligations of Piedmont Airlines, Inc. and PSA Airlines, Inc., wholly-owned
subsidiaries of USAir Group, amounting to $103 million.
5. SALE OF RECEIVABLES
The revolving receivables sales facility ("Receivables Agreement") to which
USAir had been a party, expired on December 21, 1994. USAir was unable to sell
receivables under the Receivables Agreement during 1994 because it was in
violation of certain financial covenants. USAir had no outstanding amounts due
under the Receivables Agreement at expiry. The average dollar amount of
outstanding receivable sales during 1993 was approximately $100 million. USAir
has engaged in discussions to arrange a replacement facility but has elected
not to pursue such a financing at this time.
6. INCOME TAXES
Effective January 1, 1993, USAir adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 109 required
a change from the deferred method under Accounting Principles Board Opinion
No. 11 to the asset and liability method of accounting for income taxes. No
cumulative adjustment at January 1, 1993, and no income tax credit for the
years ended December 31, 1994 and 1993, were recognized due to the FAS 109
limitation in recognizing benefits for net operating losses. USAir files a
consolidated Federal income tax return with its parent USAir Group. USAir
Group and its wholly-owned subsidiaries have executed a tax sharing agreement
which allocates tax and tax items, such as net operating losses and tax
credits between members of the group based on their proportion of taxable
income and other items. This tax sharing and allocation impacts the deferred
tax assets and liabilities reported by each corporation on a separate company
basis. Accordingly, USAir's tax expense is based on its taxable income (loss),
taking into consideration its allocated tax loss carryforwards and tax credit
carryforwards.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current provision:
Federal.............................................. $4,107 $ -- $ --
State................................................ 301 -- --
------ ----- -----
Total current provision............................ 4,408 0 0
------ ----- -----
Deferred provision:
Federal.............................................. -- -- --
State................................................ -- -- --
------ ----- -----
Total deferred provision........................... 0 0 0
------ ----- -----
Provision for income taxes............................. $4,408 $ 0 $ 0
====== ===== =====
</TABLE>
In 1995, USAir was not subject to regular Federal income tax as a result of
using $22 million in Federal net operating loss carryforwards. However, USAir
was subject to Federal alternative minimum tax ("AMT") and environmental tax.
Approximately $88 million in AMT net operating loss carryforwards and
approximately $17 million in state net operating loss carryforwards were
utilized to reduce the Federal and state tax liabilities.
F-23
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The significant components of deferred income tax expense (benefit) for the
years ended December 31, 1995, 1994, and 1993, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax expense (benefit) (exclusive of
the other components listed below)......... $ 17,779 $(234,269) $(121,847)
Adjustments to deferred tax assets and
liabilities for enacted changes in tax laws
and rates.................................. -- -- (9,429)
Increase (decrease) for the year in the
valuation allowance for deferred tax
assets..................................... (17,779) 234,269 131,276
-------- --------- ---------
Total..................................... $ 0 $ 0 $ 0
======== ========= =========
</TABLE>
A reconciliation of taxes computed at the statutory Federal tax rate on
earnings before income taxes to the provision (credit) for income taxes is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (credit) computed at Federal
statutory rate............................. $ 13,089 $(250,664) $(146,579)
State income tax expense, net of Federal tax
benefit.................................... 196 -- --
Book expenses not deductible for tax
purposes................................... 15,088 15,691 9,348
Limitation in recognizing tax benefit of net
operating loss/credits..................... -- 234,973 146,660
Utilization of Federal Net Operating Loss
which reduced valuation allowance.......... (7,778) -- --
Adjustments to deferred tax assets and
liabilities for enacted changes in tax laws
and rates.................................. -- -- (9,429)
Current year temporary differences which
reduced valuation allowance................ (20,293) -- --
Alternative Minimum tax which increased
valuation allowance........................ 3,384 -- --
Other....................................... 722 -- --
-------- --------- ---------
Provision for Income Taxes.................. $ 4,408 $ 0 $ 0
======== ========= =========
Effective Tax Rate.......................... 12% 0% 0%
======== ========= =========
</TABLE>
F-24
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Leasing transactions................. $ 168,813 $ 164,513 $ 129,276
Tax benefits purchased/sold.......... 67,348 76,784 79,434
Gain on sale and lease-back
transactions........................ 146,387 154,246 162,400
Employee benefits.................... 487,050 484,347 429,312
Net operating loss carryforwards..... 627,357 657,870 508,240
Alternative minimum tax credit
carryforwards....................... 25,819 20,881 20,881
Investment tax credit carryforwards.. 48,720 47,880 47,880
Other deferred tax assets............ 118,521 99,368 61,210
---------- ---------- ----------
Total gross deferred tax assets.... 1,690,015 1,705,889 1,438,633
Less valuation allowance............. (785,306) (803,085) (568,816)
---------- ---------- ----------
Net deferred tax assets............ 904,709 902,804 869,817
Deferred tax liabilities:
Equipment depreciation and
amortization........................ 871,056 866,356 840,584
Other deferred tax liabilities....... 33,653 36,448 29,233
---------- ---------- ----------
Total deferred tax liabilities..... 904,709 902,804 869,817
---------- ---------- ----------
Net deferred tax liabilities....... $ 0 $ 0 $ 0
========== ========== ==========
</TABLE>
Included in "Other Deferred Tax Assets" above for 1995, 1994 and 1993 are
approximately $22 million, $16 million and $0, respectively, of tax assets
which originate from subsidiaries of USAir Group in accordance with USAir's
Tax Sharing Agreement.
The valuation allowance for deferred tax assets as of January 1, 1993, was
$438 million. The valuation allowance increased $131 million in 1993, $234
million in 1994 and decreased $18 million in 1995.
At December 31, 1995, USAir had unused net operating losses of $1.6 billion
for Federal tax purposes, which expire in the years 2005 to 2009. USAir also
has available, to reduce future taxes payable, $653 million alternative
minimum tax net operating losses expiring in the years 2007 to 2009, $49
million of investment tax credits expiring in the years 2002 to 2003, and $26
million of alternative minimum tax credits which do not expire. The Federal
income tax returns of USAir through 1986 have been examined and settled with
the Internal Revenue Service.
7. STOCKHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
USAir Group owns all of the outstanding common stock of USAir. USAir's board
of directors has not authorized the payment of dividends to USAir Group since
1988. In addition, USAir, organized under the Laws of the State of Delaware,
may be subject to certain legal prohibitions on the payment of dividends on
its capital stock. At December 31, 1995, USAir believes that it was legally
prohibited from paying dividends to USAir Group due to the provisions of
Section 170 of Delaware General Corporation Law ("Delaware Law"), which
require a company to maintain a capital surplus in order to pay dividends on
its capital stock. In addition, as of December 31, 1995, USAir does not
believe that it can comply with certain provisions of Delaware Law which
permit a company with a capital deficit to pay dividends under special
circumstances. In order for USAir to return to a capital surplus position it
must realize substantial profits or increase its equity through other measures
such as the sale of addition common stock.
F-25
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Covenants related to USAir's 10% and 9 5/8% Senior Unsecured Notes currently
do not permit the payment of dividends by USAir to USAir Group. However, these
covenants do not restrict USAir from loaning or advancing funds to USAir
Group.
The provisions of Statement of Accounting Standards No. 87, "Employers'
Accounting for Pensions," require the recognition of an additional minimum
liability for each defined benefit plan for which the accumulated benefit
obligation exceeds plan assets. This amount has been recognized by USAir as a
long-term liability with an offsetting intangible asset (see Note 1.(e)).
Because the intangible asset recognized may not exceed the amount of
unrecognized prior service cost on an individual plan basis, the balance is
reported as a separate reduction of Stockholder's Equity (Deficit) at December
31, 1995 and 1994. See also Note 9.
8. EMPLOYEE STOCK OWNERSHIP PLAN
In August 1989, USAir established an Employee Stock Ownership Plan ("ESOP").
USAir Group sold 2,200,000 shares of its Common Stock to an Employee Stock
Ownership Trust (the "Trust") to hold on behalf of USAir's employees,
exclusive of officers, in accordance with the terms of the Trust and the ESOP.
The trustee placed those shares in a suspense account pending their release
and allocation to employees. USAir provided financing to the Trust in the form
of a 9 3/4% loan for $111.4 million for its purchase of shares and USAir
contributed an additional $2.2 million to the Trust. USAir makes a yearly
contribution to the Trust sufficient to cover the Trust's debt service
requirement. The contributions are made in amounts equal to the periodic loan
payments as they come due, less dividends available for loan payment. Since
the Company did not pay dividends on any shares held by the Trust for the
years ended December 31, 1995, 1994 and 1993, the Trust did not utilize
dividends to service its debt during those periods. The initial maturity of
the loan is 30 years. As the loan is repaid over time, the trustee
systematically releases shares of the common stock from the suspense account
and allocates them to participating employees. Each participant's allocation
is based on the participant's compensation, the total compensation of all ESOP
participants and the total number of shares being released. For each year
after 1989, a minimum of 71,933 shares are released from the suspense account
and allocated to participant accounts. If USAir's return on sales equals or
exceeds four percent in a given year, more shares are released and repayment
of the loan is accelerated. Annual contributions made by USAir, and therefore
loan repayments made by the Trust, were $11.4 million in each of 1995, 1994
and 1993. The interest portion of these contributions was $10.4 million in
1995, $10.5 million in 1994 and $10.5 million in 1993. Approximately 510,000
shares of USAir Group Common Stock have been released or committed to be
released as of December 31, 1995. USAir recognized approximately $4 million of
compensation expense related to the ESOP in each of 1995, 1994 and 1993 based
on shares allocated to employees (the "shares allocated" method). Deferred
compensation related to the ESOP amounted to approximately $87 million, $91
million and $95 million at December 31, 1995, 1994 and 1993, respectively.
In October 1995, the Financial Accounting Standards Board adopted Statement
No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). This statement
establishes the fair value based method of accounting for stock-based
compensation. USAir has elected to continue using the intrinsic value based
method of accounting prescribed in Accounting Principles Board opinion No. 25,
"Accounting for Stock Issued to Employees", as permitted by FAS 123.
9. EMPLOYEE BENEFIT PLANS
(a) Pension Plans
USAir has several pension plans in effect covering substantially all
employees. One qualified defined benefit plan covers USAir maintenance
employees and provides benefits of specified amounts based on periods of
service. Qualified defined benefit plans for substantially all other employees
provide benefits based on years of
F-26
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
service and compensation. The qualified defined benefit plans are funded, on a
current basis, to meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974.
The defined benefit pension plan for USAir non-contract employees was frozen
at the end of 1991 for all non-contract participants, resulting in a one-time
book gain of approximately $107 million in 1991. All non-contract plan
participants became 100% vested at the time of the freeze. As a result of this
plan curtailment, the accrual of service costs related to defined benefits for
USAir non-contract and certain other employees ceased at the end of 1991.
USAir implemented a defined contribution pension plan for non-contract
employees in January 1993.
The funded status of the qualified defined benefit plans at December 31,
1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1995 PLANS IN WHICH 1994 PLANS IN WHICH
----------------------- -----------------------
PLAN ASSETS ACCUMULATED PLAN ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED PLAN ACCUMULATED EXCEED PLAN
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Fair value of plan assets...... $ 993 $1,419 $1,690 $183
Actuarial present value of:
Vested benefit obligation.... 929 1,603 1,513 242
Nonvested benefit
obligation.................. 29 22 27 17
------ ------ ------ ----
Accumulated benefit
obligation based on
salaries to date.......... 958 1,625 1,540 259
Additional benefits based
on estimated future salary
levels.................... 130 598 470 --
------ ------ ------ ----
Projected benefit
obligation.............. 1,088 2,223 2,010 259
------ ------ ------ ----
Projected benefit obligation in
excess of fair value of plan
assets........................ (95) (804) (320) (76)
Unrecognized net transition
asset......................... (2) (34) (29) (12)
Unrecognized prior service
cost.......................... -- 66 (15) 69
Unrecognized net loss.......... 312 571 358 15
------ ------ ------ ----
Pension (liability) pre-paid
before adjustment........... 215 (201) (6) (4)
Adjustment to recognize minimum
liability*.................... -- (149) -- (72)
------ ------ ------ ----
Pension (liability) pre-paid
as adjusted and recognized
in consolidated balance
sheets...................... $ 215 $ (350) $ (6) $(76)
====== ====== ====== ====
</TABLE>
- --------
* See Note 7.
The weighted average discount rate used to determine the actuarial present
value of the projected benefit obligation was 7.25% and 9.00% as of December
31, 1995 and 1994, respectively. The expected long-term rate of return on plan
assets used in 1995 was 9.0% to 9.5% and 9.5% in 1994. Rates of 3% to 6% were
used to estimate future salary levels. As of December 31, 1995, plan assets
consisted of approximately 7% in cash equivalents and short-term debt
investments, 26% in equity investments, and 67% in fixed income and other
investments. As of December 31, 1994, plan assets consisted of approximately
10% in cash equivalents and short-term debt investments, 27% in equity
investments, and 63% in fixed income and other investments. Plan assets as of
December 31, 1995 included 205 shares of USAir Group Common Stock. Plan assets
as of December 31, 1994 did not include shares of USAir Group Common Stock.
