-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CaGueymyS+01ggliPetFNCMGACbLtXUf0XuOXI87hsyIytQOelwEklrDL7VO1OHN dBPgWofxIo89KL/CU9AyqQ== 0000931763-97-000453.txt : 19970722 0000931763-97-000453.hdr.sgml : 19970722 ACCESSION NUMBER: 0000931763-97-000453 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS WORLD AIRLINES INC /NEW/ CENTRAL INDEX KEY: 0000278327 STANDARD INDUSTRIAL CLASSIFICATION: 4512 IRS NUMBER: 431145889 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07815 FILM NUMBER: 97569390 BUSINESS ADDRESS: STREET 1: ONE CITY CENTRE STREET 2: 515 N SIXTH ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3145893261 MAIL ADDRESS: STREET 1: ONE CITY CENTRE STREET 2: 515 N 6TH ST CITY: ST LOUIS STATE: MO ZIP: 63101 10-K 1 FORM 10-K FOR FISCAL YEAR END 12/31/96 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-7815 TRANS WORLD AIRLINES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-1145889 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE CITY CENTRE 515 NORTH 6TH STREET ST. LOUIS, MISSOURI 63101 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (314) 589-3000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NANE OF EACH EXCHANGE ON WHICH Common Stock, par value $.01 per share REGISTERED 12% Senior Secured Reset Notes Due American Stock Exchange 1998 American Stock Exchange Warants (expiring August 23, 2002) American Stock Exchange ---------------- Securities registered pursuant to Section 12(g) of the Act: 8% CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE 8% SECURED NOTES DUE 2001 11% SENIOR SECURED NOTES DUE 1997 (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [_] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 26, 1997, was $295,679,181. As of March 26 1997, 44,083,266 shares of registrant's Common Stock, par value $0.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS ON MAY 29, 1997--PART III - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS TransWorld Airlines, Inc. ("TWA" or the "Company") is a Delaware corporation organized in 1978 and is the successor to the business of its predecessor corporation, Transcontinental & Western Air, Inc., originally formed in 1934. The Company's principal executive offices are located at One City Centre, 515 N. Sixth Street, St. Louis, Missouri 63101 and its telephone number is (314) 589-3000. TWA is the seventh largest U.S. air carrier (based on 1996 revenue passenger miles ("RPMs"), whose primary business is transporting passengers, cargo and mail. During 1996, the Company carried more than 23.3 million passengers and flew approximately 27.3 billion RPMs. As of December 31, 1996, TWA provided regularly scheduled jet service to 77 cities in the United States, Mexico, Europe, the Middle East, Canada and the Caribbean. As of December 31, 1996, the Company's fleet consisted of 192 jet aircraft. TWA's passenger airline business is the Company's chief source of revenue. TWA also carries cargo (mail and freight) on its North American and international systems. In addition to TWA's passenger and cargo services, the Company operates Getaway Vacations, a tour packager offering leisure travel products and services. In addition, TWA earns revenue by providing contract maintenance services for a number of third parties. In 1997, the Company began reducing such contract maintenance service and expects this reduction to continue through 1997. NORTH AMERICAN ROUTE STRUCTURE TWA's North American operations have a hub-and-spoke structure, with a primarily domestic hub at St. Louis and a domestic-international hub at JFK. The North American system serves 37 states, the District of Columbia, Puerto Rico, Mexico, Canada and the Caribbean. The JFK and St. Louis hub systems are designed to allow TWA to support both its North American and transatlantic connecting flights. In 1996, TWA's North American revenues accounted for approximately 80% of its total revenues. St. Louis TWA is the predominant carrier at St. Louis, with approximately 355 scheduled daily departures serving 77 cities as of March 1997. In 1996, TWA had approximately a 72% share of airline passenger enplanements in St. Louis, while the next largest competitor enplaned approximately 15%. Since 1995, TWA has added service from its St. Louis hub to Jackson, Mississippi, Reno, Nevada, Knoxville, Tennessee, Shreveport, Louisiana and Toronto, Canada, and the Mexican resort cities of Cancun, Puerto Vallarta and Ixtapa/Zihuatenejo. JFK TWA serves 28 domestic and international cities from its JFK hub, with approximately 41 daily departures. JFK is both the Company's and the industry's largest international gateway from North America. The Company offers non-stop flights from JFK to 8 cities in Europe and the Middle East as well as 16 destinations in the U.S. and the Caribbean. Commuter Feed TWA coordinates operation of its commuter feed into the Company's hubs at St. Louis and JFK with Trans States Airlines, Inc. ("Trans States"). Trans States, an independently owned regional commuter carrier, currently operates approximately 168 daily flights into St. Louis and 53 flights into JFK. Trans States' operations are coordinated to feed TWA's North American and international flights. Management believes that these commuter operations are an important source of traffic into the Company's domestic and international route networks. INTERNATIONAL ROUTE STRUCTURE TWA's international operations consist of both nonstop and through service from JFK and St. Louis to destinations in Europe and the Middle East. TWA's international operations are concentrated at JFK, where TWA has built a hub system designed to provide domestic traffic feed for its transatlantic service. International 1 cities served include, Barcelona, Cairo, Lisbon, Madrid, Milan, Riyadh, Rome, Tel Aviv and, until April 18, 1997, Athens from JFK; Paris from JFK and St. Louis; London--Gatwick from St. Louis. On January 13, 1997, as part of its plans to improve the profitability of its international operations, the Company discontinued service on certain European routes, including JFK to Frankfurt and Boston to Paris, as well as non-stop feed service to JFK from several domestic cities. In addition, service to Athens will be discontinued on April 18, 1997. In 1996, TWA's international revenues accounted for approximately 20% of total revenues. RECENT DEVELOPMENTS In March 1997, the Company offered 50,000 Units ("Units"), with each Unit consisting of (i) one 12% Senior Secured Note due 2002 (a "Note"), in the principal amount of $1,000, and (ii) one Redeemable Warrant (a "Warrant") to purchase 126.26 shares of Common Stock at an exercise price of approximately $7.92 per share (the "Offering"). The Notes are secured by a lien on certain assets of the Company, including 1) the Company's beneficial interest in its FAA designated take-off and landing slots at three high-density, capacity- controlled airports 2) currently-owned and hereafter-acquired defined ground equipment of the Company used at certain domestic airports, and 3) all of the issued and outstanding stock of (a) a wholly-owned subsidiary of TWA holding the leasehold interest in a hangar at Los Angeles International Airport and (b) three wholly-owned subsidiaries of TWA holding leasehold interests in gates and related support space at certain domestic airports served by the Company. The Company realized $47.175 million (net of discounts and commissions and estimated expenses) in proceeds from the Offering. The Company intends to use a portion of the proceeds from the Offering (not to exceed approximately $5 million) to release certain of the collateral to be used to secure the Notes from a prior existing lien and the remainder of the proceeds for general corporate purposes. The Offering was made pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Units, Notes and Warrants and underlying shares of Common Stock issuable upon exercise of the Warrants are not registered under the federal and state securities laws. The Company has agreed to use its best efforts to file and, if declared effective, to effect, the registration of the Notes and the Warrants under the Securities Act under certain circumstances. The report of the Company's auditors, KPMG Peat Marwick LLP, with respect to the Company's audited financial statements for the fiscal year ended December 31, 1996, includes an explanatory paragraph that states substantial doubt exists regarding TWA's ability to continue as a going concern due to the Company's recurring losses from operations and limited sources of additional liquidity. The opinion is included herein on page F-2. CHANGES TO MANAGEMENT TEAM Commencing in June 1996, the Company experienced a substantial number of changes in its executive management team. In June 1996, Messrs. Robert A. Peiser and Mark J. Coleman, Chief Financial Officer and Senior Vice President- Marketing, respectively, resigned from the Company. On August 21, 1996, Edward Soule was elected to the position of Executive Vice President and Chief Financial Officer. On September 3, 1996, Roden A. Brandt was elected to the position of Senior Vice President--Planning. On October 24, 1996, Jeffery H. Erickson, President and Chief Executive Officer announced his intention to leave the Company. On December 16, 1996, the Board appointed Gerald L. Gitner, a member of the Board, to serve as Vice Chairman and Acting Chief Executive Officer; David M. Kennedy, a member of the Board, to serve as Acting Executive Vice President and Chief Operating Officer; and William F. Compton, also a member of the Board, to serve as Acting Executive Vice President--Operations. On December 20, 1996, Michael J. Palumbo was appointed as Senior Vice President and Chief Financial Officer, succeeding Mr. Soule, who had resigned from such positions on December 19, 1996. On February 12, 1997, the Board of Directors elected Mr. Gitner to serve as Chairman and Chief Executive Officer. On February 14, 1997, Don Monteath, who had served as the Company's Senior Vice President--Operations, left the Company. On March 13, 1997, Mr. Compton was appointed Executive Vice President--Operations, subject to Board approval. On March 27, 1997, the Board confirmed Mr. Compton's appointment and Stephen M. Tumblin was elected to fill the vacancy on the Board. The Company does not believe that such changes have unduly affected its on going operations or implementation of the Company's business strategy, although there can be no assurance that such changes will not have a material adverse effect on future operations. 2 BUSINESS STRATEGY In 1994, the Company began implementing a strategic repositioning which, in combination with the financial restructuring, cost savings and operating efficiencies achieved as a result of the '95 Reorganization, was designed to improve TWA's overall operating and financial performance. While the Company experienced improvements in its operating performance in 1995 and the first half of 1996 as a result of implementing this strategy, the Company's operating results and cash balances deteriorated significantly during the second half of 1996. Material factors contributing to this deterioration included: (i) an overly aggressive expansion of TWA's capacity and planned flight schedule, particularly during the summer season, which forced the Company to rely disproportionately on lower-yielding feed traffic and bulk ticket sales to fill the increased capacity of its system; (ii) the delayed delivery of four older 747s intended to increase capacity for incremental international summer operations; and (iii) unexpected maintenance delays due to the capacity increase, higher levels of scheduled narrow-body heavy maintenance and increased contract maintenance performed for third parties. These factors caused excessive levels of flight cancellations, poor on-time performance, increased pilot training costs and higher maintenance expenditures. In addition, the crash of TWA Flight 800 on July 17, 1996 distracted management's attention from core operating issues and led to lost bookings and revenues. Finally, the Company experienced a 27.6% increase in fuel costs in 1996, driven primarily by a 22.3% increase in the average fuel price paid per gallon during the year. In late 1996, management began to implement a series of actions intended to correct TWA's performance difficulties and refocus the Company's strategy. Steps taken to improve operating integrity included reducing the near-term flight schedule to more closely match available aircraft and terminating an unprofitable aircraft maintenance contract with the U.S. government in order to increase resources available to service TWA aircraft in maintenance backlog. The Company has also begun to restructure its operations at the JFK hub by (i) eliminating certain unprofitable international routes such as JFK to Frankfurt and, as of April 18, 1997, Athens; (ii) eliminating certain low-yielding domestic feed service into JFK; and (iii) consolidating for the near term most of its JFK operations from two terminals into a single terminal in order to reduce operating costs, increase facility utilization and improve passenger service. The Company believes that operating and financial results at JFK will be improved by the Company's recently announced plans to accelerate retirement of its remaining 747 and L-1011 fleets to year-end 1997. Such aircraft will be replaced by smaller, more efficient new or later-model used 757s, 767s and MD- 80s, which management believes will operate more reliably and be more appropriately sized to the demands of cities served, resulting in higher load factors and improved yields due to less dependence on low-yielding feed traffic. In addition, these newer, twin-engine, two-pilot aircraft should provide efficiencies in fuel, flight crew and maintenance expenses. Finally, the Company believes that its focus on improving operational integrity and product quality will allow TWA to further leverage its existing hub dominance in St. Louis by attracting a greater share of higher yielding connecting traffic. Management also believes that additional opportunities exist at St. Louis to utilize existing capacity more efficiently and expand service frequency to certain major domestic cities. The key elements of the Company's ongoing business strategy are outlined below. Route Structure Optimization The Company is optimizing its route structure by redeploying assets to markets in which it believes it has a competitive advantage and limiting its commitments in other markets. Domestically, the Company believes the greatest opportunities for improved operating results will come from focusing additional resources on its St. Louis hub in order to leverage its strong market position. The Company already dominates operations at St. Louis, with approximately 72% of total 1996 enplanements. In addition, the Company enjoys certain advantages in the Midwest due to its established route system, strong brand identity and concentrated presence in that market. Because St. Louis is located in the center of the country, it is well-suited to function as an omni-directional hub for both north-south and east-west transcontinental traffic. Therefore, TWA believes it is better positioned to offer more frequencies and connecting opportunities to many travelers in its key Midwestern markets than competing airlines. To capitalize on these advantages, the Company increased its number of daily departures at St. Louis from 229 in 1993 to 335 in 1996. In addition, beginning in 1995, the Company has consolidated domestic routes in order to strengthen its position further, and has increased 3 service to the north and south with markets to Jackson, Mississippi, Knoxville, Tennessee, Shreveport, Louisiana, and Toronto, Canada, and the Mexican resort cities of Cancun, Ixtapa/Zihuatenejo and Puerto Vallarta. Internationally, the Company's operations are concentrated at JFK. The Company's strategy is to reduce and streamline international operations to focus on business markets that it believes can support non-stop service and to maximize utilization of the JFK facility. As a result, in 1994 and 1995, the Company eliminated service to several European cities including Berlin, Zurich and Vienna and reduced its service to and from Paris. In the summer of 1996, the Company increased service to several European leisure destinations through the planned addition of four 747 aircraft. In addition, during 1996 the Company increased service from JFK to the Caribbean, Florida and certain other domestic cities to increase utilization of the Company's JFK facility, particularly during off-peak time periods, and to provide feed traffic for its international operations. Implementation of these plans resulted in significant load factor increases and improvement in RASM during the early months of 1996. However, as TWA moved into the peak summer months, delays occurred in the expected delivery of the additional 