F-27
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following items are the components of the net periodic pension cost for
the qualified defined benefit plans:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost (benefits earned during the period)..... $ 92 $ 124 $ 90
Interest cost on projected benefit obligation........ 216 216 188
Actual return on plan assets......................... (539) 48 (224)
Net amortization and deferral........................ 371 (254) 40
----- ----- -----
Net periodic pension cost............................ $ 140 $ 134 $ 94
===== ===== =====
</TABLE>
Net pension cost for 1993 presented above excludes a charge of approximately
$33.9 million related to "early-out" incentive programs offered to a limited
number of USAir employees during the years. No such charges were incurred in
1995 or 1994.
Non-qualified supplemental pension plans are established for certain
employee groups, which provide incremental pension payments from USAir's funds
so that total pension payments equal amounts that would have been payable from
USAir's principal pension plans if it were not for limitations imposed by
Federal income tax regulations.
The following table sets forth the non-qualified plans' status at December
31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----- -----
(IN
MILLIONS)
<S> <C> <C>
Fair value of plan assets.................................. $ -- $ --
Actuarial present value of:
Vested benefit obligation................................ 30 30
Nonvested benefit obligation............................. 2 2
----- -----
Accumulated benefits based on salaries to date........... 32 32
Additional benefits based on estimated future salary
levels.................................................. 2 1
----- -----
Projected benefit obligation............................. 34 33
----- -----
Projected benefit obligation in excess of fair value of
plan assets............................................... (34) (33)
Unrecognized prior service cost............................ 3 1
Unrecognized net loss...................................... 8 2
----- -----
Pension (liability) prepaid before adjustment............ (23) (30)
Adjustment to recognize minimum liability*................. (11) (5)
----- -----
Unfunded accrued supplementary costs as adjusted and
recognized in consolidated balance sheets................. $ (34) $ (35)
===== =====
</TABLE>
- --------
* See Note 7.
F-28
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net periodic supplementary pension cost for the non-qualified supplemental
pension plans included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost (benefits earned during the period)...... $ -- $ -- $ --
Interest cost on projected benefit obligation......... 2 2 2
Actual return on plan assets.......................... -- -- --
Net amortization and deferral......................... (1) 21 12
----- ----- -----
Net periodic supplementary pension cost............... $ 1 $ 23 $ 14
===== ===== =====
</TABLE>
The discount rate used to determine the actuarial present value of the
projected benefit obligation was 7.25% and 9.00% as of December 31, 1995 and
1994, respectively. A rate of 3% was used to estimate future salary levels.
In addition to the qualified and non-qualified defined benefit plans
described above, USAir also contributes to certain defined contribution plans.
USAir contributions are based on a formula which considers the age and pre-tax
earnings of each employee and the amount of employee contributions. In
addition, certain qualified defined contribution plans contain a component for
profit sharing contributions if USAir Group achieves certain pre-tax margin
levels. USAir's expense related to the defined contribution plans, excluding
expense for the ESOP Plan, was $64 million, $43 million and $42 million for
1995, 1994 and 1993, respectively. The 1995 contribution expense reflects a
new employer match contribution for certain collective bargaining groups.
USAir made no contributions to its defined contribution plans related to
profit sharing in 1995, 1994 or 1993, since USAir Group did not achieve the
prescribed pre-tax margin level.
(b) Postretirement Benefits Other Than Pensions
USAir offers medical and life insurance benefits to employees hired prior to
March 29, 1993 who retire from the Company and their eligible dependents. The
medical benefits provided by USAir are coordinated with Medicare benefits.
Retirees generally contribute amounts towards the cost of their medical
expenses based on years of service with USAir. USAir provides uninsured death
benefit payments to survivors of retired employees for stated dollar amounts,
or in the case of retired pilot employees, death benefit payments determined
by age and level of pension benefit. The plans for postretirement medical and
death benefits are funded on the pay-as-you-go basis.
The following table sets forth the financial status of the plans as of
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------ -----
(IN
MILLIONS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation (APBO):
Retirees.................................................. $ 338 $ 245
Fully eligible active plan participants................... 176 144
Other plan participants................................... 482 306
------ -----
Total APBO.............................................. 996 695
Unrecognized prior service credit......................... 155 167
Unrecognized net gain (loss).............................. (112) 123
------ -----
Accrued postretirement benefit cost......................... $1,039 $ 985
====== =====
</TABLE>
F-29
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost (benefits attributed to employee service
during the period).................................... $ 29 $ 36 $ 31
Interest cost on APBO.................................. 65 60 56
Net amortization and deferral.......................... (15) (12) (12)
---- ---- ----
Net periodic postretirement benefit cost............. $ 79 $ 84 $ 75
==== ==== ====
</TABLE>
The postretirement benefit expense for 1993 presented above excludes a
charge of approximately $15.5 million related to "early-out" programs offered
to a limited number of employees during the year. No such charges were
incurred in 1995 or 1994.
The discount rate used to determine the APBO was 7.25%, 9.00% and 7.75% at
December 31, 1995, 1994 and 1993, respectively. The average rates of annual
compensation increase used to calculate the APBO ranged from 3% to 6% at
December 31, 1995, 1994 and 1993. The assumed health care cost trend rate used
in measuring the APBO was 8.5% in 1995, declining by 1% per year after 1995 to
an ultimate rate of 4.5%. If the assumed health care cost trend rates were
increased by 1 percentage point, the APBO at December 31, 1995 would be
increased by 10% and 1995 periodic postretirement benefit costs would increase
13%.
(c) Postemployment Benefits
USAir adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("FAS 112"), during 1993.
FAS 112 requires the use of an accrual method to recognize postemployment
benefits such as disability-related benefits. The cumulative effect at January
1, 1993 of adopting FAS 112 was $43.7 million.
10. PROFIT SHARING
In exchange for temporary wage and salary reductions and other concessions
during a twelve month period in 1992 and 1993, including certain ongoing work
rule and medical benefits concessions and the freeze of the defined benefit
plan for non-contract employees, certain USAir employees participate in a
profit sharing program and have been granted options to purchase USAir Group
common stock. The profit sharing program is designed to recompense those USAir
employees whose pay had been reduced in an amount equal to (i) two times
salary forgone plus (ii) one time salary forgone (subject to a minimum of
$1,000) for the freeze of the pension plans for non-contract employees. Until
the maximum payout has been made, annual pre-tax profits, as defined in the
program, of USAir Group will be distributed to participating employees as
follows: 25% of the first $100 million in pre-tax profits; 35% of the next
$100 million in pre-tax profits; and 40% of the pre-tax profits exceeding $200
million.
The calculation of pre-tax profits under the profit sharing plan excludes
FAS 106 charges (approximately $78.6 million for 1995) and certain unusual
items. This program will be in effect until USAir employees are recompensed
for salary and pension benefits foregone. Because USAir Group recorded a pre-
tax profit for 1995, USAir recognized charges of approximately $49.7 million
under this plan in 1995 (certain amounts have been expensed in prior years
even though 1995 was USAir's first profitable year since inception of the
plan). Under the terms of the plan, the cash payout for 1995 of approximately
$73.7 million was made to employees covered by the provision of this plan in
the first quarter of 1996.
F-30
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
USAir's ESOP and Defined Contribution Retirement Program each have profit
sharing components. Under the ESOP, each eligible USAir employee receives a
certain number of USAir Group Common Stock shares based on each participant's
compensation relative to the total compensation of all participants and the
number of USAir Group Common Stock shares in the allocation pool. When USAir's
return on sales equals or exceeds certain prescribed levels, USAir increases
its contribution, which effectively increases the number of USAir Group Common
Stock shares in the allocation pool (see Note 8.--Employee Stock Ownership
Plan). Under the Defined Contribution Retirement Program, USAir makes
additional contributions to a participant's account when USAir Group achieves
certain prescribed pre-tax margin levels (see Note 9.--Employee Benefit
Plans). USAir did not make any profit sharing contributions in connection with
the profit sharing components of the ESOP or the Defined Contribution
Retirement Program in 1995, 1994 or 1993.
11. RELATED PARTY TRANSACTIONS
(a) Parent Company
As of December 31, 1995, USAir had a $68.6 million 8.4% note payable to
USAir Group related to USAir Group's purchase of aircraft-secured debt
obligations of USAir. USAir repaid the note in February 1996. During 1994,
USAir Group financed three aircraft for USAir. USAir repaid this obligation,
including interest, in December 1994.
USAir's balance sheet line item, Payable to Parent Company, includes
intercompany loans from USAir Group which arise in the normal course of
business. These loans bear interest at market rates which are reset quarterly.
Net interest expense related to the notes payable and intercompany loans was
$7.8 million, $11.3 million and $1.3 million for the years 1995, 1994 and
1993, respectively.
(b) Regional Airline Subsidiaries of USAir Group
USAir engages in certain transactions with Allegheny Airlines, Inc.
("Allegheny"), Piedmont Airlines, Inc., and PSA Airlines, Inc., wholly-owned
regional airline subsidiaries of USAir Group. USAir provides various services
to these entities including passenger handling, contract training and
catering. USAir recognized other operating revenues of approximately $46.5
million, $43.5 million and $50.3 million related to these services for the
years 1995, 1994 and 1993, respectively. These regional airlines also perform
passenger and ground handling for USAir at certain airports for which USAir
recognized other operating expenses of approximately $21.0 million and $15.3
million for the years 1995 and 1994, respectively.
USAir leases or subleases certain turboprop aircraft to these entities.
USAir recognized other operating revenues related to these arrangements of
approximately $18.7 million, $22.0 million and $14.1 million for the years
1995, 1994 and 1993, respectively. USAir entered into a sale-leaseback
arrangement with Allegheny during 1994 involving certain turboprop aircraft
(in return, USAir subleases these same aircraft back to Allegheny). USAir
recognized other operating expenses related to the lease of these aircraft
from Allegheny of approximately $9.8 million and $3.1 million for 1995 and
1994, respectively.
USAir's receivables from and payables to these regional airlines were
approximately $9.6 million and $1.6 million, respectively, at December 31,
1995 and $8.7 million and $1.3 million, respectively, at December 31, 1994.
USAir's Traffic Balances Payable liability included $30.8 million and $22.9
million at December 31, 1995 and 1994, respectively, representing passengers
flown by the regional subsidiaries on behalf of USAir during the month of
December in each of those years.
F-31
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Other USAir Group Subsidiaries
USAir leases certain aircraft to USAir Group's wholly-owned subsidiary USAir
Leasing and Services, Inc. ("Leasing"). Leasing subleases these aircraft to
third parties. USAir recognized other operating revenues related to these
arrangements of approximately $4.6 million, $2.2 million and $0.7 million for
the years 1995, 1994 and 1993, respectively.
USAir purchases a portion of its aviation fuel from USAir Group's wholly-
owned subsidiary USAir Fuel Corporation ("Fuel Corp."), which acts as a fuel
wholesaler to USAir in certain circumstances. USAir's aviation fuel purchases
were approximately $104.9 million, $57.8 million and $9.7 million for the
years 1995, 1994 and 1993, respectively. USAir's accounts payable to Fuel
Corp. was $20.7 million and $5.6 million at December 31, 1995 and 1994,
respectively.
(d) British Airways plc
On January 21, 1993, USAir Group and BA entered into an Investment Agreement
under which a wholly-owned subsidiary of BA purchased certain series of
convertible preferred stock and BA entered into code sharing and wet lease
arrangements with USAir. At December 31, 1995, BA's total voting interest in
USAir Group was approximately 21.0%.
USAir wet leases 767-200ER aircraft, including cockpit and cabin crews, to
BA in order to serve three routes between the U.S. and London. The wet lease
arrangements are scheduled to end by May 31, 1996 (the first of the three wet
lease arrangements ended in December 1995 and a second wet lease ended in
February 1996). USAir recognized other operating revenues of approximately
$63.6 million, $60.7 million and $17.1 million for the years 1995, 1994, and
1993, respectively, related to the wet lease arrangements. These revenues were
offset by an equal amount of other operating expense.
USAir also has various agreements with BA for ground handling at certain
airports, contract training and other services. USAir recognized other
operating revenues of approximately $4.9 million, $6.4 million and $2.4
million for the years 1995, 1994 and 1993, respectively, related to the
services USAir performed for BA.
USAir's current receivables from and payables to BA were approximately $11.5
million and $5.3 million, respectively, at December 31, 1995 and $11.0 million
and $4.5 million, respectively, at December 31, 1994.
USAir also had a long-term receivable from BA related to two U.S. to London
routes that USAir relinquished at the time of implementation of a code sharing
arrangement with BA. The balance of the receivable was approximately $45.4
million and $47.0 million at December 31, 1995 and 1994, respectively.
Payments began in December 1995 in conjunction with the termination of the
first wet lease arrangement and continue annually for nine years.
F-32
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for 1995 and
1994:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1995
Operating revenues...................... $1,664 $1,852 $1,743 $1,725
Operating income (loss)................. $ (50) $ 135 $ 66 $ 84
Net income (loss)....................... $ (102) $ 85 $ 17 $ 34
====== ====== ====== ======
1994
Operating revenues...................... $1,589 $1,763 $1,642 $1,584
Operating income (loss)................. $ (135) $ 60 $ (164) $ (278)
Net income (loss)....................... $ (190) $ 1 $ (196) $ (332)
====== ====== ====== ======
</TABLE>
See Note 14.--Non-Recurring and Unusual Items.
Note: The sum of the four quarters may not equal yearly totals due to
rounding of quarterly results.
13. SUPPLEMENTAL BALANCE SHEET INFORMATION
The components of certain accounts in the accompanying balance sheets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
(a)Cash and cash equivalents:
Cash............................................ $ 11,298 $ 16,946
Cash equivalents, at cost which approximates
market......................................... 868,315 411,979
---------- ----------
$ 879,613 $ 428,925
========== ==========
(b)Receivables, net:
Accounts receivable............................. $ 333,859 $ 335,234
Less allowance for doubtful accounts............ 12,104 9,222
---------- ----------
$ 321,755 $ 326,012
========== ==========
(c)Materials and supplies, net:
Materials and supplies.......................... $ 383,910 $ 408,308
Less allowance for obsolescence................. 161,665 169,827
---------- ----------
$ 222,245 $ 238,481
========== ==========
(d)Accrued expenses:
Salaries and wages.............................. $ 342,391 $ 258,426
Rents........................................... 479,749 477,972
All other....................................... 613,054 561,176
---------- ----------
$1,435,194 $1,297,574
========== ==========
</TABLE>
Note: Certain 1994 amounts have been reclassified to conform with 1995
classifications.
F-33
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. NON-RECURRING AND UNUSUAL ITEMS
(a) 1995
In the fourth quarter of 1995, USAir reversed $4.1 million of the $132.8
million non-recurring charge related to its grounded BAe-146 fleet that was
recorded in the fourth quarter of 1994 (see Note 14.(b) below). The reversal
reflects the successful remarketing by USAir of three of these aircraft. USAir
will reverse additional amounts related to the 1994 non-recurring charge in
future periods dependent upon its success and the terms at which the remaining
15 grounded BAe-146 aircraft are subleased or otherwise disposed.
(b) 1994
USAir's results for 1994 include (i) a $132.8 million charge related to its
grounded BAe-146 fleet, recorded in the fourth quarter of 1994; (ii) a $54.0
million charge for obsolete inventory and rotables to reflect market value,
recorded in the fourth quarter of 1994; (iii) a $50 million addition to
Passenger Transportation revenue in the fourth quarter of 1994 to adjust
estimates made during the first three quarters of 1994; (iv) a $40.1 million
charge primarily related to USAir's decision to cease operations of its
remaining Boeing 727-200 aircraft in 1995, recorded in the third quarter of
1994; (v) a $25.9 million charge related to USAir's decision to substantially
reduce service between Los Angeles and San Francisco and close its San
Francisco crew base, recorded in the third quarter of 1994; and (vi) an $18.6
million gain resulting from the accounting treatment of the hull insurance
recovery on the aircraft lost in the September accident, recorded in the third
quarter of 1994. USAir presently owns one and leases seventeen BAe-146-200
aircraft. The seventeen operating leases were entered into in 1984 and 1985 by
Pacific Southwest Airlines. Each of the leases expires in either 1999 or 2000.
Pacific Southwest Airlines was merged with and into USAir in 1987. In late
1990, USAir determined that the BAe-146 aircraft were uneconomical to operate
and decided to remove the planes from USAir's operating fleet in May 1991 with
the intention of terminating the leases early through buy-out clauses or
subleasing the aircraft to other airlines. USAir recorded a $44 million charge
in 1990 to reflect the lease payments required to be made between May 1991 and
the early lease termination dates in 1992 and 1993 plus additional costs
expected to be incurred in terminating the leases. In 1991, USAir was
unsuccessful in its efforts to sublease the aircraft. USAir then contemplated
returning the aircraft to its operating fleet and recorded a $21 million
unusual item in 1991 in connection with estimated return-to-service expenses.
In 1992, USAir decided not to return its BAe-146 aircraft to service, and
USAir also determined that there were no imminent remarketing possibilities
and that it would be uneconomical to terminate the leases early in 1992 and
1993 as previously envisioned. However, USAir believed that the narrowbody
market might recover by 1995. Accordingly, at the end of 1992, USAir recorded
a $72 million charge equal to the unreserved 1993 and 1994 rent payments. In
addition, USAir was contingently liable for future rent payments beyond 1994
in the approximate amount of $100 million if the BAe-146-200 aircraft could
not be successfully remarketed. At the end of 1994, USAir re-examined the
likelihood of remarketing the aircraft and the economics involved in
terminating the leases. USAir determined that, in light of economic conditions
and the worldwide glut of narrowbody aircraft (and particularly the
significant number of grounded BAe-146s), it was appropriate from an
accounting perspective to take a $132.8 million charge. This amount consisted
of $102.7 million for the present value of the remaining lease payments, $42.6
million to reduce the value of spare parts to their estimated fair market
value, a $15.5 million credit to reverse the previously accrued early
termination costs, and a $3 million write-off of a warranty claim against the
manufacturer. In the latter part of 1995 and in 1996, USAir began to witness
favorable changes in market conditions for BAe-146 aircraft. This change is
attributable to, among other factors, a shortage in certain markets of
narrowbody aircraft that comply with applicable noise regulations and the
engine manufacturer recently offering maintenance cost guarantees for the
aircraft's Avco-Lycoming engines. During the first six months of 1996, USAir
delivered seven BAe-146 aircraft to other airlines and as of July 10, 1996,
has entered into sublease agreements with foreign and domestic airlines for
eight additional aircraft to be
F-34
<PAGE>
USAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
delivered in 1996. USAir's success in remarketing the aircraft resulted in a
$4.1 million reversal of the previous accrual in the fourth quarter of 1995.
USAir anticipates that it will make additional reversals in the second, third
and fourth quarters of 1996.
(c) 1993
USAir's results for 1993 include non-recurring charges of (i) $43.7 million
for the cumulative effect of an accounting change, as required by FAS 112
which was adopted during the third quarter of 1993, retroactive to January 1,
1993; (ii) $68.8 million for severance, early retirement and other personnel-
related expenses recorded primarily during the third quarter of 1993 in
connection with a workforce reduction of approximately 2,500 full-time
positions between November 1993 and the first quarter of 1994; (iii) $36.8
million based on a projection of the repayment of certain employee pay
reductions, recorded in the fourth quarter of 1993; (iv) $13.5 million for
certain airport facilities at locations where USAir has, among other things,
discontinued or reduced its service, recorded in the fourth quarter of 1993;
(v) $8.8 million for a loss on USAir's investment in the Galileo International
Partnership, which operates a computerized reservation system, recorded in the
fourth quarter of 1993; and (vi) $18.4 million credit related to non-operating
aircraft, recorded in the second quarter of 1993.
F-35
<PAGE>
[LOGO OF USAIR APPEARS HERE]
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------
Item 20. Indemnification of Directors and Officers
-----------------------------------------
Section 145 of the Delaware Statute provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and proceeding if he acted in good faith and in manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or to the right of the
corporation to procure a judgment in its favor, against expenses actually and
reasonably occurred in connection with the defense of settlement of such action
or suit if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determinate upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses when the Court of Chancery or such other court shall
deem proper.
- 270 -
<PAGE>
Section 102(b)(7) of the Delaware Statute permits a corporation to include
in its certificate of incorporation a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a direction, provided that
such provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violations of law, (iii) under Section 174
of the Delaware Statute (relating to unlawful payment of dividends and unlawful
stock purchase and redemption) or (iv) for any transaction from which the
director derived an improper personal benefit, USAir's certificate of
incorporation includes such a provision.
Item 21. Exhibits and Financial Statement Schedules
------------------------------------------
(a) The following documents are filed as part as this Registration
Statement:
1. Financial Statements
--------------------
The following consolidated financial statements of USAir are included in
Part II, Item 8B. of this report:
- Consolidated Statements of Operations for the Three Months Ended March 31,
1996 and 1995 (unaudited)
- Consolidated Statements of Operations for each of the Three Years Ended
December 31, 1995
- Consolidated Balance Sheets as of December 31, 1995 and 1994
- Consolidated Statements of Cash Flows for each of the Three Years Ended
December 31, 1995
- Consolidated Statements of Changes in Stockholder's Equity (Deficit) for
each of the Three Years Ended December 31, 1995
- Notes to Consolidated Financial Statements
- 271 -
<PAGE>
(this space intentionally left blank)
3. Exhibits
--------
Designation Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of USAir (incorporated by
reference to Exhibit 3.1 to USAir's Registration Statement on
Form 8-B dated January 27, 1983).
3.2 By-laws of USAir (incorporated by reference to Exhibit 3.5 to
USAir's Annual Report on Form 10-K for the year ended December
31, 1995).
4.1 Amended Certificate of Designation, Preferences, and Rights of
the Series D of Junior Preferred Stock of USAir Group
(incorporated by reference to Exhibit 4(c) to USAir Group's
Current Report on Form 8-K dated August 11, 1989).
4.2 Certificate of Designation of Series A Cumulative Convertible
Preferred Stock of USAir Group (incorporated by reference to
Exhibit 4(b) to USAir Group's Current Report on Form 8-K dated
August 11, 1989).
4.3 Certificate of Designation of Series B Cumulative Convertible
Preferred Stock of USAir Group (incorporated by reference to
Exhibit 3.3 to Amendment No. 4 to USAir Group's Registration
Statement on Form S-3 (Registration No. 33-39540) dated May 17,
1991).
-272-
<PAGE>
4.4 Agreement between USAir Group and Berkshire Hathaway Inc. dated
August 7, 1989 (incorporated by reference to Exhibit 4(a) to USAir
Group's Current Report on Form 8-K dated August 11, 1989).
4.5 Certificate of Designation of Series F Cumulative Convertible Senior
Preferred Stock of USAir Group (incorporated by reference to Exhibit
28.2 to USAir Group's Current Report on Form 8-K dated January 21,
1993).
4.6 Form of Certificate of Designation of Series T Cumulative
Exchangeable Convertible Senior Preferred Stock of USAir Group
(incorporated by reference to Appendix VII to USAir Group's Proxy
Statement dated April 26, 1993). USAir is not filing any instrument
(with the exception of holders of exhibits 10.1(a-c)) defining the
rights of holders of long-term debt because the total amount of
securities authorized under each such instrument does not exceed
ten percent of the total assets of USAir. Copies of such instruments
will be furnished to the Securities and Exchange Commission upon
request.
**4.7 Consolidated Financial Statements of Galileo International
Partnerships for the years ended December 31, 1995 and 1994 and the
Consolidated Financial Statements of Appolo Travel Services
Partnership for the years ended December 31, 1995 and 1994.
* 5.1 Purchase Agreement dated February 9, 1996 among USAir and the Initial
Purchasers.
* 5.2 Registration Rights Agreement, dated as of February 15, 1996, among
USAir and the Initial Purchasers.
* 5.3 Collateral Agency Agreement, dated as of February 15, 1996, among
USAir, the Collateral Agent, the Class A, B and C Indenture Trustees
and the Class A, B and C Liquidity Providers.
* 5.4 Class A Indenture, dated as of February 15, 1996, between USAir and
the Class A Indenture Trustee.
* 5.5 Class B Indenture, dated as of February 15, 1996, between USAir
and the Class B Indenture Trustee.
* 5.6 Class C Indenture, dated as of February 15, 1996, between USAir
and the Class C Indenture Trustee.
* 5.7 Liquidity Agreement, dated as of February 15, 1996, among USAir,
the Class A Liquidity Provider and the Collateral Agent.
-273-
____________________
* previously filed
** filed herewith
<PAGE>
* 5.8 Liquidity Agreement, dated as of February 15, 1996
among USAir, the Class B Liquidity Provider and the Collateral
Agent.
* 5.9 Liquidity Agreement, dated as of February 15, 1996, among USAir,
the Class C Liquidity Provider and the Collateral Agent.
* 5.10 Opinion of Lawrence M. Nagin, as to the legality of the New Notes.
* 5.11 Tax opinion of Ginsburg, Feldmen and Bress.
* 5.12 Opinion of Fulbright & Jaworski, L.L.P.