747 aircraft, requiring daily rescheduling of aircraft and resulting in considerable disruption in the domestic feed schedule. In addition, the crash of TWA Flight 800 on July 17, 1996 diverted management's attention, contributing to additional deterioration of schedule integrity and impacting the public perception of TWA. Management believes that these factors contributed to deterioration in load factor and yield on international and domestic JFK feed flights. In addition, the Company relied disproportionately on lower-yield feed traffic to fill additional wide-body seats. As a result, after an extended series of evaluation sessions with union officials and advisors, the Company embarked on a program in late 1996 to improve yields and load factors, reduce costs and otherwise increase efficiencies by (i) accelerating the replacement of all 747 and L-1011 aircraft with smaller equipment, (ii) reducing low-yield domestic JFK feed service, (iii) limiting or eliminating historically unprofitable international routes and (iv) consolidating most JFK operations for the near term from two terminals into a single terminal facility. In addition to its own international operations, TWA is exploring the possibility of entering into marketing and code-share alliances with foreign carriers. These alliances, if consummated, would allow the Company to provide its passengers with extended service to foreign destinations not served directly by the Company, while feeding TWA's North American operations from these foreign destinations. Fleet Upgrade and Simplification TWA's fleet modernization plans seek to realize operating cost savings by replacing a number of older, less efficient aircraft with more modern, technologically advanced, twin-engine, two-pilot aircraft. New flight equipment acquisition plans initiated in 1996, are intended to achieve a decrease in operating and maintenance costs as the older, heavier maintenance aircraft are phased out and replaced by newer aircraft. The Company's plans contemplate a phase out of two older aircraft types intended to simplify the Company's fleet structure, thereby reducing the number of aircraft types to decrease overall crew training and aircraft maintenance costs (although resulting in increased short-term transition crew training costs). Additional efficiencies should be realized through increased standardization of aircraft parts, supplies and cabin equipment that must be inventoried throughout TWA's system. Despite the higher capital costs associated with owning or leasing new and later model aircraft, the Company believes that corresponding reductions in operating costs should result in a lower overall cost per seat mile. Management believes this initiative offers the potential for greater proportionate benefit to TWA than perhaps any other major U.S. airline. In early 1997, the Company announced plans to accelerate retirement of its 14 remaining 747s (four-engine, three-pilot wide-body jets with an average age of approximately 25.6 years) and its 11 remaining L-1011s (three-engine, three- pilot wide-body jets with an average age of approximately 22.6 years). These aircraft will be replaced by more efficient twin-engine, two-pilot new or later-model used 757, 767 and MD80 aircraft, which are more appropriately sized to meet the needs of TWA's mid-continent St. Louis hub and smaller JFK operation, thereby reducing the Company's dependence on low-yield feed traffic and bulk ticket sales. Such aircraft should also permit TWA to more effectively utilize its yield management system. In 1996, TWA entered into agreements with a major operating lessor to lease 10 new 757s with deliveries in 1996 and 1997 and with the aircraft manufacturer to purchase an additional 10 new 757 aircraft, with deliveries that commenced in February 1997. The Company also acquired the right, subject to certain conditions, to purchase up to 20 additional new 757 4 aircraft from the manufacturer. TWA is also in discussions with certain other lessors to lease other aircraft as part of TWA's fleet modernization program. Also in 1996, the Company entered into an agreement with the manufacturer to acquire 15 new MD-83s. The long-term leasing arrangement provides for delivery of the aircraft between the second half of 1997 and 1999. Finally, the Company outfitted thirty of its DC9-30 aircraft with "hush-kits" in order to bring such aircraft into compliance with Stage 3 requirements of the Noise Act. The Company intends to "hush-kit" additional DC9-30, DC9-40 and DC9-50 aircraft in 1997 as the FAA approves hush-kit installations for these aircraft. See "-- Regulatory Matters--Noise Abatement." While the Company is seeking financing for certain of its planned capital expenditures, a substantial portion of such expenditures is expected to utilize internally generated funds. The inability to finance or otherwise fund such expenditures could materially adversely affect the ability of the Company to implement its strategic plan. Customer Service; Travel Agent Commissions In recent years, the Company has focused on improving the quality of its air travel product and the service provided to passengers by TWA personnel. TWA has undertaken a number of service initiatives which it believes had begun building brand loyalty and increasing among existing customers its market share of value-conscious business travelers and price-conscious leisure travelers. In 1996, however, the Company's operating difficulties described elsewhere herein caused increased flight cancellations, poor on-time performance and a general deterioration in product quality. The crash of TWA Flight 800 also had a negative impact on the public perception of TWA. The Company believes that the steps taken to restore operating integrity will result in improvements in TWA's product quality and customer service. Ongoing initiatives include: Focus on Business Traveler. Based on customer research, the Company has targeted value-conscious business travelers and is therefore tailoring its marketing and advertising efforts to emphasize the Company's positioning as a full-service, high-value airline providing service to popular business destinations throughout the U.S. The Company believes that its convenient flight schedules and connections, as well as its centrally located hub at St. Louis, are important in providing service which is attractive to these travelers. The Company also offers its Frequent Flight Bonus ("FFB"(R)) program in order to build customer loyalty among business travelers. In March 1995, TWA began implementation of Trans World One SM ("Trans World One") service in international and transcontinental non-stop markets. Trans World One is aimed at attracting business travelers by providing improved premium class service at fares comparable to its competitors' business class service. To implement Trans World One, TWA converted its wide-body fleet aircraft from a traditional three-class configuration to a two-class configuration, with a special emphasis on improvements to the premium class cabin, including new seats with increased recline capability and enhanced meal service and wine selections. Leisure Traveler. Within the leisure travel market, TWA has positioned itself as a high-quality, low-fare carrier. Management believes that based upon TWA's lower costs and its extensive off-peak flight schedule, the Company is in a strong position to compete for price-conscious leisure travelers who seek a full-service product at prices competitive with other carriers offering "no-frills" service. To capitalize on its strengths in this area, the Company's marketing and advertising efforts targeted at this segment will continue to emphasize TWA's quality image and strong name recognition together with the airline's broad route network serving popular leisure destinations. The Company has recently commenced service to additional leisure destinations in Mexico and the Caribbean, and has entered into marketing agreements with a number of major international tour packagers. Travel Agent Commissions. TWA pays the full traditional 10% commission on tickets for domestic transportation on TWA sold by independent travel agents and has removed the cap of $50 and $25 per domestic round-trip and one-way tickets, respectively, which it and most other major airlines imposed in 1995. Although the Company can not quantify the current or potential future impact of this decision, the Company believes the payment of full commissions is a positive factor in maintaining and improving its long-term relationships with such travel agents. See "--Travel Agencies--Travel Agent Commissions." Labor Relationship Management believes TWA has a generally cooperative relationship with its employees, including employees represented by trade unions. At various times, the Company's employees have demonstrated significant loyalty and commitment to TWA's future by, among other things, agreeing to various wage and work rule concessions to improve productivity in connection with the '93 and '95 Reorganizations. As a result of these 5 agreements (i) the Company's employees received approximately 30% of the voting equity of TWA outstanding immediately following the '95 Reorganization and (ii) certain corporate governance provisions were effected, including provision of the right of employees represented by ALPA, the IAM and IFFA, who then together constituted approximately 84% of TWA's total employees, to elect four of the Company's 15 directors. On March 6, 1997, the IAM assumed representation of the Company's flight attendants formerly represented by IFFA, and IFFA was decertified. Union and non-union employees are also eligible under the employee stock incentive plan ("ESIP") to increase their level of stock ownership through grants and purchases of additional shares over a five year period commencing in 1997. For information concerning the ESIP, see "--Employees." Each of the Company's union contracts becomes amendable in September 1997, and negotiations have begun with respect to one of the contracts. While management believes that the negotiation process for the new contracts will result in extended contracts mutually satisfactory to the parties, there can be no assurances as to the ultimate timing or terms of any such new contracts. As the Company's financial resources are not as great as those of most of its competitors, any substantial increase in its labor costs as a result of any new labor agreements or any cessation or disruption of operations due to any strike or work action could be particularly damaging to the Company. The Company believes that the status of its employees as substantial stockholders and participants in corporate governance and the Company's efforts to involve employees in developing and achieving the Company's goals will result in continued dedication to the efforts to improve the Company's financial and operational performance. As part of the Company's efforts to foster employee participative management concepts throughout the organization, several employee-led initiatives were begun in 1994 and continue to be developed and implemented. For example, the Productivity Task Force, is designed to focus upon broader cost savings opportunities and is comprised of both labor and management members. Such initiatives are supported by the Management/Labor Advisory Task Force, consisting of union leaders, the Chairman and Chief Executive Officer and other senior officers of the Company. This task force meets monthly to discuss these and other initiatives to demonstrate joint commitment to reengineering efforts. Investment in Technology Management believes significant opportunities exist for the Company to increase revenues and reduce costs by investing in available technology that provides the Company and its employees with the information necessary to operate its business more effectively and to improve customer service. The Company has recently taken a significant step forward in this area by installing a new computerized yield management system. The need to build a historic database for such yield management system has delayed full realization of benefits expected from such system; however, later in 1997 when such database is more complete, this system is expected to allow the Company to improve significantly its ability to estimate demand flight-by-flight for each class of fares and manage the allocation of seats accordingly. Given TWA's prior lack of a computerized yield management system, the Company's management believes that full implementation of this new system will offer significant opportunities for revenue improvement. In 1996, the Company implemented a "QIK-Res" system at its reservation center in Norfolk, Virginia. QIK-Res is a front-end reservations software program designed to improve customer service. Management believes the system has demonstrated its effectiveness at Norfolk and intends to pursue the possibility of extending the system to its reservation centers in Los Angeles and Chicago. Cost and Efficiency Initiatives Management believes that maintaining a low cost structure is crucial to the Company's business strategy. TWA's airline operating cost per ASM (adjusted for subsidiaries, restructuring and earned stock contributions) increased from 8.12c in 1995 to 8.76c in 1996. The primary contributors to this increase were increases in fuel rates, maintenance costs and costs associated with flight crew training. Despite this increase, management believes that TWA's operating costs remain below the average of the six largest full service carriers. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company intends to continue to pursue, among other things, route optimization, increased labor efficiencies, fleet modernization and rationalization, and investment in technological advances in order to improve operating 6 results. The Company has also increased to 12 the number of "banks" of flights operating into its St. Louis hub to increase further the utilization of its aircraft. TWA has installed a new ticketless system and will begin testing automatic ticket machines in selected markets in the second quarter of 1997. In mid-1996, the Company initiated programs allowing customers to book reservations directly via on-line network systems, and during the second quarter of 1997, TWA expects to begin to provide bookings via the Internet. It is expected that distribution costs will be reduced as travelers use these on- line booking vehicles and ticketless systems. In addition, TWA is implementing a number of programs to reduce computer reservation systems booking fees, both internally and from travel agents. TWA will continue to explore other opportunities to reduce costs and improve efficiency in the areas of aircraft maintenance, airport operations, purchasing, distribution, ticket delivery, food service, cargo delivery operations and administrative functions. TRAVEL AGENCIES Travel Agent Commissions Consistent with most other airlines, tickets sold for travel on TWA are sold by travel agents as well as directly by the Company. During 1996, approximately 78% of all tickets sold for travel on TWA were sold by travel agents. In the domestic market, TWA generally pays travel agent commissions at the rate of 10% on all domestic fares. In the international market, TWA pays 11% on international tickets issued in the U.S. and 9% for tickets issued outside the U.S. Carriers (including TWA) may also pay additional commissions to travel agents as incentive for increased volume or other business directed to the carrier. Travel Agency Automation Greater than 90% of all travel agencies in the U.S. obtain their airline travel information through access to Global Distribution Systems (also referred to as Computer Reservation Systems or "CRS"). Such systems are used by travel agents to make travel reservations including airline, hotel, train, car and other bookings and allow travel agents to issue airline tickets and boarding passes. One such system is WORLDSPAN, which is owned 25%, 32%, 38% and 5% by affiliates of TWA, Delta Air Lines, Northwest Airlines, and ABACUS Distribution Systems Pte. Ltd, respectively. Management believes that the distribution of its airline products through WORLDSPAN is a key factor to the success of the Company's future operations. Systems such as WORLDSPAN have expanded distribution to the consumer via the Internet, on-line booking products, corporate and group booking products. TWA believes that its 25% ownership of WORLDSPAN assures new distribution opportunities. FREQUENT FLIGHT BONUS PROGRAM TWA initiated its FFB Program in May 1981. Frequent flyer programs like TWA's FFB Program have been adopted by most major air carriers and are considered the number one marketing tool for developing brand loyalty among travelers and accumulating demographic data pertaining to business flyers. TWA's FFB Program rewards its members with mileage credit for travel on TWA and for purchasing goods and services offered by various travel and non-travel related businesses that participate in the FFB Program including other airlines. Currently, FFB Program members receive mileage credit for airline travel on Air India, Alaska Airlines, Ladeco Airlines, Philippines Airlines and Trans States. FFB Program members may also receive mileage credit pursuant to exchange agreements maintained by TWA with a variety of entities, including hotels, car rental firms, credit card issuers and long distance telephone service companies. TWA accounts for its FFB Program under the incremental cost method, whereby travel awards are valued at the incremental cost of carrying one additional passenger. Such costs are accrued when FFB Program participants accumulate sufficient miles to be entitled to claim award certificates. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, reservations, communications, liability insurance and denied boarding compensation expenses expected to be incurred on a per passenger basis. No profit or overhead 7 margin is included in the accrual for incremental costs. No liability is recorded for airline, hotel or car rental award certificates that are to be honored by other parties because there is no cost to TWA for these awards. At December 31, 1995, FFB participants had accumulated mileage credits for approximately 660,752 free awards, compared with accumulated mileage credits for approximately 751,689 awards at December 31, 1996. Because TWA expects that some award certificates will never be redeemed, the calculations of the accrued liability for incremental costs at December 1995 and 1996 were based on approximately 70% and 71.5%, respectively, of the accumulated credits. Mileage for FFB 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. The accrued liability at December 31, 1995 was approximately $19.0 million compared to approximately $20.4 million at December 31, 1996. TWA's customers redeemed awards for free travel representing approximately 6.3%, 6.0% and 4.5% of TWA's RPMs in 1994, 1995 and 1996, respectively. AIRCRAFT FUEL TWA's worldwide aircraft fuel requirements are met by in excess of twenty different suppliers. The Company has contracts with some of these suppliers, the terms of which vary as to price, payment terms, quantities and duration. The Company also makes incremental purchases of fuel based on price and availability. To assure adequate supplies of jet fuel and to provide a measure of control over price, the Company trades fuel, ships fuel and maintains fuel storage facilities to support key locations. Petroleum product prices, including jet fuel, are primarily driven by crude oil costs. The market's alternate uses of crude oil to produce petroleum products other than jet fuel (e.g., heating oil and gasoline) as well as the adequacy of refining capacity and other supply constraints affect the price and availability of jet fuel. Changes in the price or availability of fuel could materially affect the financial results of the Company. During 1996, aircraft fuel prices increased significantly. The following table details TWA's fuel consumption and costs for the three years ended December 31, 1994, 1995 and 1996:
YEAR ENDED DECEMBER 31, --------------------------- 1994 1995 1996 -------- -------- ------- Gallons consumed (in millions).................. 852.2 804.2 838.9 Total cost(1) (in millions)..................... $477.6 $458.6 585.2 Average cost per gallon (cents)................. 0.56 0.57 0.70 Percentage of operating expenses................ 13.0% 13.9% 15.6%
- - -------- (1) Excludes into-plane fees. COMPETITION Since the passage of the Airline Deregulation Act of 1978, the airline industry has been characterized by intense competition, consolidation of existing carriers and the advent of numerous low-cost low-fare new entrants. A number of airlines have filed for bankruptcy and/or ceased operations. In addition, several carriers have introduced or announced plans to introduce low- cost, short-haul service, which may result in increased competition to TWA. Airlines offer discount fares, a wide range of schedules, frequent flyer mileage programs and ground and in-flight services as competitive tools to attract passengers and increase market share. Intense price competition has accelerated the efforts of airline managements to reduce costs and improve productivity in order to withstand greater levels of discounting. TWA's services are subject to varying degrees of competition, depending in part on whether such services are operated over domestic or international routes. Because of the relative ease with which U.S. carriers can enter new markets, TWA's domestic services are subject to increases or decreases in competition from other air carriers. Changes in intensity of competition in the deregulated domestic environment cannot be predicted. 8 The level of competition in international markets is normally governed by the terms of bilateral agreements between the U.S. and the foreign countries involved. Many of the bilateral agreements permit an unlimited number of carriers to operate between the U.S. and the foreign country. Competition in some international markets is limited to a specified number of carriers and flights on a given route by the terms of the air transport agreements between the U.S. and the foreign country. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--General." The airline industry is subject to substantial price competition as U.S. airlines are free to determine domestic pricing policies without government regulation. While the DOT retains authority over international fares, which are also subject to the jurisdiction of the governments of the foreign countries being served, the Company generally has substantial discretion with respect to its international pricing policies. While DOT authority is now required before any person may operate as an air carrier within or to and from the U.S., the Airline Deregulation Act of 1978 and the International Air Transportation Competition Act of 1979 substantially decreased previous governmental restrictions in this area. In the case of domestic operations, any person who is found to be fit, willing and able may operate as an air carrier between any two points in the U.S. Thus, TWA is able to enter new routes or suspend existing routes within the U.S. without seeking regulatory approval, and other airlines are similarly free to enter or leave TWA's domestic markets. EMPLOYEES As of December 31, 1996 the Company had approximately 25,092 full-time employees (based upon full-time equivalents which include part-time employees). Of these, approximately 82% were represented by three principal unions: ALPA, IAM and IFFA. On March 6, 1997, the IAM was certified to replace IFFA as the bargaining representative of the Company's flight attendants. During 1994, the Company entered into the '94 Labor Agreements with ALPA, IAM and IFFA amending then existing labor agreements with each such union to, among other things, (i) eliminate certain raises scheduled to take effect in 1994 and 1995, thereby continuing certain wage and benefit concessions granted to the Company in the '92 Labor Agreements, (ii) modify existing work rules and benefit packages, and (iii) eliminate contractual "snapback" provisions contained therein which would have automatically restored wages to pre- concessionary levels for purposes of future contract negotiations. The terms of the IFFA contract remain in effect, although the flight attendants are now represented by the IAM. In addition, the Company implemented a number of similar savings initiatives with respect to domestic non-union and management employees, primarily through reducing headcount, altering benefit packages, and eliminating certain planned restorations of previous wage concessions. In exchange for the substantial cost savings realizable by the Company as a result of the foregoing, as described in more detail below, TWA (i) agreed to certain wage increases and productivity payments to its employees, (ii) issued certain equity securities of the Company to its employees, (iii) agreed to make certain future grants of equity securities and to permit such employees an opportunity to purchase certain additional securities at a discount, and (iv) effected certain amendments to the Company's Certificate of Incorporation and By-laws with respect to the election of certain directors and director voting requirements in the event of certain specified corporate actions. As part of the '94 Labor Agreements, TWA agreed with its unionized employees to a series of semi-annual 1% wage increases commencing in May 1995 and continuing through August 31, 1997 (the last such wage increase to equal 3% in the case of employees represented by ALPA and IFFA; the IAM will receive a 1% wage increase and a 2% contribution to its retirement plan on August 31, 1997). In addition to such scheduled wage increases, TWA agreed to make certain annual productivity payments to its unionized employees in the event the Company achieves certain operating profit goals set forth in the agreement. If the Company achieves such goals (established at various levels between $50 million and $200 million annually), employees will receive productivity payments in an amount to be determined based upon a sliding scale from 1% to 4% of employees' W-2 wages. Any productivity payments resulting from 1996 operations are required to be converted 9 into wage increases. Similarly, the Company implemented comparable wage increases and productivity incentives to its non-union (including management) employees. On the '95 Effective Date, TWA issued to certain trusts established for the benefit of its unionized employees shares of Employee Preferred Stock; such stock being issued in three separate series designated the ALPA Preferred Stock, the IAM Preferred Stock and the IFFA Preferred Stock. Except for certain rights with respect to the election of directors, the Employee Preferred Stock has rights substantially identical to the Common Stock. TWA also issued an aggregate of 1,026,694 shares of Common Stock to a trust established for the benefit of TWA's non-unionized employees. The value of shares issued to the Company's non-union employees was intended to reflect the estimated value to the Company of the concessions granted by employees. The equity securities issued on the '95 Effective Date resulted in the employees of the Company initially owning approximately 30% of the then outstanding Common Stock and Common equivalents of the Company. In recognition of the fact that as a result of the '95 Reorganization, the percentage of the Company's stock owned by the Company's employees was substantially reduced, the Company adopted as of the '95 Effective Date the ESIP pursuant to which the Company would commencing in 1997 grant to certain trusts established for the benefit of its union and non-union employees certain additional shares of Common Stock and Employee Preferred Stock. Under the ESIP, in any year in which the market price of the Common Stock exceeds certain target prices, the Company has agreed to issue shares in amounts sufficient to increase the aggregate percentage ownership of the employees by the following percentages of the then outstanding shares of Common Stock and Common Stock equivalents: 2.0% (1997), 1.5% (1998), 1.5% (1999), 1.0% (2000), 1.0% (2001) and 1.0% (2002). The ESIP also grants to the employee trusts a right to purchase, on a quarterly basis, additional shares ("Stock Purchase Shares") in amounts of up to an aggregate of 2% of the then outstanding Common Stock and Employee Preferred Stock. Stock Purchase Shares may be purchased at 80% of the then market value of the Common Stock. In the event of a merger, consolidation or sale of all or substantially all of the assets of the Company, the ESIP provides for certain limited acceleration rights with respect to the stock grants and employee stock purchase arrangements. In addition to the scheduled grants and purchase rights described above, the ESIP provides for the Company to accelerate grants to be made in 2001 and 2002, if the Company issues additional Common Stock at a price equal to or in excess of $11 per share which results in aggregate proceeds to the Company in excess of $20 million. The ESIP also provides that if additional shares are distributed following the '95 Effective Date in respect of the '95 Reorganization, employees will be entitled to receive an additional number of shares of Common Stock and Employee Preferred Stock such that the employees will retain the same level of ownership. Union representatives and the Company have tentatively agreed that the number of shares of Employee Preferred Stock and Common Stock to be issued pursuant to the ESIP is 525,856. In addition, if the additional ESIP shares are not issued to the employees in July 1997, an additional 405,750 shares of Employee Preferred Stock and Common Stock will be issued, subject to a future credit, in that amount in the event additional shares are granted pursuant to the ESIP. The issuance of the additional shares is subject to approval by the Company's Board of Directors. The number of shares of Employee Preferred Stock outstanding at December 31, 1996 does not reflect any such additional shares. In addition to certain amendments required to effect the recapitalization of the Company, on the '95 Effective Date, TWA further amended its Certificate of Incorporation and By-laws to (i) permit certain employees represented by ALPA, the IAM and IFFA to elect four of the Company's 15 directors (the "Employee Directors"), and (ii) provide that certain extraordinary corporate actions, including mergers, sales of all or substantially all of the Company's assets or certain routes or any filing seeking protection under the bankruptcy laws, must be approved by at least six directors, including each of the Employee Directors. The "94 Labor Agreements were three year agreements but become amendable after August 31, 1997. Negotiations on a new collective bargaining agreement with the IAM covering approximately 70% of the Company's employees, including its flight attendants, commenced in February 1997 and are currently ongoing. Negotiations with ALPA are expected to begin in the second quarter of 1997. Under the RLA workers whose 10 contracts have become amendable are required to continue to work under the "status quo" (i.e., under the terms of employment antedating the amendable date) until the RLA's procedures are exhausted. Under the RLA, the Company and its unions are obligated to continue to bargain until agreement is reached or until a mediator is appointed and concludes that negotiations are deadlocked and mediation efforts have failed. The mediator must then further attempt to induce the parties to agree to arbitrate the dispute. If either party refuses to arbitrate, then the mediator must notify the parties that his efforts have failed and, after a 30-day cooling-off period, a strike or other direct action may be taken by the parties. In the opinion of management, the Company's financial resources are not as great as those of most of its competitors, and, therefore, any substantial increase in its labor costs as a result of any new labor agreements or any cessation or disruption of operations due to any strike or work action could by particularly damaging to the Company. See "-- Employees." REGULATORY MATTERS Slot Restrictions The Company's ability to increase its level of operations at certain domestic cities currently served is affected by the number of slots available for takeoffs and landings. At JFK, LaGuardia, Chicago O'Hare and Washington National, which have been designated "High Density Airports" by the FAA, there are restrictions on the number of aircraft that may land and take off during peak hours. In the future, these take-off and landing time slot restrictions and other restrictions on the use of various airports and their facilities may result in further curtailment of services by, and increased operating costs for, individual airlines, including TWA, particularly in light of the increase in the number of airlines operating at such airports. On April 1, 1986, the FAA implemented a final rule relating to allocated slots at the High Density Airports. This rule, as since amended, contains provisions requiring the relinquishment of slots for nonuse and permits carriers, under certain circumstances, to sell, lease or trade their slots to other carriers. TWA does not anticipate losing any slots as a result of these new rules. The higher use rates required by these rules, however, increase the risk that TWA may lose slots in the future because of nonuse and decrease TWA's ability to adjust its flight schedules at the High Density Airports. Most international points served by TWA also are slot-controlled. Control over International