* 5.13 Form T-1 of Wilmington Trust Company with respect to the Class A
Notes. (Statement of Eligibility under the Trust Indenture Act of
1939 of a Corporation Designated to Act as Trustee).
* 5.14 Form T-1 of Wilmington Trust Company with respect to the Class B
Notes. (Statement of Eligibility under the Trust Indenture Act of
1939 of a Corporation Designated to Act as Trustee).
* 5.15 Form T-1 of Wilmington Trust Company with respect to the Class C
Notes. (Statement of Eligibility under the Trust Indenture Act of
1939 of a Corporation Designated to Act as Trustee).
** 5.16 Appraisals of Airclaims, AISI and BK.
10.1(a) Supplemental Agreement No. 16, dated July 19, 1990, to Purchase
Agreement No. 1102 between USAir and The Boeing Company
(incorporated by reference to Exhibit 10.2(a) to USAir Group's
Annual Report on Form 10-K of the year ended December 31, 1990).
10.1(b) Supplemental Agreement No. 17, dated November 28, 1990, to Purchase
Agreement No. 1102, between USAir and The Boeing Company
(incorporated by reference to Exhibit 10.2(b) to USAir Group's
Annual Report on Form 10-K for the year ended December 31, 1990).
10.1(c) Supplemental Agreement No. 18, dated December 23, 1991, to Purchase
Agreement No. 1102 between USAir and The Boeing Company
(incorporated by reference to Exhibit 10.2(c) to USAir Group's
Annual Report on Form 10-K for the year ended December 31, 1991).
10.2 Purchase Agreement No. 1725 dated December 23, 1991 between USAir
and The Boeing Company (incorporated by reference to Exhibit 10.3
to USAir Group's and USAir's Annual Report on Form 10-K for the
year ended December 31, 1991).
10.3 Executive Incentive Compensation Plan of USAir Group, Inc. as
amended and restated December 1, 1995 (incorporated by reference to
Exhibit 10.4 to USAir Group's and USAir's Annual Report on Form 10-
K for the year ended December 31, 1995.
10.4 USAir, Inc. Officers' Supplemental Benefit Plan (incorporated by
reference to Exhibit 10.5 to USAir's Annual Report on Form 10-K for
the year ended December 31, 1980).
- 274 -
<PAGE>
10.5 USAir, Inc. Supplementary Retirement Benefit Plan
(incorporated by reference to Exhibit 10.5 to USAir
Group's Annual Report on Form 10-K for the year ended
December 31, 1989).
10.6 USAir, Inc. Supplemental Executive Defined Contribution
Plan (incorporated by reference to Exhibit 10.6 to USAir
Group's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.7 USAir Group's 1984 Stock Option and Stock Appreciation
Rights Plan (incorporated by reference to Exhibit A to
USAir Group's Proxy Statement dated March 30, 1984).
10.8 USAir Group's 1988 Stock Incentive Plan (incorporated by
reference to Exhibit 10.15 to USAir Group's Annual
Report on Form 10-K for the year ended December 31,
1987).
10.9 USAir Group's 1992 Stock Option Plan (incorporated by
reference to Exhibit A to USAir Group's Proxy Statement
dated March 30, 1992).
10.10 USAir Group's 1996 Stock Incentive Plan (incorporated by
reference to Exhibit A to USAir Group's Proxy Statement
dated April 15, 1996).
10.11 Employment Agreement between USAir and its Chief Execu-
tive Officer (incorporated by reference to Exhibit 10.11
to USAir Group's and USAir's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.12 Employment Agreement between USAir and its President and
Chief Operating Officer (incorporated by reference to
Exhibit 10.12 to USAir Group's and USAir's Annual Report
on Form 10-K for the year ended December 31, 1995).
10.13 Employment Agreement between USAir and its Executive
Vice President-Corporate Affairs and General Counsel
(incorporated by reference to Exhibit 10.13 to USAir
Group's and USAir's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.14 Agreement between USAir and its Chief Executive Officer
with respect to certain employment arrangements
(incorporated by reference to Exhibit 10.14 to USAir
Group's and USAir's Annual Report on Form 10-K for the
year ended December 31, 1995).
-275-
<PAGE>
10.15 Agreement between USAir and its President and Chief
Operating Officer with respect to certain employment
arrangements (incorporated by reference to Exhibit 10.15
to USAir Group's and USAir's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.16 Agreement between USAir and its Executive Vice Presi-
dent-Corporate Affairs and General Counsel with respect
to certain employment arrangements (incorporated by
reference to Exhibit 10.16 to USAir Group's and USAir's
Annual Report on Form 10-K for the year ended December
31, 1995).
10.17 Employment Agreement between USAir and its former Chief
Executive Officer, as amended by a severance agreement
(incorporated by reference to Exhibit 10.17 to USAir
Group's and USAir's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.18 Employment Agreement between USAir and its former
President and Chief Operating Officer, as amended by a
severance agreement (incorporated by reference to
Exhibit 10.18 to USAir Group's and USAir's Annual Report
on Form 10-K for the year ended December 31, 1995).
10.19 Employment Agreement between USAir and its former
Executive Vice President, General Counsel and Secretary,
as amended by a severance agreement (incorporated by
reference to Exhibit 10.19 to USAir Group's and USAir's
Annual Report on Form 10-K for the year ended December
31, 1995).
10.20 Employment Agreement between USAir and its Executive
Vice President-Marketing (incorporated by reference to
Exhibit 10.20 to USAir Group's and USAir's Annual Report
on Form 10-K for the year ended December 31, 1995).
10.21 Trust Agreement dated as of April 1, 1992 between USAir
and Wachovia Bank of North Carolina, N.A. providing for
certain compensation arrangements for the Executive Vice
President-Marketing (incorporated by reference to
Exhibit 10.21 to USAir Group's and USAir's Annual Report
on Form 10-K for the year ended December 31, 1995).
10.22 Employment Agreement between USAir and its Executive
Vice President-Customer Services (incorporated by
reference to Exhibit 10.22 to USAir Group's and USAir's
Annual Report on Form 10-K for the year ended December
31, 1995).
- 276 -
<PAGE>
10.23 Agreement between USAir and its Chief Executive Officer providing
supplemental retirement benefits (incorporated by reference to
Exhibit 10.23 to USAir Group's and USAir's Annual Report on Form
10-K for the year ended December 31, 1995).
10.24 Agreement between USAir and its President and Chief Operating Officer
providing supplemental retirement benefits (incorporated by reference
to Exhibit 10.24 to USAir Group's and USAir's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.25 Agreement between USAir and its Executive Vice President-Corporate
Affairs and General Counsel providing supplemental retirement
benefits (incorporated by reference to Exhibit 10.25 to USAir Group's
and USAir's Annual Report on Form 10-K for the year ended December
31, 1995).
10.26 Agreement between USAir and its former Chief Executive Officer
providing supplemental retirement benefits (incorporated by
reference to Exhibit 10.26 to USAir Group's and USAir's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.27 Agreement between USAir and its former President and Chief Operating
Officer providing supplemental retirement benefits (incorporated by
reference to Exhibit 10.27 to USAir Group's and USAir's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.28 Agreement between USAir and its former Executive Vice President,
General Counsel and Secretary providing supplemental retirement
benefits (incorporated by reference to Exhibit 10.28 to USAir
Group's and USAir's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.29 Agreement between USAir and its Executive Vice President-Marketing
providing supplemental retirement benefits (incorporated by
reference to Exhibit 10.29 to USAir Group's and USAir's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.30 Employment Agreement between USAir and its Executive Vice
President-Customer Services providing retirement benefits
(incorporated by reference to Exhibit 10.30 to USAir Group's and
USAir's Annual Report on Form 10-K for the year ended December 31,
1995).
-277-
<PAGE>
* 21 Subsidiary of USAir.
** 23.1 Consent of KPMG Peat Marwick LLP to the incorporation of their
report concerning certain financial statements of USAir
in this registration statement.
* 23.2 Consent of Fulbright & Jaworski, L.L.P. to the incorporation of
their legal opinion covering certain matters of New York law and
Section 1110 of the Federal Bankruptcy Code.
* 23.3 Consent of Lawrence M. Nagin as to the incorporation of his legal
opinion (included within Exhibit 5.10).
* 23.4 Consent of Ginsburg, Feldman & Bress to the incorporation of their
tax opinion (included within Exhibit 5.11).
* 23.5 Consent of BK, AISI and Airclaims to the references to their
aircraft appraisals and to their inclusion as exhibits.
**23.6 Consent of KPMG Peat Marwick LLP to the incorporation of their
report of certain financial statements of Galileo International
Partnership in an exhibit to this registration statement.
**23.7 Consent of Arthur Andersen LLP the incorporation of their report of
certain financial statements of Apollo Travel Services in an
exhibit to this registration statement.
* 24.1 Powers of Attorney signed by the directors of USAir, Inc.
authorizing their signatures on this registration statement.
* 27.1 Valuation and Qualifying Accounts and Reserves
99.1 Letter of Transmittal
Item 22. Undertakings
------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933:
ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent port-effective amendment hereof) which, individually or
in the aggregate, represent a fundamental change to such
information in the Registration Statement;
iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
- 278 -
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers,
partners and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, partner or controlling
person of any of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer,
partner or controlling person in connection with the securities
being registered, the registrants will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
- 279 -
<PAGE>
SIGNATURES
Pursuant to the requirements to the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in Arlington, Virginia
on July 16, 1996.
USAir, Inc.
By: /s/ Stephen M. Wolf
----------------------------
Stephen M. Wolf
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons on behalf
of USAir, Inc. and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
July 16, 1996 By: /s/ Stephen M. Wolf
------------------------------
Stephen M. Wolf
Chairman and Chief
Executive Officer
(Principal Executive Officer)
July 16, 1996 By: /s/ John W. Harper
------------------------------
John W. Harper
Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
July 16, 1996 By: /s/ James A. Hultquist
------------------------------
James A. Hultquist
Controller
(Principal Accounting Officer)
July 16, 1996 By: *
------------------------------
Robert J. Ayling
Director
</TABLE>
-280-
<PAGE>
July 16, 1996 By: *
_________________________
Robert W. Bogle
Director
July 16, 1996 By: *
_________________________
Edwin I. Colodny
Director
July 16, 1996 By: *
________________________
Mathias J. DeVito
Director
July 16, 1996 By: *
________________________
Rakesh Gangwal
Director
July 16, 1996 By: *
________________________
George J. W. Goodman
Director
July 16, 1996 By: *
________________________
John W. Harris
Director
July 16, 1996 By: *
________________________
Edward A. Horrigan, Jr.
Director
July 16, 1996 By: *
________________________
Robert LeBuhn
Director
July 16, 1996 By: *
________________________
Roger P. Maynard
Director
-281-
<PAGE>
July 16, 1996 By: *
-----------------------------
John G. Medlin, Jr.
Director
July 16, 1996 By: *
-----------------------------
Hanna M. Merriman
Director
July 16, 1996 By: *
-----------------------------
Raymond W. Smith
Director
July 16, 1996 By: *
-----------------------------
Derek M. Stevens
Director
By: /s/ Lawrence M. Nagin
------------------------
Lawrence M. Nagin
Attorney-In-Fact
- 282 -
<PAGE>
Exhibit 4.7
GALILEO INTERNATIONAL PARTNERSHIP
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
[LOGO OF PEAT MARWICK LLP APPEARS HERE]
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601-9973
Independent Auditors' Report
The Supervisory Board
Galileo International Partnership:
We have audited the accompanying consolidated balance sheets of Galileo
International Partnership and subsidiaries (the "Partnership") as of December
31, 1995 and 1994, and the related consolidated statements of income, cash
flows, and partners' capital for the years then ended. These consolidated
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Galileo
International Partnership and subsidiaries at December 31, 1995 and 1994, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
February 16, 1996
1
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Consolidated Balance Sheets
December 31, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
-------- --------
Assets 1995 1994
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,367 30,652
Accounts receivable 130,071 103,728
Less allowances 11,713 14,946
-------- --------
Net accounts receivable 118,358 88,782
Other current assets 60,586 14,361
-------- --------
Total current assets 187,311 133,795
Property and equipment, at cost:
Land 5,070 5,070
Buildings and improvements 53,777 55,010
Equipment 242,314 213,759
-------- --------
301,161 273,839
Less accumulated depreciation and amortization 197,813 187,313
-------- --------
Net property and equipment 103,348 86,526
Computer software, net of accumulated amortization
of $124,490 and $84,005 at December 31, 1995
and 1994, respectively 273,514 290,606
Other noncurrent assets 4,835 44,571
-------- --------
$569,008 555,498
-------- --------
Liabilities and Partners' Capital
-------- --------
Current liabilities:
Accounts payable 35,194 23,396
Accrued commissions 41,191 35,694
Other accrued liabilities 74,848 82,910
Income taxes payable 5,514 4,210
Capital lease obligations, current portion 7,372 18,419
Long-term debt, current portion 67,204 30,188
-------- --------
Total current liabilities 231,323 194,817
Postretirement benefits 13,936 11,715
Obligations under capital leases,
less current portion 36,263 38,723
Data center consolidation reserve,
less current portion 23,637 29,495
Long-term debt, less current portion 134,171 239,812
Other long-term liabilities, net 125 1,454
Partners' capital, including cumulative
translation losses of $7,763 and $3,377
in 1995 and 1994, respectively 129,553 39,482
-------- --------
$569,008 555,498
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Consolidated Statements of Income
Years ended December 31,1995 and 1994
(In thousands)
=======================
<TABLE>
<CAPTION>
1995 1994
=========== =======
<S> <C> <C>
Services revenues $ 928,205 801,373
Costs and expenses:
Costs of operations 248,445 239,219
Selling and administrative 539,462 492,856
=========== =======
787,907 732,075
=========== =======
Operating income 140,298 69,298
Other income (expense):
Interest income 4,476 4,275
Interest expense (18,882) (25,945)
Foreign exchange gain (loss) (380) 343
Other (1,797) 5,243
=========== =======
(16,583) (16,084)
=========== =======
Net income before taxes 123,715 53,214
Income taxes 2,664 4,404
=========== =======
Net income $ 121,051 48,810
</TABLE>
See accompaning notes to consolidated financial statements.
3
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
-------- --------
1995 1994
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 121,051 48,810
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 80,151 91,488
Loss on disposal of property and equipment 2,472 472
Provision for losses on accounts receivable 1,558 5,432
Decrease in noncurrent assets 38,672 9,566
Decrease in noncurrent liabilities (8,490) (4,165)
Changes in operating assets and liabilities:
Increase in accounts receivable (30,970) (8,007)
Increase in other current assets (46,304) (1,100)
Increase (decrease) in accounts payable and commissions 18,581 (14,609)
Increase (decrease) in other accrued liabilities (5,475) 3,705
Increase in income taxes payable 1,304 4,210
-------- --------
Net cash provided by operating activities 172,550 135,802
- -------------------------------------------------------------------------------- --------
Investing activities:
Purchase of property and equipment (56,726) (29,176)
Purchase and capitalization of computer software (32,287) (29,709)
Proceeds of disposal of property and equipment 2,883 246
-------- --------
Net cash used in investing activities (86,130) (58,639)
-------- --------
Financing activities:
Distributions to partners (26,594) (5,428)
Payment of capital lease obligations (13,318) (12,798)
Repayments under credit agreement (68,625) (70,000)
-------- --------
Net cash used in financing activities (108,537) (88,226)
-------- --------
Effect of exchange rate changes on cash (168) 70
-------- --------
Decrease in cash and cash equivalents (22,285) (10,993)
-------- --------
Cash and cash equivalents at beginning of year 30,652 41,645
-------- --------
Cash and cash equivalents at end of year $ 8,367 30,652
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Consolidated Statements of Partners' Capital
Years ended December 31, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Travel Roscom
Covia Distribution Roscor Industry USAM Teledata
Corporation Systems, Inc. A.G. Systems B.V. Corporation S.p.A.
- -----------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ (1,823) (703) (634) (580) (527) (418)
Net income 18,548 7,150 6,453 5,901 5,369 4,251
Distributions - - (260) (238) - (171)
Allocation of increase in
translation adjustment (1,467) (565) (510) (466) (425) (336)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 15,258 5,882 5,049 4,617 4,417 3,326
Net income 45,999 17,734 16,003 14,635 13,316 10,543
Distributions (8,977) (3,461) (4,274) (3,908) (2,599) (2,816)
Allocation of increase in
translation adjustment (1,667) (643) (580) (530) (483) (382)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 50,613 19,512 16,198 14,814 14,651 10,671
- -----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Resnet
Olynet, Holdings, Travidata, Retford Coporga,
Inc. Inc. Inc. Limited Inc. Total
- --------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 (49) (48) (5) (5) (5) (4,797)
Net income 503 488 49 49 49 48,810
Distributions - - - (2) - (671)
Allocation of increase in
translation adjustment (40) (39) (4) (4) (4) (3,860)
- --------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 414 401 40 38 40 39,482
Net income 1,247 1,211 121 121 121 121,051
Distributions (243) (236) (24) (32) (24) (26,594)
Allocation of increase in
translation adjustment (45) (44) (4) (4) (4) (4,386)
- --------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 1,373 1,332 133 123 133 129,553
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) Organization and Basis of Presentation
The principal services provided by Galileo International Partnership
(Partnership) are in connection with its proprietary travel reservation
systems. The Partnership's receivables are primarily due from airlines
and other entities operating in the travel industry.
On September 16, 1993 Covia Partnership (Covia) and Galileo Company
Limited (Galileo) combined, resulting in the realignment of the
partners' interests. The partners of Covia and the shareholders of
Galileo were substantially the same. The operations of Galileo and
certain operations of Covia were combined and the name of Covia was
changed to Galileo International Partnership. In addition, certain sales
support and telecommunications operations were distributed by Covia to
Apollo Travel Services, a newly formed entity owned by certain former
Covia partners, and certain telecommunications and data processing
operations performed by Covia for United Airlines, Inc. (United) were
distributed to United. On the date of this combination, Galileo sold
Covia certain of its intellectual property and Galileo used the proceeds
to retire debt. Subsequent to the retirement of debt, Galileo was
converted from a limited to an unlimited liability company and its
shareholders contributed 99% of their ownership interest in Galileo to
the Galileo International Partnership.
The Partnership, a Delaware general partnership, is owned by, and net
income or loss is allocated based on the following:
<TABLE>
<CAPTION>
Ownership
Partner Partner's affiliate percentage
- --------------------------------------------------------------------------------
<S> <C> <C>
Covia Corporation United Airlines, Inc. 38.00%
Distribution Systems,
Inc. British Airways plc 14.65
Roscor A.G. Swissair Swiss Air
Transport Company Ltd. 13.22
Travel Industry
Systems B.V. KLM Royal Dutch Airlines 12.09
USAM Corporation USAir Inc. 11.00
Racom Teledata S.p.A. Alitalia Linee Aeree Italiane S.p.A. 8.71
Olynet, Inc. Olympic Airways S.A. 1.03
Resnet Holdings, Inc. Air Canada 1.00
Retford Limited Aer Lingus plc 0.10
Coporga, Inc. Transportes Aereos Portuguese S.A. 0.10
Travidata, Inc. Austrian Airlines Oesterreichische
Luftverkehrs Aktiengesellschaft 0.10
</TABLE>
(Continued)
6
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Notes to Consolidated Financial Statements
The consolidated financial statements include the accounts of the
Partnership and all majority-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
(2) Significant Accounting Policies
Cash and Cash Equivalents
Cash in excess of operating requirements is invested daily in liquid,
income-producing investments, generally having maturities of three months
or less. The carrying amounts reported on the consolidated balance sheet
for cash equivalents include cost and accrued interest, which approximate
those assets' fair value.
Foreign Currency Translation
The Partnership uses the U.S. dollar for financial reporting purposes. The
balance sheets of the Partnership's foreign subsidiaries are translated
into U.S. dollars using the current exchange rate and revenues and
expenses are translated using the average exchange rate. The resulting
translation gains or losses are recorded as a separate component of
partners' capital.
Allowance for Doubtful Accounts Receivable
The allowance for doubtful accounts receivable was $11,713,000 and
$14,946,000 at December 31, 1995 and 1994, respectively. Provisions for
bad debts were $1,558,000 and $5,432,000 for the years ended December 31,
1995 and 1994, respectively. Write-offs of uncollectible accounts, net of
recoverables and adjustments, were $4,791,000 and $2,877,000 for the years
ended December 31, 1995 and 1994, respectively.
Property and Equipment
Depreciation of property and equipment is provided on the straight-line
method over the following estimated useful lives of the assets:
Buildings and improvements 5 - 35 years
Equipment 3 - 10 years
Depreciation expense for the years ended December 31, 1995 and 1994 was
$33,280,000 and $34,269,000, respectively. Accounts payable at December
31, 1995 and 1994 includes property and equipment additions of $959,000
and $1,951,000, respectively.
Income Taxes
No provision for U.S. Federal income taxes is recorded as such liability
is the responsibility of the partners rather than of the Partnership.
Galileo Company Unlimited, a wholly-owned subsidiary in the United
Kingdom, is subject to United Kingdom income taxes.
(continued)
7
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Notes to Consolidated Financial Statements
Computer Software
Computer software consists principally of purchased computer software and
capitalized computer software development costs, which are being amortized on
the straight-line method over three to ten years. Amortization expense for the
years ended December 31, 1995 and 1994 was $46,225,000 and $48,380,000,
respectively.
Maintenance and Installation
Maintenance and installation expense for the years ended December 31, 1995 and
1994 was $12,362,000 and $12,089,000, respectively.
Taxes Other Than Income
Taxes, excluding income and payroll taxes, included in selling and
administrative expense were $7,693,000 and $6,167,000 for the years ended
December 31, 1995 and 1994, respectively.
Research and Development
Research and development costs, excluding amortization of computer software, are
expensed as incurred and approximated $10,094,000 and $10,319,000 for the years
ended December 31, 1995 and 1994, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Partnership's financial instruments are valued at their carrying amounts
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
Reclassifications
Certain reclassifications have been made to the 1994 consolidated financial
statements in order to conform to the 1995 presentation.
(Continued)
8
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Notes to Consolidated Financial Statements
(3) Transactions With Affiliates
The Partnership receives participant revenues from the partners and their
affiliates based on standard charges for flights booked by travel agents. In
addition, the Partnership, in the ordinary course of business, purchases
services from its partners and their affiliates and provides data processing
and communications-related services to United. Total revenues from partners
and their affiliates, classified within service revenues in the consolidated
statements of income, were $371,269,000 and $311,841,000 for the years ended
December 31, 1995 and 1994, respectively. Services purchased from partners
and their affiliates during 1995 and classified within costs of operations
and selling and administrative expense totaled $14,638,000 and $365,423,000,
respectively. Services purchased from partners and their affiliates during
1994 and classified within costs of operations and selling and
administrative expense totaled $15,755,000 and $343,185,000, respectively.
(4) Capital Lease and Other Lease Commitments
The Partnership leases various office facilities and equipment under
operating leases with remaining terms of up to 11 years. Rental expense
under operating leases was $16,510,000 and $20,134,000 for the years ended
December 31, 1995 and 1994, respectively.
The Partnership also leases data processing equipment under capital leases.
Equipment, at cost, includes $36,139,000 and $33,187,000, relating to
capital leases at December 31, 1995 and 1994, respectively. Accumulated
depreciation and amortization includes $18,620,000 and $19,349,000 relating
to capital leases at December 31, 1995 and 1994, respectively. The
Partnership entered into capital leases of $8,070,000 and $6,033,000 during
the years ended December 31, 1995 and 1994, respectively.
Future minimum lease payments under capital leases and noncancelable
operating leases at December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
===============================================================================
<S> <C> <C>
1996 $ 10,374 20,124
1997 8,152 14,832
1998 7,114 10,234
1999 6,473 8,005
Thereafter 25,056 74,198
=========================
Total minimum lease payment 57,169 $ 127,393
========
Less amount representing interest (13,534)
==========
Present value of future minimum
lease payments $ 43,635
==========
</TABLE>
(Continued)
9
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Notes to Consolidated Financial Statements
(5) Long-term Debt
At December 31, 1995, the Partnership has outstanding long-term debt
consisting of a $161,375,000 term loan and a $40,000,000 cash collateral
term loan. The Partnership also has an unused committed revolving loan of
$80,000,000, with commitment fees of 0.25% charged quarterly on the unused
credit facilities. Prior to renegotiation of the debt during 1995, the
Partnership paid an annual fee equal to 0.50% of the aggregate amount of the
outstanding loan and the unused facilities to various partners who had
guaranteed the partnership debt. Interest on outstanding debt is based on
a moving three-month London Inter-bank Offer Rate (LIBOR) plus an additional
percentage, as negotiated. Such additional percentages were 0.625% and
0.95%, at December 31, 1995 and 1994, respectively. The credit agreement
limits, among other things, the sale of fixed assets, dividends, and
issuance of debt, and it requires that the Partnership maintain specified
minimum levels of tangible partnership capital. At December 31, 1994 the
Partnership had outstanding long-term debt consisting of a $230,000,000 term
loan and a $40,000,000 cash collateral term loan.
At December 31, 1995, the Partnership had interest rate protection
agreements for the outstanding loans in the form of interest rate swaps and
interest rate caps. The interest rate swap agreements cover $124,900,000 of
the debt facility with fixed interest rates averaging 5.075%. The interest
rate cap agreements cover $75,200,000 of the debt facility, and are in
effect when LIBOR reaches a rate of 7.00%. For the years ended December 31,
1995 and 1994, the effective interest rate on outstanding debt was 6.55% and
5.77%, respectively.