Routes TWA's international certificates are granted by the DOT for indefinite or fixed-term periods, depending on the route. TWA is authorized to provide transatlantic service from major cities in the U.S. to points in Europe, North Africa, the Middle East and Asia. Some of these authorized routes are not currently served by TWA. Many of the European markets served by TWA are "limited entry" markets in which, as a result of agreements between the United States and foreign governments, TWA has traditionally competed with a limited number of other carriers. During the past several years, however, the U.S. government has encouraged competition in international markets and entered into bilateral agreements with various foreign governments that provide for expanded exchanges of routes and traffic rights, reduction of governmental controls over fares and avoidance of limits on capacity and charter services. Competition in international markets has increased dramatically over the past several years as major U.S. carriers have initiated and/or continued to expand their international operations. Foreign flag carriers have continued to expand service and the DOT has indicated its support for further expansion of opportunities of foreign carriers to serve new points in the U.S. No assurance can be given that TWA will continue to have the advantage of all the "limited entry" markets in which it currently operates or that additional carriers will not be permitted to operate in one or more of these markets or that TWA in general will not face substantial unexpected competition. Competition in the international market is further complicated by the fact that pricing levels on some transatlantic routes are influenced by subsidies that certain foreign carriers receive from their governments and by the presence of smaller, low- cost carriers. Certain portions of TWA's transatlantic route authority have been granted on a fixed-term basis. TWA's right to carry local traffic between London and Frankfurt expired in April 1994. In addition, on May 4, 1993, the bilateral air transport agreement between the U.S. and France lapsed. Absent a bilateral agreement, the U.S. and 11 France are operating on a system of comity and reciprocity. Under this regime, carriers are permitted to maintain historical levels of service, but few or no new services are permitted. Cessation of service to any authorized markets from France may cause such underlying authority to terminate. Any reduction in U.S. carrier access to France could have an adverse impact on TWA's transatlantic operations. TWA's route authority between St. Louis and London- Gatwick has expired. TWA has applied for renewal of its St. Louis-Gatwick authority and continues to operate such route pending a determination of its application. While no assurance can be given, TWA believes that the St. Louis- Gatwick authority will be renewed. The operations of TWA's international system will require continued approval by the U.S. government as well as permission or authorization from the governments of the respective countries served and compliance with the laws and regulations of those countries. These authorizations, permits and rights vary considerably in their terms, particularly as to the imposition of restrictive conditions on U.S. airlines. Other DOT/FAA Regulations The DOT has the authority to regulate competitive practices, advertising and other consumer protection matters such as on-time performance, smoking policies, denied boarding, baggage liability and CRSs provided to travel agents. With respect to foreign air transportation, the DOT may approve agreements between air carriers and grant antitrust immunity to those agreements. The DOT must also approve the transfer between U.S. carriers of international route certificates. The Department of Justice has the authority to approve mergers and interlocking relationships. Noise Abatement The Noise Act provides for a reduction in aircraft noise levels by commercial aircraft. Under the Noise Act, air carriers were permitted to elect to comply with the transitional requirements of the Noise Act at December 31, 1994, either by (i) phasing out, or retrofitting with noise abatement equipment, certain older aircraft known as Stage 2, or (ii) phasing in quieter aircraft, known as Stage 3. Air carriers who elected to comply by phasing out or retrofitting Stage 2 aircraft were required to phase out or retrofit at least 25% of a specified 1990 base level of such aircraft by December 31, 1994 and by at least 50% by December 31, 1996. TWA elected to comply with the final Noise Act requirements by adopting the Stage 2 aircraft phase out/retrofit option, and had reduced its specified base level of Stage 2 aircraft by 25% at December 31, 1994 and by 50% at December 31, 1996. The Company will be required to reduce its specified base level of Stage 2 aircraft by at least 75% by December 31, 1998 and 100% by December 31, 1999 or alternatively, that 75% of its total fleet meet Stage 3 requirements by December 31, 1998 and 100% on December 31, 1999. As of December 31, 1996, 122, approximately 64% of TWA's active fleet, met the Stage 3 standards. TWA's ability to comply with the federal requirements within the time specified, or with more restrictive local noise restrictions, by acquiring newer aircraft and by phasing out or retrofitting older aircraft that are not in compliance with the Stage 3 standards, will depend upon its ongoing financial condition, its ability to renegotiate existing leases for such aircraft and its ability to obtain financing to acquire the requisite number of Stage 3 aircraft or retrofit kits. Although TWA has a plan to meet the federal requirements, and has already acquired a number of Stage 3 aircraft while phasing out several Stage 2 aircraft, there can be no assurance that TWA will be able to satisfy all applicable noise level requirements. Numerous airports have imposed restrictions such as curfews, airplane noise levels, mandatory flight paths and runway restrictions, which limit the ability of TWA and other carriers to increase services at such airports. Other jurisdictions are considering similar measures. While the Company has historically had the flexibility to schedule around these restrictions, there can be no assurance that the Company will continue to be able to work around these restrictions. The Port Authority of New York and New Jersey is considering a phaseout of Stage 2 aircraft on a more accelerated basis than that of the FAA requirement, a prohibition on additional Stage 2 flights and an expanded nighttime curfew. The FAA and air carriers, including TWA, have stated their opposition to these proposals. At this time, TWA cannot predict whether the proposals will be implemented or, if so, the timing or effect on TWA of any such implementation, which would depend on the extent to which TWA's aircraft then being used in the affected airports meet the Stage 3 requirements as well as the timing of TWA's flights. 12 Labor The RLA governs the labor relations of employers and employees engaged in the airline industry. Comprehensive provisions are set forth in the RLA establishing the right of airline employees to organize and bargain collectively along craft or class lines and imposing a duty on air carriers and their employees to exert every reasonable effort to make and maintain collective bargaining agreements. See "--Employees." The RLA contains detailed procedures which must be exhausted before a lawful work stoppage can occur. Pursuant to the RLA, TWA has collective bargaining agreements with four domestic unions representing four separate employee groups. Aging Aircraft Maintenance The FAA issued several ADs in 1990 mandating changes to maintenance programs for older aircraft to ensure that the oldest portion of the nation's fleet remains airworthy. The FAA required that these older aircraft undergo extensive structural modifications prior to the later of the accumulation of a designated number of flight cycles or 1994 deadlines established by the various ADs. Most of the Company's aircraft are currently affected by these aging aircraft ADs. The Company monitors its fleet of aircraft to ensure safety levels which meet or exceed those mandated by the FAA. In 1995 and 1996, TWA spent approximately $2.6 million and $3.4 million, respectively, to comply with aging aircraft maintenance requirements. Based on information currently available to TWA and its current fleet plan, TWA estimates that costs associated with complying with these aging aircraft maintenance requirements will aggregate approximately $18.7 million through 2000. These cost estimates assume, among other things, that newer aircraft will replace certain of TWA's existing aircraft and as a result, the average age of TWA's fleet will be significantly reduced. There can be no assurance that TWA will be able to implement fully its fleet plan. Safety TWA is subject to FAA jurisdiction with respect to aircraft maintenance and operations, including equipment, dispatch, communications, training, flight personnel and other matters affecting air safety. The FAA has the authority to issue new or additional regulations. To ensure compliance with its regulations, the FAA requires the Company to obtain operating, airworthiness and other certificates which are subject to suspensions or revocation for cause. In addition, a combination of FAA and Occupational Safety and Health Administrative regulations on both federal and state levels apply to all of TWA's ground-based operations. Passenger Facilities Charges During 1990, Congress enacted legislation to permit airport authorities, with prior approval from the FAA, to impose passenger facility charges ("PFCs") as a means of funding local airport projects. These charges, which are intended to be collected by the airlines from their passengers and remitted to the airports, are limited to $3.00 per enplanement and to no more than $12.00 per round trip. As a result of competitive pressure, the Company and other airlines have been limited in their abilities to pass on the cost of the PFCs to passengers through fare increases. Environmental The Company is subject to regulation under major environmental laws administered by state and federal agencies, including the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980 and the Resource Conservation and Recovery Act. In some locations there are also county and sanitary sewer district agencies which regulate the Company. The Company believes that it is in substantial compliance with applicable environmental regulations. See, however, "Item 3. Legal Proceedings--Other Actions." Foreign Ownership of Shares The Federal Aviation Act of 1958 generally prohibits non-U.S. citizens from owning more than 25% of the voting interest in U.S. air carriers, including the Company. 13 CORPORATE REORGANIZATIONS During the early 1990s, the U.S. airline industry, including the Company, experienced unprecedented losses, which were largely attributable to, among other things, the Persian Gulf War (which caused a substantial increase in fuel costs and reduction in travel demand due to concerns over terrorism), recessions in the United States and Europe, and significant industry-wide fare discounting resulting from another U.S. airline's attempt to introduce a new pricing structure into the domestic airline business. In addition, TWA had incurred significant debt as a result of the leveraged acquisition in 1986 of a controlling interest in the Company by Mr. Icahn. The substantial losses sustained by the Company during this period, coupled with the Company's excessive debt obligations, made it necessary for TWA to restructure its debt obligations and equity, lower its labor costs and severely reduce its capital outlays. '93 Reorganization On November 3, 1993 (the " '93 Effective Date"), TWA emerged from the protection of Chapter 11 of the United States Bankruptcy Code pursuant to a bankruptcy case filed on January 31, 1992. During the pendency of the '93 Reorganization, the Company (i) negotiated, effective September 1, 1992, a series of three-year concession agreements with its unions providing for, among other things, a 15% reduction in wages and benefits and certain work- rule concessions designed to reduce costs substantially (the " '92 Labor Agreements"), (ii) obtained confirmation of a reorganization plan which eliminated more than $1 billion of debt and lease obligations, and (iii) reached a settlement with the Pension Benefit Guaranty Corporation (the "PBGC") with respect to the Company's underfunded pension plan obligations. During the pendency of the '93 Reorganization, the Icahn Entities released their claims against and interests in TWA and Mr. Icahn resigned as Chairman of the Board of Directors and as an officer of TWA. The Icahn Entities (as defined) also agreed to provide up to $200 million of financing pursuant to the Icahn Loans (as defined) (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 3. Legal Proceedings--Icahn Litigation"). '95 Reorganization Notwithstanding the reduction in levels of debt and obligations achieved through the '93 Reorganization, the Company emerged from the '93 Reorganization in a too highly leveraged position and, despite progress in increasing revenues and reducing costs, continued to experience significant operating losses. With the hiring of a new management team in 1994, the assumptions underlying the Company's operating plans, upon which its ability to service its post '93 Reorganization obligations depended, were recognized as unrealistic and unachievable. As a consequence, the Company was forced to seek a second financial restructuring. In the second quarter of 1995, the Company solicited and received sufficient acceptances to effect the proposed "prepackaged" plan of bankruptcy. Therefore, on June 30, 1995, the Company filed a prepackaged Chapter 11 plan of reorganization, which with certain modifications was confirmed by the United States Bankruptcy Court in St. Louis (the "Bankruptcy Court") on August 4, 1995. On August 23, 1995, approximately eight weeks after filing the prepackaged Chapter 11 plan, the '95 Reorganization became effective and the Company emerged from the protection of this second Chapter 11 proceeding. In connection with the '95 Reorganization, the Company (i) exchanged certain of its then outstanding debt securities for a combination of newly issued 12% Preferred Stock, Common Stock, warrants and rights to purchase Common Stock, and debt securities, (ii) converted its then outstanding preferred stock to shares of Common Stock, warrants and rights to purchase Common Stock, (iii) obtained certain short-term lease payment and conditional sale indebtedness deferrals amounting to approximately $91 million and other modifications to certain aircraft leases; and (iv) obtained an extension of the term of the approximately $190 million principal amount of the Icahn Loans. The Company also (i) effected a reverse stock split of its then outstanding common stock and exchanged such shares for Common Stock; (ii) raised approximately $52 million through an equity rights offering; (iii) distributed certain warrants to its then current equity holders; and (iv) implemented certain amendments to the Certificate of Incorporation relating to the recapitalization and various corporate governance matters. 14 In connection with and as a precondition to the '95 Reorganization, in August and September of 1994, the Company entered into the '94 Labor Agreements, amending existing collective bargaining agreements, with the IAM, ALPA and IFFA, the three labor unions who then represented approximately 84% of the Company's employees. The '94 Labor Agreements provided for an extension of certain previously agreed wage concessions, modifications to work rules and the deletion of certain provisions of the then existing labor agreements, including elimination of so-called snapbacks, i.e., the automatic restoration of wage reductions granted in such agreements at the end of their term to levels that prevailed prior to the concessionary agreement. During 1994 and 1995, the Company also implemented a number of similar cost savings initiatives with respect to domestic non-union and management employees, primarily through reducing head count, altering benefit packages, and continuing wage reductions which had been scheduled to expire. See "-- Employees." ITEM 2. PROPERTIES Substantially all of TWA's assets are subject to various liens and security interests. See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." FLIGHT EQUIPMENT As of December 31, 1996, TWA's operating fleet consisted of 192 aircraft, of which 47 were owned by TWA and 145 were leased. All aircraft in use are maintained in airworthy condition in accordance with procedures approved by the FAA. The operating aircraft owned by and leased to TWA as of December 31, 1996 are listed below.
AVERAGE AGE OF AIRCRAFT SEATS IN STANDARD TYPE OWNED(2) LEASED TOTAL(3) (IN YEARS) TWA CONFIGURATION - - ---- -------- ------ -------- ----------- ----------------- Douglas DC-9-10......... -- 7 7 30.0 68 Douglas DC-9-30......... -- 36 36 27.0 98 Douglas DC-9-40......... -- 3 3 22.2 98 Douglas DC-9-50......... -- 12 12 19.9 107 Douglas MD-80/83........ -- 53 53 9.4 142 Boeing 727-200(1)....... 28 11 39 22.6 146 Boeing 747(1)........... 6 8 14 25.6 434 Boeing 757.............. -- 3 3 0.2 180 Boeing 767.............. 5 9 14 12.3 190 Lockheed L-1011(1)...... 8 3 11 22.6 254 --- --- --- ---- Total............... 47 145 192 19.0 === === === ====
- - -------- (1) Excludes the following aircraft which are not in the active fleet; eight Boeing 727-100s, one Boeing 727-200, one Boeing 747-100 and three L-1011s. (2) Substantially all TWA's owned flight equipment is pledged to secure its indebtedness. (3) For information concerning compliance of the above-referenced aircraft with the Noise Act, see "Item 1. Regulatory Matters--Noise Abatement." In 1997, the Company intends to replace its 11 remaining L-1011 aircraft with newer and more efficient 757s. Also in 1997, TWA plans to retire all of its 747 aircraft, some of which are to be replaced by 767 aircraft, and 10 of its older 727 aircraft, to be replaced with MD-80s. In 1996, TWA entered into agreements providing for the lease of up to 10 new 757 aircraft from a major operating lessor to be delivered in 1996 and 1997, the purchase of 10 new 757 aircraft from the manufacturer with deliveries scheduled from February 1997 to May 1999, the lease of 15 new MD-83s with deliveries scheduled from 1997 to 1999, and the lease of 9 used MD-82s with deliveries scheduled in 1997. The Company also acquired the right, subject to certain conditions, to purchase up to 20 additional 757 aircraft from the manufacturer. 15 REAL PROPERTY TWA utilizes or has rights to utilize airport and terminal facilities located in or near the cities it serves under lease agreements or other arrangements with the governmental authorities exercising control over such facilities. At St. Louis, TWA has preferential use rights to 57 gates and 40 ticket counter positions, and ramp, baggage and other supporting ground facility space. TWA's domestic-international hub at JFK operates out of two passenger terminal facilities (Terminals 5 and 6). TWA is the lessee at JFK of a total of 27 gates, 102 ticket counter positions, and ramp, baggage and other supporting ground facility space. TWA occupies both Terminal 5 and Terminal 6 as a holdover tenant pursuant to expired agreements of lease with the Port Authority of New York and New Jersey (the "Port Authority"). Such holdover tenancies are with the consent of the Port Authority pursuant to a Term Sheet dated August 12, 1993 (the "Term Sheet"), which extended TWA's right to occupy Terminals 5 and 6, provided TWA paid the rent set forth in the Term Sheet, made certain specified financed improvements to Terminals 5 and 6, and was otherwise in compliance with the expired leases. On February 8, 1996, the Port Authority's Board of Commissioners adopted a resolution authorizing the Port Authority to enter into a new five year lease with TWA for both Terminals 5 and 6 for a term expiring on March 31, 2001; however, the lease has not yet been signed. The Company has recently consolidated for the near term most JFK operations into Terminal 5, using only limited facilities in Terminal 6. TWA is attempting to sublease the remainder of Terminal 6. TWA's overhaul base is located on approximately 250 acres of leased property at the Kansas City International Airport, Kansas City, Missouri. The overhaul base is TWA's principal maintenance base where TWA performs major maintenance and repair services for its aircraft fleet. The overhaul base is owned by the City of Kansas City, Missouri and leased to TWA along with other facilities until May 31, 2000. TWA leases office space and other facilities in a number of locations in the U.S. and abroad. In December 1993, pursuant to a sale/leaseback with the City of St. Louis, TWA leased a two-story ground operations building near the St. Louis Airport and an adjacent 165,000 square foot, five-story flight training facility. The lease of these properties is covered under a month-to-month agreement subject to automatic renewal so long as TWA is not in default thereunder, such agreement having a term otherwise expiring December 31, 2005. Such term is subject to early termination in the event of certain events of default, including non-payment of rents, cessation of service, failure to maintain corporate headquarters within the City or County of St. Louis or failure to maintain a reservations office within the City of St. Louis. For a description of certain environmental corrective actions that TWA anticipates will be required at the overhaul base, see "Item 3. Legal Proceedings." TWA's corporate headquarters are located at One City Centre, 515 N. Sixth Street, St. Louis, Missouri where TWA has subleased approximately 56,700 square feet through February 28, 2000. TWA's St. Louis area reservation facility and customer relations department is located in approximately 48,000 square feet in the City of St. Louis, Missouri. In June 1996, TWA opened a new reservation facility in Norfolk, Virginia, comprised of approximately 40,000 square feet and having 455 work stations. The facility is leased for a twenty- five year term. ITEM 3. LEGAL PROCEEDINGS Icahn Litigation Tickets sold by the Company to Karabu pursuant to the Ticket Agreement are priced at levels intended to approximate current competitive discount fares available in the airline industry. TWA believes that applicable provisions of the Ticket Agreement do not allow Karabu to market or sell such tickets through travel agents to the general public. Karabu, however, has been marketing tickets through travel agents. TWA has demanded that Karabu cease doing so, and Karabu has stated that it disagrees with the Company's interpretation concerning sales through travel agents. In December 1995, the Company filed a lawsuit against Karabu, Mr. Icahn, and certain affiliated companies seeking damages and to enjoin further violations of the Ticket Agreement. Mr. Icahn countered by threatening to file his own lawsuit and to declare a default on the financing of up to $200 million provided to TWA by Karabu in connection with the '93 Reorganization (the "Icahn Loans"), which financing is 16 secured by receivables and certain flight equipment pledged under a security agreement (the "Karabu Security Agreement") with State Street Bank and Trust Company of Connecticut N.A., as security trustee (the "Security Trustee"). Mr. Icahn's position was based upon a variety of claims related to his interpretations of the Karabu Security Agreement as well as certain alleged violations of the Ticket Agreement by the Company. A violation of the Ticket Agreement by the Company could result in a cross-default under the Icahn Loans. An event of Default (as defined in the Icahn Loans), if resulting in an acceleration of the indebtedness due thereunder, would constitute a default under the instruments governing substantially all of the Company's other indebtedness and leases and would have a material adverse effect on the Company. Mr. Icahn has also alleged independent violations of the Icahn Loans, including, among other things, that the Company has not been maintaining, in accordance with the terms of the Karabu Security Agreement, certain aircraft which TWA has retired from service and stored and which are pledged as security for the Icahn Loans. To endeavor to eliminate this issue from the various disputes with Mr. Icahn and his affiliates, the Company has deposited an amount equal to the appraised fair market value of such aircraft with the Security Trustee and requested the release of the liens on such aircraft. To date, the Security Trustee has not released such liens. In addition, Mr. Icahn has asserted that the approval of the Security Trustee is required for any modification to the FAA-approved maintenance program affecting aircraft pledged as security under the Karabu Security Agreement. The parties negotiated a series of standstill agreements, pursuant to which TWA's original lawsuit was withdrawn, while the Company and Mr. Icahn endeavored to negotiate a settlement of their differences and respective claims. The final extension of such standstill agreement expired on March 20, 1996. On March 20, 1996, the Company filed a Petition (the "TWA Petition") commencing a lawsuit against Mr. Icahn, Karabu and certain other entities affiliated with Icahn (collectively, the "Icahn Defendants"). The TWA Petition, which is pending in the Circuit Court for St. Louis County, Missouri, alleges that the Icahn Defendants are violating the Ticket Agreement and otherwise tortiously interfering with the Company's business expectancy and contractual relationships, by among other things, marketing and selling tickets purchased under the Ticket Agreement to the general public through travel agents. The TWA Petition seeks a declaratory judgment finding that the Icahn Defendants have violated the Ticket Agreement, and also seeks liquidated, compensatory and punitive damages, in addition to the Company's costs and attorney's fees. The Company believes the allegations contained in the TWA Petition are meritorious. Also on March 20, 1996, TWA was named as a defendant in a complaint (the "Icahn Complaint") filed by Karabu and certain other affiliates of Mr. Icahn (the "Icahn Entities"). The Icahn Complaint alleges, among other things, that the Company has violated certain federal antitrust laws, breached the Ticket Agreement and interfered with certain existing and prospective commercial relations of the Icahn Entities. The Icahn Complaint is based upon an interpretation by Mr. Icahn and the Icahn Entities that the Ticket Agreement permits sales of tickets to the general public through travel agents. The Icahn Complaint seeks injunctive relief and actual and punitive monetary damages, as well as the Icahn Entities' costs of litigation. On June 13, 1996, following TWA's filing of a motion to dismiss the Icahn Complaint, the Icahn Entities amended the Icahn Complaint to delete the federal antitrust claims and to add new allegations and theories with respect to claimed violations of the federal antitrust laws and the Lanham Act (the "Amended Icahn Complaint"). On March 24, 1997, on the Company's motion, the Amended Icahn Complaint was dismissed in its entirety. On June 6, 1996, Karabu forwarded a letter to TWA advising the Company of Karabu's possible intention to instruct the PBGC to require the Security Trustee to give a 30 day default notice to TWA in respect of certain alleged instances of non-compliance by TWA with the provisions of the Karabu Security Agreement relating to, among other things, four Boeing 727-100 aircraft which are no longer being flown by TWA in active service and changes by TWA to the FAA-approved scheduled maintenance of such aircraft and other aircraft pledged under the Karabu Security Agreement without obtaining approval of the Security Trustee. Karabu also forwarded with such letter a draft of a proposed complaint which it threatened to file a declaratory judgment that Karabu would be entitled to instruct the PBGC to require the Security Trustee to give TWA such notice of default. The complaint was filed in a New York state court and was served on TWA on June 28, 1996. 