At December 31, 1995, the long-term debt maturity schedule, prior to
adjustment for the matter discussed in note 9, is as follows:
1996 $ 26,743,000
1997 66,113,000
1998 108,519,000
---------------
$ 201,375,000
---------------
Total interest, including interest under capital leases, of $18,882,000 was
incurred and $19,299,000 was paid for the year ended December 31, 1995.
Total interest, including interest under capital leases, of $25,945,000 was
incurred and $24,930,000 was paid for the year ended December 31, 1994.
(6) Employee Benefit Plans
The Partnership has a defined benefit pension plan that covers substantially
all U.S. employees. Plan benefits are based on the participant's years of
service and average compensation for a
(Continued)
10
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Notes to Consolidated Financial Statements
specified period before retirement. The Partnership's funding policy is to
contribute annually an amount which satisfies ERISA funding standards. The
assets of the plan at December 31, 1995 and 1994 are principally comprised
of marketable equity securities, U.S. Government and government agency
bonds, and short-term securities.
The following sets forth the plan's obligations, funded status, and pension
costs at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested $ (23,184) (16,633)
Nonvested (5,626) (3,876)
---------- ----------
$ (28,810) (20,509)
========== ==========
Projected benefit obligation for service rendered to date (38,833) (30,742)
Plan net assets at fair value 25,421 16,447
---------- ----------
Plan net assets less than projected benefit obligation (13,412) (14,295)
Unrecognized net loss 4,125 4,235
Unrecognized prior service cost 4,164 4,688
Unrecognized net transition obligation 2,985 3,234
Adjustment to recognize minimum pension liability (1,251) (1,924)
---------- ----------
Net pension liability $ (3,389) (4,062)
========== ==========
Net pension costs for the years ended December 31, 1995 and 1994 included
the following components (in thousands):
1995 1994
---------- ----------
Interest cost on projected benefit obligation $ 2,744 2,218
Service cost 3,038 2,977
Actual investment return on plan assets (4,789) (200)
Net amortization and deferral 3,884 (326)
---------- ----------
$ 4,877 4,669
---------- ----------
</TABLE>
(Continued)
11
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Notes to Consolidated Financial Statements
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
were 7.25% and 4.25%, respectively, in 1995 and 8.5% and 5.5%, respectively,
in 1994. The expected long-term rate of return on assets as of December 31,
1995 and 1994 was 9.5%.
The Partnership has a defined contribution pension plan covering a majority
of the United Kingdom employees which requires the Partnership to annually
contribute 10% of eligible employee compensation on behalf of each
participant.
The Partnership offers U.S. based employees a 401(k) savings plan. Employees
can elect to contribute pre-tax earnings, as limited by the Internal Revenue
Code, to their account and can determine how the money is invested. During
1995, the Partnership made a special, one-time contribution to the Plan of
$4,242,000 based upon 1994 results versus plan.
(7) Postretirement Benefits
The Partnership provides certain health care benefits to its retired
employees. The majority of its domestic employees may become eligible for
these benefits if they reach normal retirement age while working for the
Partnership. In addition, the Partnership provides retiree flight benefits
to certain former United employees. The discount rate used to develop the
accumulated postretirement benefit obligation for the retiree health care
plan was 7.25% and 8.5% in 1995 and 1994, respectively. The Partnership's
plan is unfunded.
Components of the expense recognized for the year ended December 31, 1995
and 1994 for the retiree health care plan were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------------------------------
<S> <C> <C>
Service costs $ 909 894
Interest cost on projected obligation 1,362 1,193
Amortization of losses 127 272
--------------------------------
Net retiree health care expense $ 2,398 2,359
--------------------------------
</TABLE>
The health care trend rate used to determine the accumulated postretirement
benefit obligation is 14% for 1993 through 1996, decreasing by 1% each year
until reaching 4% for the year 2006 and beyond. Increasing the health care
trend rate by one percentage point would increase the accumulated
postretirement benefit obligation by $127,000 and $100,000 in 1995 and 1994,
respectively, and would increase the 1995 and 1994 net retiree health care
expense by $10,000 and $9,000, respectively. There are no significant
postretirement health care benefit plans outside of the United States.
(Continued)
12
<PAGE>
GALILEO INTERNATIONAL PARTNERSHIP
Notes to Consolidated Financial Statements
================================================================================
(8) Discontinued Operations
During 1995, the Partnership decided to discontinue the operations of Covia
Technologies. A reserve of $12,388,000 has been provided for the costs of
the disposal of the discontinued operations and the write-off of intangible
assets as of December 31, 1995.
(9) Early Repayment of Debt
The Partnership has classified $40,461,000 of non-required debt payments as
current debt in the accompanying consolidated balance sheet at December 31,
1995. This classification reflects the Partnership's intent to utilize cash
generated from the return of a lease deposit, which will be replaced by an
irrevocable letter of credit in the first quarter of 1996, to retire such
debt. The lease deposit has also been classified as a current asset in the
accompanying consolidated balance sheet at December 31, 1995.
(10) Commitments and Contingencies
United has communicated their intent to recover $23,100,000 in previously
paid booking fees ($7,000,000, net of commission recoveries). United claims
such fees should be categorized as bookings by "non-neutral" travel
providers under the Computer Services Agreement between United and Galileo
and billed at cost. The Partnership disagrees with such claims and
therefore has not provided for this claim in the accompanying consolidated
balance sheet at December 31, 1995. The Partnership will submit the matter
for partner arbitration under provisions of the Combination Agreement.
(11) Litigation
The Partnership is involved in various matters of litigation as both
plaintiff and defendant. In the opinion of management, none of these
matters would have a material adverse effect on the consolidated financial
statements.
13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and Supervisory Board of
Apollo Travel Services Partnership
We have audited the accompanying consolidated balance sheets of Apollo Travel
Services Partnership (Partnership) as of December 31, 1995 and 1994, and the
related consolidated statements of operations, partners' capital and cash flows
for the years then ended. These financial statements are the responsibility of
the Partnership'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 consolidated financial position of the Partnership as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Chicago, Illinois ARTHUR ANDERSEN LLP
February 14, 1996
See accompanying notes
2
<PAGE>
Apollo Travel Services Partnership
Consolidated Balance Sheets
December 31, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Assets 1995 1994
- ------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 158,934 $ 118,038
Accounts receivable-
United Air Lines, Inc. 15,553 11,855
Other related parties 25,204 24,341
Subscribers and other 11,507 9,010
----------- -----------
52,264 45,206
Less allowances 4,096 6,160
----------- -----------
Net accounts receivable 48,168 39,046
Other current assets 2,704 2,442
----------- -----------
Total current assets 209,806 159,526
Property and equipment, at cost:
Land 2,430 2,430
Buildings and improvements 2,044 1,821
Equipment 81,423 71,972
Equipment held for lease 341,268 323,140
----------- -----------
427,165 399,363
Less accumulated depreciation 323,135 294,421
----------- -----------
Net property and equipment 104,030 104,942
Deferred lease incentives, less accumulated amortization
of $13,099 and $13,163 16,637 12,505
Other noncurrent assets 5,646 1,823
----------- -----------
$ 336,119 $ 278,796
=========== ===========
Liabilities and Partners' Capital
- ---------------------------------
Current liabilities:
Accounts payable-
United Air Lines, Inc. $ 5,358 $ 7,956
Other related parties 2,504 3,114
Other 25,044 17,658
Accrued liabilities 27,432 22,128
Capital lease obligations, current portion 697 637
----------- -----------
Total current liabilities 61,035 51,493
Noncurrent liabilities:
Pension liability 6,283 4,210
Obligations under capital leases 467 1,164
Postretirement benefit obligation 12,250 10,606
----------- -----------
Total noncurrent liabilities 19,000 15,980
Partners' capital:
Partners' capital before cumulative translation adjustment 256,685 211,568
Cumulative translation adjustment (601) (245)
----------- -----------
Total partners' capital 256,084 211,323
----------- -----------
$ 336,119 $ 278,796
=========== ===========
</TABLE>
See accompanying notes
2
<PAGE>
Apollo Travel Services Partnership
Consolidated Statement of Operations
Years Ended December 31, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Net revenues:
Computer reservation system $ 236,096 $ 239,108
Services to affiliates 142,426 137,280
---------- ----------
378,522 376,388
---------- ----------
Operating expenses:
Wages and benefits 69,306 70,283
Communications 89,000 82,836
Depreciation and amortization 49,924 50,388
Maintenance and installation 26,672 24,687
Marketing and sales support 23,987 24,964
Other 30,043 30,830
---------- ----------
288,932 283,988
---------- ----------
Operating income 89,590 92,400
Interest and other income 8,646 2,897
---------- ----------
Net Income $ 98,236 $ 95,297
========== ==========
</TABLE>
See accompanying notes
3
<PAGE>
Apollo Travel Services Partnership
Consolidated Statement of Partners' Capital
Years Ended December 31, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Resnet
Covia USAM Holdings
Corporation Corporation Inc. Total
----------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $117,324 $32,119 $2,926 $152,369
Net income 73,379 20,088 1,830 95,297
Distributions (27,805) (7,601) (692) (36,098)
Change in cumulative
translation adjustment (189) (52) (4) (245)
-------- -------- -------- --------
Balance at December 31, 1994 $162,709 $44,554 $4,060 $211,323
Net income 75,641 20,709 1,886 98,236
Distribution (40,901) (11,198) (1,020) (53,119)
Change in cumulative
translation adjustment (274) (74) (8) (356)
-------- -------- -------- --------
Balance at December 31, 1995 $197,175 $53,991 $4,918 $256,084
======== ======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE>
Apollo Travel Services Partnership
Consolidated Statement of Cash Flows
Years Ended December 31, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Operating activities:
Net Income $ 98,236 $ 95,297
Adjustments to reconcile net income to net
cash provided by operating activities
Deprecition and amortization 45,518 44,857
Amortization of deferred lease
incentives 11,075 12,779
Gain on disposal of property and
equipment (974) (360)
Foreign exchange loss 66
Increase in deferred lease incentives (15,207) (9,038)
Provision for losses on accounts
receivable 3,732 4,910
Increase in noncurrent assets (2,954) (992)
Increase in postretirement benefit
obligation 1,644 1,752
Changes in operating assets and
liabilities-
Increase in accounts receivable (12,885) (3,830)
(Increase) decrease in other
current assets (285) 1,741
Increase (decrease) in accounts
payable 4,194 (3,278)
Increase (decrease) in accrued
liabilities 6,307 (3,444)
----------- -----------
Net cash provided by operating activities 138,401 140,460
Investing activities:
Purchase of property and equipment (45,006) (31,998)
Proceeds on disposal of property and
equipment 1,335 701
----------- -----------
Net cash used in investing activities (43,671) (31,297)
Financing activites:
Distributions to partners (53,119) (36,098)
Payment of capital lease obligations (697) (582)
----------- -----------
Net cash used in financing activites (53,816) (36,680)
Effect of exchange rate changes on cash (18) (48)
Net increase in cash and cash equivalents
during period 40,896 72,435
Cash and cash equivalents at beginning of
period 118,038 45,603
----------- -----------
Cash and cash equivalent at end of period $ 158,934 $ 118,038
----------- -----------
</TABLE>
See accompanying notes
5
<PAGE>
Apollo Travel Services Partnership
Notes to Consolidated Financial Statements
1. Organization and basis of presentation
--------------------------------------
Apollo Travel Services Partnership (Partnership) acts as the national
distributor in the United States and Mexico of the proprietary Apollo computer
reservation system, owned and operated by Galileo International Partnership
(Galileo International). The Partnership performs certain sales support and
telecommunications operations pursuant to a distribution agreement with Galileo
International.
The Partnership, a Delaware general partnership, is owned by, and net income or
loss is allocated based on the following:
<TABLE>
<CAPTION>
Ownership
Partner Partner's Affiliate Percentage
------- ------------------- ----------
<S> <C> <C>
Covia Corporation United Air Lines, Inc. 77.00%
USAM Corporation USAir Group, Inc. 21.08%
Resnet Holdings Inc. Air Canada 1.92%
</TABLE>
The preparation of the Partnership's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Certain
reclassifications have been made to prior year balances to conform to the
current year presentation.
2. Significant accounting policies
-------------------------------
Basis of consolidation -
The consolidated financial statements include the accounts of the Partnership
and its wholly-owned subsidiaries; Apollo Travel Services Mexico S.A. de C.V.
and Apollo Communications Services.
6
<PAGE>
Cash and cash equivalents -
Cash in excess of operating requirements is invested in the United Air Lines,
Inc. (United) liquidity investment pool which consists of short-term, highly
liquid, income-producing investments. Cash equivalents are reported on the
balance sheet at amortized cost with accrued interest, which approximates those
assets' fair value due to the short maturity of the underlying investments in
the liquidity pool.