17 On June 26, 1996, Karabu formally requested the PBGC to instruct the Security Trustee to give TWA a notice of default under the Karabu Security Agreement. On June 27, 1996, the PBGC declined to so instruct the Security Trustee, advising Karabu that the PBGC did not believe TWA was in default and, even if a default were determined to exist, any such default would be technical only and Karabu would not be harmed by such default. On June 28, 1996, Karabu brought an action against the PBGC in the United States District Court for the Southern District of New York, seeking a declaratory judgment for the purpose of determining Karabu's rights with respect to the Karabu Security Agreement. TWA then sought to intervene in such lawsuit and was granted the right to do so whereupon the Company filed a motion to dismiss Karabu's complaint and for summary judgment. Karabu then withdrew its separate suit in New York state court for a declaratory judgment previously filed on June 28, 1996. Although the Company intends to press its claims vigorously and believes its defenses to Mr. Icahn's claim are meritorious, it is possible that Karabu's interpretation of the Ticket Agreement regarding discount ticket sales by the Icahn Defendants to the general public through travel agents could be determined, either by a court or otherwise, to be correct. In such event, unless the Company took appropriate action to mitigate the effect of such sales, the Company could suffer significant loss of revenue that could reduce overall passenger yields on a continuing basis during the term of the Ticket Agreement. In addition, although the Company believes that no material default exists under the Karabu Security Agreement, any default by the Company under the Ticket Agreement or directly on the Icahn Loans which resulted in an acceleration of the Icahn Loans would result in a cross-default under substantially all of the Company's other indebtedness and leases and otherwise have a material adverse effect on the Company. As of December 31, 1996, an aggregate principal amount of $125.1 million was outstanding under the Icahn Loans. Other Actions On July 17, 1996, TWA Flight 800 crashed shortly after departure from JFK en route to Paris, France. There were no survivors among the 230 passengers and crew members aboard the Boeing 747 aircraft. While TWA is currently a defendant in a number of lawsuits relating to the crash, it is unable to predict the amount of claims which may ultimately be made against the Company or how those claims might be resolved. TWA maintains substantial insurance coverage, and at this time management has no reason to believe that such insurance coverage will not be sufficient to cover the claims arising from the crash. Therefore, TWA believes that the resolution of such claims will not have a material adverse effect on its financial condition or results of operations. On May 31, 1988, the U.S. Environmental Protection Agency ("EPA") filed an administrative complaint seeking civil penalties as well as other relief requiring TWA to take remedial procedures at TWA's maintenance base in Kansas City, Missouri, alleging violations resulting from TWA's past hazardous waste disposal and related environmental practices. Simultaneously, TWA became a party to a consent agreement and a consent order with the EPA pursuant to which TWA paid a civil penalty of $100,000 and agreed to implement a schedule of remedial and corrective actions and to perform environmental audits at TWA's major maintenance facilities. In September 1989, TWA and the EPA signed an administrative order of consent, which required TWA to conduct extensive investigations at or near the overhaul base and to recommend remedial action alternatives. TWA completed its investigations and on February 17, 1996, submitted a Corrective Measures Study ("CMS") to the Missouri Department of Natural Resources ("MDNR") and the EPA. It is anticipated that review and approval of the CMS by the MDNR and EPA will be completed by late 1997. Upon approval of the CMS, an additional order will be issued and the required corrective actions implemented. TWA presently estimates the cost of the corrective action activities under the existing and anticipated orders to be approximately $7 million, a majority of which represents costs associated with long-term groundwater monitoring and maintenance of the remedial systems. Although the Company believes adequate reserves have been provided for all known environmental contingencies, it is possible that additional reserves might be required in the future which could have a material adverse effect on the results of operations or financial condition of the Company. However, the Company believes that the ultimate resolution of known environmental contingencies should not have a material adverse effect on the financial position or results of operations based on the Company's knowledge of similar environmental sites. 18 On October 22, 1991, judgment in the amount of $12,336,127 was entered against TWA in an action in the United States District Court for the Southern District of New York by Travellers International A.G. and its parent company, Windsor, Inc. (collectively, "Travellers"). The action commenced in 1987, as subsequently amended, sought damages from TWA in excess of $60 million as a result of TWA's alleged breach of its contract with Travellers for the planning and operation of Getaway Vacations. In order to obtain a stay of judgment pending appeal, TWA posted a cash undertaking of $13,693,101. In connection with the '93 Reorganization, TWA sought to have the matter ultimately determined by the Bankruptcy Court. Following prolonged litigation with respect to jurisdiction, the United States Supreme Court determined that the matter should be addressed by the bankruptcy court, and in February 1994, the bankruptcy court determined the matter in a manner favorable to TWA. Upon appeal, the District Court affirmed in part and reversed in part the bankruptcy court's decision. Both parties have appealed the matter to the United States Court of Appeals for the Third Circuit. The Company believes that in the event that the District Court's decision is affirmed, the ultimate result will not be materially different than the decision of the bankruptcy court. Pursuant to the Icahn Loans, amounts received by TWA in connection with the Travellers litigation would be used to repay, in part, certain of the Company's obligations to the Icahn Entities. In February 1995, a number of actions were commenced in various federal district courts against TWA and six other major airlines, alleging that such companies conspired and agreed to fix, lower and maintain travel agent commissions on the sale of tickets for domestic air travel in violation of the United States and, in certain instances, state, antitrust laws. On May 9, 1995, TWA announced settlement, subject to court approval, of the referenced actions and reinstated the traditional 10% commission on domestic air fares. A final order has not yet been entered; however, an interim order approving the settlement has been entered. The Company believes the settlement of this case will have a favorable effect on revenues. On November 9, 1995, ValuJet Air Lines, Inc. ("ValuJet") instituted a lawsuit against TWA and Delta Air Lines ("Delta") in the United States District Court for the Northern District of Georgia, alleging breach of contract and violations of certain antitrust laws with respect to the Company's lease of certain takeoff and landing slots at LaGuardia International Airport in New York. On November 17, 1995, the court denied ValuJet's motion to temporarily enjoin the lease transaction and the Company and Delta consummated the lease of the slots. On July 12, 1996, the Federal Court in Atlanta granted summary judgment in TWA's favor in the ValuJet litigation on all claims and counts raised in the ValuJet amended complaint. The order granting summary judgment to TWA was not a final order and was not directly appealable due to an outstanding claim against Delta. While ValuJet's counsel has stated that an appeal will be filed at a later date, the Company intends to defend itself vigorously in any future action and believes that all of the allegations that have been made to date are without merit. In addition, based on certain written grievances or complaints filed by ValuJet, the Company was informed that the United States Department of Justice ("DOJ"), Antitrust Division, was investigating the circumstances of the slot lease of certain takeoff and landing slots to Delta at LaGuardia to determine whether an antitrust violation has occurred. During the course of its investigation, the DOT was informed of the summary judgment described above. Since the date of the judgment, TWA is unaware of whether the DOJ has undertaken further investigative efforts, the status of the investigation or any future plans of the DOJ or other regulatory bodies with respect to the ValuJet allegations. While TWA believes the summary judgment should be persuasive to the various regulatory bodies petitioned by ValuJet, it will cooperate with any further investigations and strongly believes that the slot lease transaction was not in violation of antitrust laws. The Company is also defending a number of other actions which have either arisen in the ordinary course of business or are insured or the cumulative effect of which management of the Company does not believe may reasonably be expected to be materially adverse. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No meeting of Security Holders was held during the fourth quarter of 1996. 19 PART II ITEM 5. MARKET FOR COMMON STOCK AND DIVIDEND POLICY GENERAL On August 23, 1995, all of the Company's previously outstanding equity securities were canceled and certificates with respect thereto thereafter evidenced only the right to receive Common Stock and the other consideration specified in the '95 Reorganization. Also pursuant to the '95 Reorganization, holders of certain debt securities of the Company received shares of Common Stock. Information regarding the trading price range of pre-'95 Reorganization common stock is not comparable with data provided for the Common Stock and is not included herein. For information concerning the '95 Reorganization, see "Item 1. Business--Corporate Reorganizations." The Common Stock is listed for trading on the American Stock Exchange. The following table sets forth the range of high and low prices for shares of the Common Stock (as reported in The Wall Street Journal) for the periods indicated:
PERIOD HIGH LOW ------ ------- ------ 1995 Third Quarter (August 23 through September 30).............. $ 8.000 $5.313 Fourth Quarter (October 1 through December 31).............. 14.625 6.500 1996 First Quarter............................................... 20.500 9.125 Second Quarter.............................................. 23.625 14.125 Third Quarter............................................... 15.125 8.125 Fourth Quarter.............................................. 9.688 6.500 1997 First Quarter (through March 26, 1997)...................... 8.125 5.750
Since 1978, the Company has not paid any cash dividends on any of its common stock. The Company currently plans to retain all earnings to finance its business and to reduce its leverage rather than paying cash dividends on the Common Stock. Payments of any cash dividends in the future will depend on the financial condition, results of operations and capital requirements of TWA as well as other factors deemed relevant by its Board of Directors, including applicable restrictions in various agreements relating to indebtedness. As of March 20, 1997, there were (i) 44,083,266 shares of the Company's Common Stock outstanding and 18,227 holders of record of the Common Stock, and (ii) 6,233,334 shares of Employee Preferred Stock issued and outstanding and 5 holders of record of the Employee Preferred Stock. SALES OF UNREGISTERED SECURITIES In March, 1996, the Company issued and sold 3,869,000 shares of its 8% Cumulative Convertible Exchangeable Preferred Stock (the "8% Preferred Stock") in transactions exempt from the registration requirements of the Securities Act. The Company filed a shelf registration statement pursuant to Rule 415 of the Securities Act, No. 333-04977, which was declared effective August 16, 1996, to afford the holders of the 8% Preferred Stock the opportunity to sell such stock in a public transaction. Pursuant to certain Exchange Agreements with Elliott Associates L.P. and Westgate International L.P. reported on a Form 8-K filed on September 20, 1996, the Company exchanged 4,455,820 shares of Common Stock for $45.25 million principal amount of its 12% Senior Secured Reset Notes (the "Notes") plus approximately $1.5 million in accrued interest thereon in a series of transactions between July and December, 1996. An additional 1,661,060 shares of Common Stock have been exchanged for an additional $10.25 million principal amount of Notes in the first quarter of 1997. The Common Stock was issued pursuant to the exemption granted by Section 3(a)(9) of the Securities Act. The Notes were registered and issued pursuant to the Company's registration statement on Form S-4 filed with the Commission on May 12, 1995. 20 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below relate to periods in the year ended December 31, 1992, the ten months ended October 31, 1993, the two months ended December 31, 1993, the year ended December 31, 1994, the eight months ended August 31, 1995, the four months ended December 31, 1995 and the year ended December 31, 1996. This data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements. The consolidated financial data for the above periods was derived from the audited consolidated financial statements of the Company. Certain amounts have been reclassified to conform with presentations adopted in 1996. During the period from 1992 through 1995, TWA underwent two separate Chapter 11 reorganizations, the first in 1992-93 and the second in 1995. In connection with the '95 Reorganization, TWA has applied fresh start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which has resulted in the creation of a new reporting entity for accounting purposes and the Company's assets and liabilities being adjusted to reflect fair values on the '95 Effective Date. A description of the adjustments to the financial statements arising from the consummation of the '95 Reorganization and the application of fresh start reporting is contained in Note 19 to the Consolidated Financial Statements. For accounting purposes, the '95 Effective Date is deemed to be September 1, 1995. Because of the application of fresh start reporting, the financial statements for periods after the '95 Reorganization are not comparable in all respects to the financial statements for periods prior to the reorganization. Similarly, the Consolidated Financial Statements for the periods prior to the '93 Reorganization are not consistent with periods subsequent to the '93 Reorganization. Accordingly, a vertical black line separates these periods. Preferred stock dividend requirements and earnings per share of the predecessor companies have not been presented as these amounts are not meaningful.
REORGANIZED PREDECESSOR PRIOR PREDECESSOR COMPANY COMPANY COMPANY ------------------------- -------------------------------------- ------------------------ YEAR FOUR MONTHS EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS YEAR ENDED ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER DECEMBER 31, 1996 1995 1995 1994 1993 31, 1993 1992 ------------ ------------ ------------ ------------ ------------ ---------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Statement of Operations Data: Operating revenues...... $3,554,407 $1,098,474 $2,218,355 $3,407,702 $520,821 $2,633,937 $3,618,661 Operating income (loss)(1).............. (198,527) 10,446 14,642 (279,494) (58,251) (225,729) (420,432) Loss before income taxes and extraordinary items(2)............... (274,577) (32,268) (338,309) (432,869) (88,140) (362,620) (314,292) Provision (credit) for income taxes........... 450 1,370 (96) 960 (248) 1,312 3,361 Loss before extraordinary items.... (275,027) (33,638) (338,213) (433,829) (87,892) (363,932) (317,653) Extraordinary items(3).. (9,788) 3,500 140,898 (2,005) -- 1,075,581 -- Net income (loss)....... (284,815) (30,138) (197,315) (435,834) (87,892) 711,649 (317,653) Per share amounts(4): Loss before extraordinary items and special dividend requirement........... $(6.60) $(1.15) Net loss............... (7.27) (1.05)
21
PRIOR PREDECESSOR REORGANIZED COMPANY PREDECESSOR COMPANY COMPANY ---------------------- ----------------------- ----------- DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- ---------- ----------- ---------- ----------- SELECTED BALANCE SHEET DATA: Cash and cash equivalents............ $ 181,586 $ 304,340 $ 138,531 $ 187,717 $ 67,885 Current assets.......... 586,442 715,647 577,735 706,462 602,007 Net working capital (deficiency)........... (404,150) (124,446) (1,286,487) (150,744) (316,165) Flight equipment, net... 472,495 455,434 508,625 660,797 827,747 Total property and equipment, net......... 614,207 600,066 693,045 886,116 1,114,345 Intangible assets, net.. 1,184,786 1,275,995 921,659 1,024,846 -- Total assets............ 2,681,939 2,868,211 2,512,435 2,958,862 2,158,143 Current maturities of long-term debt and capital leases(5)...... 134,948 110,401 1,149,739 108,345 327,251 Liabilities subject to Chapter 11 reorganization proceedings(6)......... -- -- -- -- 2,026,895 Long-term debt, less current maturities(5).. 608,485 764,031 -- 1,053,644 -- Long-term obligations under capital leases, less current maturities............. 220,790 259,630 339,895 376,646 -- Shareholders' equity (deficiency)(7)........ 238,105 302,855 (417,476) 18,358 (1,149,733)
- - -------- (1) Includes special charges of $85.9 million in 1996, $1.7 million in the eight months ended August 31, 1995 and $138.8 million in 1994. For a discussion of these and other non-recurring items, see Note 16 to the Consolidated Financial Statements. (2) The eight months ended August 31, 1995 includes charges of $242.2 million related to reorganization items. The ten months ended October 31, 1993 includes a charge of $342.4 million related to the settlement of pension obligations and income of $268.1 million related to reorganization items. The 1992 results include non-recurring gains of $254.6 million from the disposition of assets. (3) The extraordinary item in 1996 results from the early extinguishment of certain debt. The extraordinary item in the four months ended December 31, 1995 was the result of the settlement of a debt of a subsidiary, while the extraordinary item in the eight months ended August 31, 1995 represents the gain on the discharge of indebtedness pursuant to the consummation of the '95 Reorganization. The extraordinary item in 1994 represents the charge for a prepayment premium related to the sale and lease back of four McDonnell Douglas MD-80 aircraft. The extraordinary item in 1993 represents the gain on discharge of indebtedness pursuant to the consummation of the '93 Reorganization. (4) No effect has been given to stock options, warrants or potential issuances of additional Employee Preferred Stock as the impact would have been anti- dilutive. (5) Long-term debt in 1994 was reclassified to current maturities as a result of certain alleged defaults and payment defaults. (6) For periods after January 31, 1992 and before the '93 Effective Date, certain prepetition liabilities, which were subject to compromise pursuant to the '93 Reorganization, were classified as liabilities subject to Chapter 11 reorganization proceedings, and the accrual of interest was discontinued on prepetition debt that was unsecured or estimated to be undersecured. (7) No dividends were paid on the Company's outstanding common stock during the periods presented above. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the period from 1992 through 1995, TWA underwent two separate Chapter 11 reorganizations, the first in 1992-93 and the second in 1995. In connection with the '95 Reorganization, TWA has applied fresh start reporting in accordance with SOP 90-7 which has resulted in the creation of a new reporting entity for accounting purposes and the Company's assets and liabilities being adjusted to reflect fair values on the '95 Effective Date. A description of the adjustments to the financial statements arising from the consummation of the '95 Reorganization and the application of fresh start reporting is contained in Note 19 to Consolidated Financial Statements. For accounting purposes, the '95 Effective Date is deemed to be September 1, 1995. Because of the application of fresh start reporting, the financial statements for periods after the '95 Reorganization are not comparable in all respects to the financial statements for periods prior to the reorganization. Similarly, the 22 Consolidated Financial Statements for the periods prior to the '93 Reorganization are not consistent with periods subsequent to the '93 Reorganization. As discussed below under "--Liquidity and Capital Resources," pursuant to the '95 Reorganization, the Company initially improved its financial condition and operating performance by, among other things, reducing labor and other operating and financing costs, rescheduling debt payments, recapitalizing the Company's equity securities and certain of its debt, revising the Company's route structure to capitalize further on its strength in St. Louis, and developing enhanced marketing systems. Pursuant to the '95 Reorganization, the Company eliminated approximately $500 million in face amount (approximately $300 million book value) of debt from its balance sheet. In addition, the final maturity of the Icahn Loans was extended from January 8, 1995 to January 8, 2001, and the Company negotiated an aggregate of $91 million of aircraft lease and conditional sale agreement deferrals for various periods of time, with a weighted average life of approximately two years. Through the second quarter of 1996 the Company experienced improvements in its operating performance as operating income increased to $7.8 million in the six months ended June 30, 1996, as compared to an operating loss of $21.9 million in the same period of 1995. However, beginning in the third quarter of 1996, the Company's operating performance substantially deteriorated as the Company's operating profit for the third quarter, typically the strongest period of the year, declined to $26.0 million in the three months ended September 30, 1996, as compared to a combined operating profit (excluding special charges and earned stock compensation charges aggregating $57.9 million) of $103.7 million in the comparable period of the prior year. The results for the fourth quarter of 1996 evidenced a further acceleration of this deterioration as the Company reported an operating loss (excluding special charges aggregating $85.9 million) of $146.5 million, as compared to operating income of $1.1 million in the same period of 1995. In the second half of 1996, the Company's revenues increased only 2.4%, while capacity, measured in ASMs, increased by 6.9%, as compared to the second half of 1995. Operating costs, excluding earned stock compensation and special charges, increased 16.0% over this same period. The most significant increases were: salaries, wages and benefits ($82.4 million), which reflected the increased number of employees, wage rate increases and additional overtime costs; fuel ($69.4 million), reflecting significantly higher units costs and increased usage; and maintenance costs. Notwithstanding the actions taken and planned by management to improve the Company's future operating results as described below, management expects a large first quarter 1997 operating loss, which will significantly exceed that reported in the first quarter of 1996. In light of deterioration in the Company's operating results, management has over the last several months refocused and accelerated certain aspects of its business strategy, including its fleet modernization and consolidation plan, route structure and facility improvements and efficiencies. Management believes that its recent operating results have been adversely affected by an overly aggressive increase in capacity, which when combined with unexpected maintenance delays and related costs, have negatively impacted schedule reliability resulting in excessive levels of flight cancellations and deterioration in its on-time performance. The Company believes that this has adversely affected its unit revenues (principally yields) and costs. In response to these issues, management has taken action to accelerate the phase out of all B-747 and L-1011 aircraft, reduce low yield domestic JFK feed service, curtail and/or eliminate historically unprofitable international routes and consolidate for the near term most of its JFK operations into a single terminal. The above actions are designed to improve its operational performance and make its product more competitive to the business segment which offers higher yields. The Company has also curtailed the amount of contract maintenance services provided to third parties and redeployed those resources to TWA's aircraft. In connection with the above described plans, management has announced a comparable reduction in employee headcount. Management may undertake further actions to reduce costs which may result in additional reductions of the number of employees. GENERAL The airline industry operates in an intensely competitive environment. The industry is also cyclical due to, among other things, a close relationship of yields and traffic to general U.S. and worldwide economic conditions. Small fluctuations in revenue per available seat mile ("RASM") and cost per available seat mile ("CASM") 23 can have a significant impact on the Company's financial results. The Company has experienced significant losses (excluding extraordinary items) on an annual basis since the early 1990s, except in 1995 when the Company's combined operating profit was $25.1 million. Factors contributing to these losses included, among other things, excess financial leverage; adverse publicity associated with the Company's financial difficulties; excessive labor costs; the periods of a relatively weak economy, which resulted in weak air travel demand; poor operating performance; domestic pricing policies of other airlines, which decreased industry revenue yields and generated intense competition; and volatility in jet fuel costs. The Company's ability to improve its financial position and meet its financial obligations will depend upon a variety of factors, including; significantly improved operating results, favorable domestic and international airfare pricing environments, absence of adverse general economic conditions, more effective operating cost controls and efficiencies, and the Company's ability to attract new capital and maintain adequate liquidity. No assurance can be given that the Company will be successful in generating the operating results or attracting new capital required for future viability. The '94 Labor Agreements become amendable after August 31, 1997. While the Company cannot predict the precise wage rates that will be in effect at such time (since such rates will be determined by subsequent events), the wage rates then in effect will likely increase. However, management believes that it is essential that the Company's labor costs remain favorable in comparison to its largest competitors. See "Item 1. Business--Business Strategy." The Company will seek to continue to improve employee productivity as an offset to any wage increases and will continue to explore other ways to control and/or reduce operating expenses. There can be no assurance that the Company will be successful in obtaining such productivity improvements or unit cost reductions. In the opinion of management, the Company's financial resources are not as great as those of most of its competitors, and therefore, any substantial increase in its labor cost as a result of any new labor agreements or any cessation or disruption of operation due to any strike or work action could be particularly damaging to the Company. As a result of the application of fresh start reporting as of the '95 Effective Date, substantial values were assigned to routes, gates and slots ($458.4 million) and reorganization value in excess of amounts allocable to identifiable assets ($839.1 million). The Company has evaluated its future cash flows and, notwithstanding the operating loss experienced since the '95 Effective Date, expects that the carrying value of the intangibles at December 31, 1996 will be recovered. However, the achievement of such improved future operating results and cash flows are subject to considerable uncertainties. In future periods these intangibles will be evaluated for recoverability based upon estimated future cash flows. If expectations are not substantially achieved, charges to future operations for impairment of those assets may be required and such charges could be material. There are a number of uncertainties relating to agreements with employees, the resolution of which could result in charges to future operating results of the Company. Shares granted or purchased at a discount under the employee stock incentive program ("ESIP") will generally result in a charge equal to the fair value of shares granted and the discount for shares purchased at the time when such shares are earned. If the ESIP's target prices for the Common Stock are realized, the minimum aggregate charge for the years 1997 to 2002 would be approximately $58 million based upon such target prices and the number of shares of Common Stock and Employee Preferred Stock outstanding at December 31, 1996. The charge for any year, however, could be substantially higher if the market price of the Common Stock exceeds the target price for such year ($11.00, $12.10, $13.31, $14.64, $16.11 and $17.72 for the respective years 1997 to 2002). The allocation of approximately 570,000 shares of Employee Preferred Stock issued to a trust for employees represented by ALPA pursuant to the '95 Reorganization will also, when allocated to individual employees so represented in August 1997, result in a charge of equal to the fair market value of the shares on the dates allocated. Pursuant to the '92 Labor Agreements, the Company agreed to pay to employees represented by the IAM a cash "bonus' for the amount by which overtime incurred by the IAM from September 1992 through August 1995 was reduced below specified thresholds. This amount was to be offset by the amount by which medical savings during the period for the same employees did not meet certain specified levels of savings. The obligation is 24 payable in three equal annual installments beginning in 1998. The Company has estimated the net overtime bonus owed to the IAM to be approximately $26.3 million and has reflected this amount as a noncurrent liability on the accompanying