Property and equipment -
Depreciation of property and equipment is provided on the straight-line method
over the following estimated useful lives of the assets:
Buildings and improvements 31 years
Equipment 5 - 10 years
Equipment held for lease 3 - 7 years
Depreciation expense for the years ended December 31, 1995 and 1994
respectively, was $45,518,000 and $44,857,000.
Income taxes -
No provision for U.S. federal income taxes is recorded as such liability is the
responsibility of the partners rather than of the Partnership.
Deferred lease incentives -
Deferred lease incentives include various considerations provided to travel
agencies in the form of cash payments or special services in connection with
long-term contracts to use the Apollo system. Such incentives are being
amortized on the straight-line method over the average term of the contracts of
thirty months. During 1995 and 1994 respectively, gross revenues were reduced by
$6,669,000 and $7,248,000 related to the amortization of cash deferred lease
incentives, and depreciation and amortization expense included amortization of
special services deferred lease incentives of $4,406,000 and $5,531,000.
Partner distributions -
Distributions reported in the accompanying statement of partners' capital are
net of the required fifty-percent contribution to the Partnership by partners in
accordance with the Apollo Travel Services Partnership agreement.
7
<PAGE>
Foreign currency translation -
Gains and losses resulting from the translation of the accounts of Apollo Travel
Services Mexico S.A. de C.V. into the United States dollar are recorded as an
adjustment to partners' capital in accordance with the provisions of Statement
of Financial Accounting Standards No. 52 "Foreign Currency Translation."
3. Transactions with related parties
---------------------------------
Pursuant to a distribution and sales agreement between the Partnership and
Galileo International, the Partnership, in the ordinary course of business,
receives a share of revenues related to its subscribers' use of the Apollo
computer reservations system which is passed through Galileo International from
travel vendors including United, USAir, and Air Canada, related parties through
joint ownership in the Partnership. For 1995 and 1994, computer reservations
system revenues reported in the statement of operations included the following
related to bookings with United, USAir and Air Canada (In thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1994
-------- --------
United $ 55,080 $ 54,030
USAir 19,350 21,205
Air Canada 618 482
-------- --------
$ 75,048 $ 75,717
-------- --------
</TABLE>
In addition, the Partnership receives revenues directly from United for data
processing and communications-related services it provides to United. Rates
charged for such services are redetermined semi-annually. Included in services
to affiliates revenue in the accompanying statement of operations is $86,190,000
and $78,756,000 related to these services provided to United in 1995 and 1994,
respectively.
The Partnership, in the ordinary course of business, purchases services and
rents facilities from United. For 1995 and 1994, respectively, total operating
expenses in the accompanying statement of operations include $11,191,000 and
$14,290,000 related to these services. In addition, operating expenses included
$3,272,000 and $3,469,000 related to marketing services provided the Partnership
by USAir during 1995 and 1994, respectively.
8
<PAGE>
In the ordinary course of business, the Partnership provides network
communications-related services to Galileo International, a related party
through certain common ownership. During 1995 and 1994 respectively, the
Partnership recognized revenues of $55,878,000 and $57,882,000 related to these
services.
The Partnership utilizes data processing and facilities-related services
provided by Galileo International. Total operating expenses included $5,478,000
and $5,618,000 related to such charges by Galileo International during 1995 and
1994, respectively.
The Partnership provides financial, network and management services to Galileo
Japan Partnership, a related party through certain common ownership. Revenues
from such services included in services to affiliates revenue in the
accompanying statement of operations were $358,000 and $642,000 respectively,
during 1995 and 1994.
4. Equipment held for lease
------------------------
The Partnership leases computer equipment related to the Apollo system to travel
agencies under operating leases, generally for terms up to five years. Such
leases are generally noncancelable and contain damage clauses in the event of
unilateral termination of the lease by the leasee. The following represents the
cost and accumulated depreciation related to equipment held for lease at
December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cost $341,268 $323,140
Less: Accumulated depreciation 258,421 236,193
-------- --------
$ 82,847 $ 86,947
======== ========
</TABLE>
Aggregate future minimum leasing fees expected under these leases are as follows
(in thousands):
<TABLE>
<S> <C>
1996 $ 29,457
1997 26,822
1998 22,699
1999 17,125
2000 7,043
--------
$103,146
========
</TABLE>
9
<PAGE>
5. Capital lease and other lease commitments
-----------------------------------------
The Partnership leases various office facilities and equipment under operating
leases with terms of up to 10 years. Rental expense under operating leases was
$3,752,000 and $3,789,000 during 1995 and 1994, respectively. Included in
rental expense was $981,000 and $924,000 respectively, related to the rental of
United facilities during 1995 and 1994.
The Partnership also leases data processing equipment under capital leases.
Equipment, at cost and the related accumulated depreciation included the
following amounts related to such leased equipment at December 31, 1995 and
1994, with lease amortization included in depreciation expense (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Cost $ 3,105 $ 3,105
Less: Accumulated depreciation 2,070 1,449
------- -------
$ 1,035 $ 1,656
======= =======
</TABLE>
Future minimum lease payments under capital leases and noncancelable operating
leases, are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
1996 $ 773 $ 2,356
1997 483 1,264
1998 - 1,034
1999 - 1,055
2000 - 865
Thereafter - 2,536
------- ---------
Total future minimum lease payments 1,256 $ 9,110
=========
Less amounts representing interest 93
-------
Present value of future minimum
lease payments $ 1,163
=======
</TABLE>
10
<PAGE>
6. Pension plans
-------------
The Partnership sponsors the defined benefit Apollo Travel Service Pension Plan
(Pension Plan), covering substantially all employees. Plan benefits are based on
the participant's years of service and annual compensation upon termination or
retirement. Plan assets at December 31, 1995 are principally comprised of
marketable equity securities, U.S. government and government agency bonds and
short-term securities. The Partnership's policy is to fund amounts which satisfy
the minimum funding requirements under the Employees Retirement Income Security
Act.
In addition to the above, the Partnership sponsors a nonqualified supplemental
defined benefit pension plan, the Apollo Travel Services Supplemental Retirement
Plan, covering certain highly compensated employees. Plan benefits are based on
years of service and annual compensation upon termination or retirement. The
Partnership's policy is to fund benefits as they become payable to participants.
The following sets forth the Partnership's obligations, funded status and
pension costs related to the defined benefit plans at December 31, 1995 and
1994, as determined by an independent actuary (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation:
Vested $ 18,693 $ 12,063
Nonvested 5,566 4,744
-------- --------
$ 24,259 $ 16,807
======== ========
Actuarial present value of projected benefit obligation $ 33,476 $ 24,630
Plan assets at fair value (16,524) (9,900)
-------- --------
Projected benefit obligation in excess of plan assets 16,952 14,730
Unrecognized net loss (4,123) (1,222)
Unrecognized prior service cost (4,648) (5,206)
Remaining unrecognized net transition obligation (2,423) (2,625)
Adjustment required to recognize minimum liability 2,018 866
-------- --------
Pension liability recognized in balance sheet $ 7,776 $ 6,543
======== ========
</TABLE>
11
<PAGE>
Net pension cost:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Service cost $ 2,424 $ 2,947
Interest cost 2,011 1,828
Actual (return)/loss on plan assets (2,700) 149
Net amortization and deferral 2,430 143
-------- --------
Net periodic pension cost $ 4,165 $ 5,067
======== ========
</TABLE>
The following sets forth the discount rate, expected long-term rate of return on
assets and rate of increase in future compensation levels used in determining
the actuarial present value of projected benefit obligation:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Discount rate 7.25% 8.75%
Long-term rate of return 8.50% 9.00%
Salary scale 4.00% 4.50%
</TABLE>
The effect of the change in the above assumptions from 1994 was to increase the
projected benefit obligation by approximately $6,108,000 at December 31, 1995.
7. Postretirement benefits
-----------------------
In addition to the above pension plans, the Partnership sponsors a defined
benefit health care plan providing postretirement health care benefits in
full-time employees who have worked at least ten years and have attained age 55
while in service with the Partnership. The plan is contributory, with retiree
contributions adjusted annually, and contains other cost-sharing features such
as deductibles and coinsurance. In addition, the plan provides certain former
employees of United retiree flight benefits. The Partnership's policy is to pay
benefits under this plan as incurred. During the years ended December 31, 1995
and 1994 respectively, benefits of approximately $53,000 and $20,000 were paid
to retirees under this plan.
12
<PAGE>
The following table presents the plan's financial status reconciled to amounts
recognized in the Partnership's balance sheet at December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Vested $ 4,233 $ 3,295
Nonvested 10,403 8,158
--------- ---------
Accumulated postretirement benefit obligation 14,636 11,453
Unrecognized net loss (3,379) (847)
Unrecognized prior service cost 993 -
--------- ---------
Accrued postretirement benefit obligation $ 12,250 $ 10,606
--------- ---------
Net periodic postretirement benefit cost:
Service cost $ 695 $ 745
Interest cost 1,005 898
Net amortization and deferral (3) 129
--------- ---------
Net periodic postretirement benefit cost $ 1,697 $ 1,772
--------- ---------
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost of
coverage benefits (health care cost trend factor) was 12% for 1995 and is
assumed to decrease gradually to 6% for 2003 and remain at that level
thereafter. The health care cost trend rate assumption has a significant affect
on the amounts reported. For example, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $406,000, and the
aggregate of the service and interest cost components of net periodic pension
cost for the year ended December 31, 1995 by $32,000. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% and 8.75% at December 31, 1995 and 1994, respectively. The
decrease in the weighted-average discount rate from 1994 had the impact of
increasing the accumulated postretirement benefit obligation at December 31,
1995 by approximately $2,636,000.
13
<PAGE>
8. Contingencies
-------------
On February 7, 1996, the Partnership became aware that Galileo International was
notified by United that, in United's opinion, the method used to determine
certain computer reservation system revenues was not in accordance with
contractual agreements. The eventual outcome of this matter is uncertain and it
is expected Galileo International will contest United's interpretation of their
contractual agreements. Pursuant to a distribution agreement with Galileo
International, the Partnership shares in the subject revenue and the
Partnership could be obligated to refund any amounts collected in excess of
contractual revenues. While no reserve has been provided at December 31, 1995,
the Partnership has currently estimated the potential refund exposure to Galileo
International for the subject revenues since the inception of the Partnership
through December 31, 1995 could approximate between $6,700,000 and $8,300,000.
This Partnership also has certain other contingencies resulting from litigation
and claims incident to the ordinary course of business. Management believes,
after considering a number of factors, including (but not limited to) the views
of legal counsel, the nature of contingencies to which the Partnership is
subject and its prior experience, that the ultimate disposition of these
contingencies is not expected to materially affect the Partnership's financial
position and results of operations.
14
<PAGE>
Exhibit 5.16
[LETTERHEAD OF AIRCLAIMS APPEARS HERE]
Our Ref: 95889/ROW
USAir Group Inc. 31 December, 1995
Crystal Park 4
2345 Crystal Drive
Arlington
Virginia VA 22227
United States of America
Dear Sirs,
CURRENT VALUATIONS
NINE BOEING 757-2B7 AIRCRAFT
In accordance with the request, we are pleased to be able to provide our opinion
of the current market values ("CMV") of each of the nine Boeing 757-2B7 aircraft
identified in this report, currently operated by USAir Inc. (the "Airline")
Airclaims' valuations of these aircraft takes into account the data supplied by
USAir regarding the serial numbers and basic specifications of the subject
aircraft. We have additionally referred to the data held on our own databases in
relation to the subject aircraft and have assumed that each is a typical example
of its type, model and age, and in generally good condition, with all
airworthiness directives (ADs) and significant service bulletins (SBs) complied
with. Given the years of build of the subject aircraft (1994 & 1995) each is
assumed to currently be in above 'half-life' maintenance condition.
No physical inspections of the subject aircraft have been undertaken by
Airclaims in conjunction with this assignment, and no attempt made to verify the
information available to us, which is therefore assumed to be correct.
The appraisal was conducted in accordance with the Principals of Appraisal
Practice and Code of Ethics of the International Society of Transport Aircraft
Trading ("ISTAT").
VALUATION
We have provided our current value opinions under the scenario of 'Base' Value.
These are given in the attached table. Airclaims believes it to be very
important that value definitions are understood by all parties and that such
values are always considered in conjunction with their definitions.
<PAGE>
`Base' Value
The International Society of Transport Aircraft Trading (ISTAT) defines `Base'
Value such:
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.
The values do not therefore reflect those anticipated under current (today's)
market conditions or 'distress' sale conditions.
Whilst the tabulated values are given as single figures, it must be borne in
mind that the determination of such values involves a multiplicity of variables,
and that some variation in perceived value must be expected. In this case we
consider that a tolerance of +/- 4% may reasonably apply to each of the
aforementioned calculated values.
Please note that valuations given by Airclaims are valid only as at the date of
issue. Subsequent to that date there may be alterations in the world aviation
market, and in the status and physical condition of the subject aircraft, the
engines or other general factors that may affect Airclaims' valuation.
Abbreviations used on the tabulated valuation page include:
Type - Aircraft Type, model and variant
S/N-L/N - Manufacturer serial and line numbers
YoB - Year of Build (roll out date)
MTOW - Maximum Take-Off Weight
We trust the forgoing is satisfactory for your purposes.
Yours faithfully,
/s/ Richard Owen Walker
Richard Owen Walker BA (Hons)
Aviation Analyst
Appraiser-International Society of Transport Aircraft Trading
<PAGE>
USAir - Current Valuations Of Selected Boeing 757 Aircraft
31 December 1995
<TABLE>
<CAPTION>
Aircraft Utilization
Type S/N L/N Registration Built MTOW ENGINES Hours Cycles As at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Boeing 757-2B7 27246 643 N625VI 28-Sep-94 230,000lb Rolls-Royce RB211-535E4 3,121 1,319 Sep-95
2 Boeing 757-2B7 27303 647 N626AU 17-Oct-94 230,000lb Rolls-Royce RB211-535E4 2,917 1,272 Sep-95
3 Boeing 757-2B7 27805 655 N627AU 06-Dec-94 230,000lb Rolls-Royce RB211-535E4 2,161 910 Sep-95
4 Boeing 757-2B7 27806 657 N628AU 16-Dec-94 230,000lb Rolls-Royce RB211-535E4 2,164 907 Sep-95
5 Boeing 757-2B7 27807 662 N629AU 27-Jan-95 230,000lb Rolls-Royce RB211-535E4 1,884 778 Sep-95
6 Boeing 757-2B7 27808 666 N630AU 24-Feb-95 230,000lb Rolls-Royce RB211-535E4 1,545 644 Sep-95
7 Boeing 757-2B7 27809 673 N631AU 14-Apr-95 230,000lb Rolls-Royce RB211-535E4 1,080 427 Sep-95
8 Boeing 757-2B7 27810 678 N632AU 22-May-95 230,000lb Rolls-Royce RB211-535E4 770 294 Sep-95
9 Boeing 757-2B7 27811 681 N633AU 09-Jun-95 230,000lb Rolls-Royce RB211-535E4 469 212 Sep-95
<CAPTION>
31-Dec-95
BASE Value#
(USSM) Notes
<S> <C> <C>
1 Boeing 757-2B7 $45.50
2 Boeing 757-2B7 $45.50
3 Boeing 757-2B7 $46.40 (i)
4 Boeing 757-2B7 $46.40 (ii)
5 Boeing 757-2B7 $47.30
6 Boeing 757-2B7 $47.30
7 Boeing 757-2B7 $47.30
8 Boeing 757-2B7 $47.30
9 Boeing 757-2B7 $47.30
</TABLE>
NOTES:
a ISTAT 'Base' Value - 31 December 1995
(i) Delivered 23 January, 1995
(ii) Delivered 27 January, 1995
31 December, 1995 USAir Group Inc
TO BE READ IN CONJUNCTION WITH COVERING LETTER 95R79
<PAGE>
[LETTERHEAD OF AIRCRAFT INFORMATION SERVICES, INC. APPEARS HERE]
31 December 1995
Mr. Thomas A.Fink
USAIR GROUP,INC.
Crystal Park Four
2345 Crystal Drive
Arlington, VA 22227
Subject: Base Value Opinion of Nine B757-200 Non-EROPS Aircraft.
AISI File No. A5D094B57.
Dear Mr. Fink:
Aircraft Information Services, Inc. (AISI) is pleased to offer USAir Group, Inc.
(USAir) our considered opinion of the base value of nine (9) Boeing 757-200
Non-EROPS aircraft manufactured in 1994 and 1995, operating at 230,000lbs.
Maximum Take-Off Weight (MTOW), powered by Rolls Royce RB211-535E4 engines and
identified as follows (the "Aircraft"):
<TABLE>
<CAPTION>
Manufacture Serial Number Registration
----------- ------------- ------------
<S> <C> <C>
Oct. 1994 27246 N625VJ
Oct. 1994 27303 N626AU
Dec. 1994 27805 N627AU
Jan. 1995 27806 N628AU
Feb. 1995 27807 N629AU
Mar. 1995 27808 N630AU
Apr. 1995 27809 N631AU
Jun. 1995 27810 N632AU
Jun. 1995 27811 N633AU
</TABLE>
New York Area Office 400 Perrine Road, Suite 400B, Old Bridge, NJ 08857-2811
TEL: 908-727-3434 FAX: 908-727-5011
<PAGE>
After studying present market conditions and the anticipated future market,
consulting with knowledgeable aircraft brokers and financiers and reviewing
sales data contained within AISI databases, we have formed the considered
opinion that the base values of the Aircraft are in 1995 USDollars as follows:
B757-200 Non-EROPS Aircraft
---------------------------
<TABLE>
<CAPTION>
Manufacturer Serial Number Registration Base Value
------------ ------------- ------------ ----------
<S> <C> <C> <C>
Oct. 1994 27246 N625VJ $56,610,000.00
Oct. 1994 27303 N626AU $56,610,000.00
Dec. 1994 27805 N627AU $57,210,000.00
Jan. 1995 27806 N628AU $57,500,000.00
Feb. 1995 27807 N629AU $57,810,000.00
Mar. 1995 27808 N630AU $58,100,000.00
Apr. 1995 27809 N631AU $58,400,000.00
Jun. 1995 27810 N632AU $59,000,000.00
Jun. 1995 27811 N633AU $59,000,000.00
</TABLE>
No physical inspection of the Aircraft or their records was made by AISI for
purposes of this report. No attempt has been made to verify information provided
to us, which is assumed to be correct and applicable to the Aircraft.
The historical standard term of reference for commercial aircraft value is
'half-life fair market value' of and 'average' aircraft. This is a theoretical
situation that assumes a 'fair market' and a hypothetical 'average' airplane
condition. Recently, the term 'base value' has superseded 'fair market value' to
describe the theoretical balanced market condition and to avoid the potentially
misleading term 'fair market'.
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 cash transaction with no hidden value or liability, and with supply and
demand of the sale item roughly in balance. Basic 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
<PAGE>
which is normal for its intended use and age. '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 a condition which is one-half of the total interval.
B757-200 MARKET
- ---------------
The B757 occupies a unique place in the family of commercial aircraft in that it
has no direct competitor. Its closest narrow-body competitors, the MD-83 and
A321, neither have the range to compete with the B757, and the MD-83 has
considerably smaller passenger capacity. Airbus has considered increasing the
size and maximum weights of the A321, but a new larger wing would be required
for the A321 to be truly competitive with the B757.
The closest wide-body competitors, the B767-200 and A310-200/-300, are
considerably larger aircraft and cost considerably more per plane miles to
operate. For the foreseeable future, it appears the other airframe
manufacturers are content to permit the B757 to remain unchallenged at the top
of the larger, long range, narrow-body market. Boeing, realizing it has a
significant market in which it is uncontested, has now initiated studies to
increase the size and weights of the B757-200. This will further distance the
B757-200 from its narrow-body competitors and place it closer to the smallest
wide-body competitors, over whom it enjoys considerable operating cost
advantages.
This report is offered as a fair and unbiased sight unseen opinion. AISI has no
past, present or anticipated future interest in the Aircraft. The conclusions
and opinions expressed in this report are based on published information,
information provided by others, reasonable interpretations and calculations
thereof and are given in good faith. Such conclusions and opinions are
judgments that reflect conditions and values which are current at the time of
this report. Conditions and values reported upon are subject to any subsequent
change.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ Nancy Dilliplane for
Fred E. Bearden
President
FEB/ND/slf
A5D094B57, 31 December 1995
<PAGE>
BK Associates, Inc.
1295 Northern Boulevard
Manhasset, New York 11030
(516) 365-6272 . Fax (516) 365-6287
December 31, 1995
Mr. Thomas A. Fink, Treasurer
USAir
Crystal Park Four
2345 Crystal Drive
Arlington, VA 22227
Dear Mr. Fink:
In response to your request, BK Associates, Inc. ("BK") has estimated the
current fair market values (CFMV) of the nine Boeing 757-2B7 aircraft, equipped
with Rolls-Royce RB211-535E4 engines (Aircraft) identified in the Conclusion to
this letter. Set forth below is a summary of the methodology, considerations
and assumptions utilized in BK's appraisal. (The appraisal was conducted in
accordance with the Principles of Appraisal Practice and Code of Ethics of the
International Society of Transport Aircraft Trading.)
The following summarizes the methodology, considerations and assumptions
utilized in the appraisal report, dated September 28, 1995, prepared by BK.
FAIR MARKET VALUE
Fair Market Value is the Appraiser's opinion of the price at which an aircraft
would change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or sell, and both having knowledge of all relevant
facts.
VALUE METHODOLOGY
Current fair market valuations are determined based upon one of three methods:
comparable recent sales, replacement cost or rate of return to investor. In
this appraisal since the Aircraft are nearly new and there have been no
published realizations from recent used sales of comparable aged aircraft, BK
relied largely on the replacement cost method in determining the base value of
the Aircraft. This method uses the new price or replacement cost and
<PAGE>
BK Associates, Inc.
Mr. Thomas A. Fink
December 31, 1995
Page 2
deducts an allowance for the time and cycles accumulated on the aircraft to
date. The fair market value of the new Aircraft and the allowance for the
utilization to date are based on BK's familiarity with the aircraft type, its
earnings potential in commercial service, its knowledge of its capabilities and
the uses to which it will be put worldwide, its knowledge of the marketing of
used aircraft, and the factors affecting the fair market value of such aircraft,
and on its knowledge of the asking, offered and transaction prices for similar
competitive, and alternative equipment as well as transactions and negotiations
involving basically identical aircraft. These realizations reflect the market
supply and demand. In arriving at the fair market value, BK considered the
impact of many factors affecting the market for used aircraft, including: the
current demand for and availability of aircraft, the projected demand for lift,
the suitability and operating economies of the aircraft, regulatory factors, and
recent sales experience.
LIMITING CONDITIONS AND ASSUMPTIONS
BK has not inspected the Aircraft or their maintenance records but relied upon
information supplied by USAir and from BK's own database. In determining the
fair market value of a used aircraft, the following assumptions apply to the
base aircraft:
1. The aircraft is in compliance under a Federal Aviation Administration
approved airline maintenance program, with all airworthiness directives,
mandatory modifications and applicable service bulletins currently up to
industry standard.
2. The interior of the aircraft is in a standard configuration for its specific
type, with the buyer furnished equipment and options of the types and models
generally accepted and utilized in the industry.
3. The aircraft is in current flight operations.
4. The aircraft is sold for cash without seller financing.
5. The Aircraft is in average or better condition.
6. There is no accident damage.
<PAGE>
[LOGO OF BK ASSOCIATES, INC. APPEARS HERE]
Mr. Thomas A. Fink
December 31, 1995
Page 3
CONCLUSIONS
Based on the above methodology, considerations and assumptions, the CFMVs and
FFMVs of the nine B757-2B7 Aircraft were estimated by BK as of December 1995 to
be as follows:
<TABLE>
<CAPTION>
Registration Serial In Service Appraised
Number Number Date CFMV
------------ ------ ---------- ---------
<S> <C> <C> <C>
N625VJ 27246 09/94 47.71
N626AU 27303 10/94 47.92
N627AU 27805 12/94 48.33
N628AU 27806 12/94 48.33
N629AU 27807 01/95 48.74
N630AU 27808 02/95 48.75
N631AU 27809 04/95 49.17
N632AU 27810 05/95 49.38
N633AU 27811 07/95 49.79
</TABLE>
Sincerely yours,
BK ASSOCIATES, INC.
/s/ William H. Bath
William H. Bath
President
ISTAT Certified Senior Appraiser
WHB/kf
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
USAir, Inc.:
We consent to the use of our reports dated February 28, 1996 included herein in
the registration statement. Our report on the consolidated financial statements
refers to a change in the method of accounting for post-employment benefits
effective January 1, 1993.
KPMG Peat Marwick LLP
Washington, D.C.
July 16, 1996
<PAGE>
EXHIBIT 23.6
------------
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
USAir, Inc.;
We consent to the use of our report on the consolidated financial statements of
Galileo International Partnership dated February 16, 1996 included herein in
the registration statement.
KPMG Peat Marwick LLP
Chicago, IL
July 16, 1996
<PAGE>
Exhibit 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants we hereby consent to the use in this
Registration Statement (File No. 333-4335) of our report dated February 14,
1996, covering the financial statements of Apollo Travel Services Partnership,
as of December 31, 1995 and 1994, and for the years then ended, included in this
Registration Statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
July 16, 1996