balance sheets. Such amount reflects a reduction of approximately $10.0 million pursuant to an agreement to reduce proportionately the obligation based upon the size of the reduction of indebtedness achieved by the '95 Reorganization. The IAM, while not providing a calculation of its own, has disputed the method by which management has computed the net overtime bonus and has indicated that they believe the amount due to the IAM is much greater than the amount which has been estimated by management. In addition, in connection with certain wage increases afforded to non- contract employees, employees represented by the IFFA have asserted and won an arbitration ruling that, if sustained, would require that the Company provide additional compensation to IFFA represented employees. The Company estimates that at December 31, 1996 such additional compensation would aggregate approximately $6 million. The Company denies any such obligation and intends to pursue an appeal of the arbitration ruling. As such, no liability has been recorded by the Company at December 31, 1996. In connection with the '95 Reorganization, the Company entered into a letter agreement with employees represented by the ALPA whereby if the Company's flight schedule, as measured by block hours, does not exceed certain thresholds a defined cash payment would be made to the ALPA. The defined thresholds were exceeded during the measurement periods through December 31, 1996 and no amount was therefore owed to the ALPA as of that date. The Company, however, anticipates that a liability will be incurred during 1997 as a result of the Company's planned reductions in capacity. The amount of the liability, if any, will be dependent on the amount by which the targeted block hours flown during the year exceed the actual block hours flown. Based upon current plans, management believes that its obligation under this agreement in 1997 will not exceed $12 million. See Notes 7 and 12 to the Consolidated Financial Statements. Significant variations in annual operating revenues and operating expenses have been experienced historically by TWA and are expected to continue in the future. Numerous uncertainties concerning the level of revenues and expenses always exist and it is not possible to predict the potential impact of such uncertainties upon TWA's results of operations. Among the uncertainties that might adversely impact TWA's future results of operations are: (i) competitive pricing and scheduling initiatives; (ii) the availability and cost of capital; (iii) increases in fuel and other operating costs; (iv) insufficient levels of air passenger traffic resulting from, among other things, war, threat of war, terrorism or changes in the economy; (v) governmental limitations on the ability of TWA to service certain airports and/or foreign markets; (vi) regulatory requirements requiring additional capital expenditures; (vii) the outcome of certain upcoming labor negotiations; (viii) the possible reduction in yield due to a discount ticket program entered into by the Company with Karabu in connection with the '95 Reorganization; and (ix) the impact of the public's perception of the crash of TWA Flight 800. See "--Liquidity and Capital Resources." The Company's operating results for any interim period are not necessarily indicative of those for the entire year due to seasonal fluctuations. The second and third quarter results have historically been more favorable for the Company due to increased leisure travel on both domestic and international routes during the spring and summer months. On July 17, 1996, TWA Flight 800 crashed shortly after departure from JFK en route to Paris, France. There were no survivors among the 230 passengers and crew members aboard the B-747 aircraft. The Company is cooperating fully with all federal, state and local regulatory and investigatory agencies to ascertain the cause of the crash, which to date has not been determined. While TWA is currently a defendant in a number of lawsuits relating to the crash, it is unable to predict the amount of claims which may ultimately be made against the Company or how those claims might be resolved. TWA maintains substantial insurance coverage and, at this time, management has no reason to believe that such insurance coverage will not be sufficient to cover the claims arising from the crash. Therefore, TWA believes that the resolution of such claims will not have a material 25 adverse effect on its financial condition or results of operations. The Company is unable to identify or predict the extent of any adverse effect on its revenues, yields or results of operations which has resulted or may result from the public perception of the crash. On May 4, 1993, the bilateral air transport agreement between the U.S. and France lapsed. Any reduction in U.S. carrier access could have an adverse impact on TWA's transatlantic operations. Absent a bilateral agreement, the U.S. and France are operating on a system of comity and reciprocity. Under this regime, carriers are permitted to maintain historical levels of service, but few or no new services are permitted. Cessation of service to any authorized markets from France may cause such underlying authority to terminate. In March 1997, the President signed legislation reinstating the 10% tax on domestic tickets, the 6.25% air cargo tax and the $6.00 international departure tax, effective March 7, 1997. These taxes had expired on December 31, 1995, were reinstated on August 27, 1996 and thereafter expired again on December 31, 1996. The Company is not able to determine the extent to which operating results in 1996 and in early 1997 benefited from the absence of these taxes, although it does believe that such had a positive impact on its operating results. Similarly, the Company believes that the reimposition of the tax in March 1997 will likely have an adverse impact on its operating results in subsequent periods. In October 1996 Congress enacted the Federal Aviation Reauthorization Act of 1996 (the FAA Reauthorization Act). The FAA Reauthorization Act established a national commission which, together with the DOT, is to conduct an independent study of FAA funding requirements and recommend alternative methods for apportioning the costs of the system to its users, including commercial airlines. The results of the study are to be presented to the Secretary of Transportation in August 1997 and the Secretary is to make recommendations to Congress in October 1997. The Company believes that the current system of a 10% ticket tax imposed on domestic fares unfairly subsidizes certain low-fare competitors. The Company and a group of other major airlines have proposed that the ticket tax be replaced by a system of user fees including an element based upon a charge per originating passenger and an element based upon a mileage charge. The Company is unable to predict the outcome of these studies or any Congressional actions related thereto. Following the crash of TWA Flight 800 in July 1996, the FAA implemented new security measures primarily impacting international operations. The Company does not believe that these measures have had any material effect on its revenues or operating costs to date. Additionally, a special committee appointed by the President to review aviation safety and airport security issued its final report on February 12, 1997. The report contains several recommendations. However, the Company is unable to predict which recommendations will be adopted or their impact on the Company's future operating results. Additional government mandated security measures could have a direct adverse impact on the Company's operating costs to the extent any such costs are directly assessed to commercial airlines or, if funded through new taxes or user fees, could indirectly have an adverse impact on the Company's future operating results in the event that the Company is not able to fully pass on those charges in the form of ticket price increases. The Company's auditors have included in their report dated March 24, 1997 on the Consolidated Financial Statements an explanatory paragraph to the effect that substantial doubt exists regarding the Company's ability to continue as a going concern due to the Company's recurring losses from operations and limited sources of additional liquidity. See the Consolidated Financial Statements. TWA's passenger traffic data, for scheduled passengers only and excluding TWE, are shown in the table below for the indicated periods(1):
1996 1995 1994 ------- ------- ------- NORTH AMERICA Passenger revenues ($ millions)..................... $ 2,515 $ 2,292 $ 2,221 Revenue passenger miles (millions)(2)............... 19,513 17,902 17,543 Available seat miles (millions)(3).................. 30,201 28,194 27,963 Passenger load factor (4)........................... 64.6% 63.5% 62.7% Passenger yield (cents)(5).......................... 12.89c 12.80c 12.66c Passenger revenue per available seat mile (cents) (6)................................................ 8.33c 8.13c 7.94c
26
1996 1995 1994 ------ ------ ------ INTERNATIONAL Passenger revenues ($ millions)......................... $ 563 $ 544 $ 597 Revenue passenger miles (millions)(2)................... 7,598 7,000 7,363 Available seat miles (millions)(3)...................... 10,393 9,719 11,228 Passenger load factor (4)............................... 73.1% 72.1% 65.6% Passenger yield (cents)(5).............................. 7.41c 7.78c 8.10c Passenger revenue per available seat mile (cents)(6).... 5.42c 5.60c 5.31c TOTAL SYSTEM Passenger revenues ($ millions)......................... $3,078 $2,836 $2,818 Revenue passenger miles (millions)(2)................... 27,111 24,902 24,906 Available seat miles (millions)(3)...................... 40,594 37,905 39,191 Passenger load factor (4)............................... 66.8% 65.7% 63.5% Passenger yield (cents)(5).............................. 11.35c 11.39c 11.31c Passenger revenue per available seat mile (cents)(6).... 7.58c 7.48c 7.19c Operating cost per available seat mile (cents)(7)....... 8.76c 8.12c 8.45c Average daily utilization per aircraft (hours)(8)....... 9.63 9.45 9.30 Aircraft in fleet being operated at end of period....... 192 188 185
- - -------- (1) Excludes subsidiary companies. (2) The number of scheduled miles flown by revenue passengers. (3) The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown. (4) Revenue passenger miles divided by available seat miles. (5) Passenger revenue per revenue passenger mile. (6) Passenger revenue divided by scheduled available seat miles. (7) Operating expenses, excluding special charges, earned stock compensation, other nonrecurring charges and subsidiaries, divided by total available seat miles. (8) The average block hours flown per day in revenue service per aircraft. RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE FOUR MONTHS ENDED DECEMBER 31, 1995 AND EIGHT MONTHS ENDED AUGUST 31, 1995 In the following discussion, the results of operations for the fiscal year ended December 31, 1996 is compared to the combined results of the four months ended December 31, 1995 and eight months ended August 31, 1995 (twelve months ended December 31, 1995) unless specified otherwise. Total operating revenues of $3,554.4 million for 1996 were $237.6 million or 7.2% more than the total operating revenues of $3,316.8 million for the year ended December 31, 1995. The increase was primarily reflected in TWA passenger revenues which were $241.6 million higher than in 1995. Additionally, revenues from contract work increased $15.7 million and revenue from freight and mail increased $9.9 million. Operating revenues for 1995 included $35.9 million in passenger revenues from Trans World Express which discontinued operations in November 1995. Capacity and traffic increased in 1996 as compared to 1995. System-wide capacity, measured in ASMs, increased by 7.1% in 1996 as compared to 1995 (representing increases in domestic and international ASMs of 7.1% and 7.0%, respectively). Passenger traffic volume, as measured by total RPMs in scheduled service, increased 8.9% in 1996 over 1995. Passenger load factor for 1996 was 66.8% compared to 65.7% in 1995. TWA's yield per passenger mile decreased slightly from 11.39 cents in 1995 to 11.35 cents in 1996. Although the yield per passenger mile declined only slightly year over year, the yield during the second half of 1996 was 10.97 cents compared to 11.40 cents during the second half of 1995. 27 Operating expenses of $3,752.9 million in 1996 reflect an increase of $461.2 million (14.0%) over the total operating expenses of $3,291.7 million for the year ended December 31, 1995, representing a net change in the following expense groups: Salaries, wages and benefits of $1,254.3 million for 1996 were $125.6 million (11.1%) more than 1995, primarily due to an increase in the average number of employees, overtime costs required due to poor operating performance in 1996 and lower productivity levels. The Company had an average of 24,254 employees in 1996 as compared to 22,927 in 1995. Earned stock compensation charges of $9.1 million for 1996 and $58.0 million for 1995 represents primarily the non-cash compensation charge recorded to reflect the expense associated with the distribution of shares of stock on behalf of employees as part of the '95 Reorganization. Additional non- cash compensation charges will be recorded in 1997, a substantial portion of which will depend on the market price of the Common Stock. For a further discussion of future charges related to non-cash compensation, see Notes 11 and 12 to the Consolidated Financial Statements. Aircraft fuel and oil expense of $585.2 million for 1996 was $126.6 million (27.6%) over the total expenses of $458.6 million for the year ended December 31, 1995. The increase in expenses is primarily due to an increase in the price of fuel (22.3%), an increase in gallons consumed (4.3%) and the expiration in October 1995 of the airlines' exemption from paying fuel taxes of 4.3 cents per gallon, which impacted fuel expense by approximately $13.6 million. Passenger sales commission expense of $268.1 million for 1996 was $2.1 million (0.8%) higher than the combined expenses of $266.0 million in 1995, and is primarily related to the $241.6 million increase in TWA passenger revenues offset by an increase in non-commissionable international tickets. Aircraft maintenance materials and repairs expense of $208.2 million in 1996 represented an increase of $60.5 million (41.0%) from $147.7 million for 1995. The increase was primarily the result of higher levels of scheduled maintenance in 1996, including heavy maintenance, a 3.6% increase in flying hours and increased repair work performed by the Company for other air carriers and third parties. Depreciation and amortization expense of $161.8 million for 1996 increased slightly from combined expenses of $161.6 million for 1995. Operating lease rentals of $303.0 million for 1996 were $24.1 million (8.6%) more than the total rentals of $278.9 million for 1995. The increase was primarily due to an increase in the average number of leased aircraft from 119 in 1995 to 123 in 1996 and higher lease rates. Passenger food and beverage expense of $110.1 million in 1996 represented an increase of $7.3 million (7.1%) from $102.8 million for the twelve months of 1995. The increase is primarily due to the 8% increase in the number of passengers boarded. During the fourth quarter of 1996, special charges of $85.9 million were recorded in connection with the Company's decision to modify its international route structure and related aircraft fleet plan. The charges included a write- off of the New York-Athens route ($26.7 million), international employee severance liabilities ($5.6 million) related to the termination of service to Athens and Frankfurt and a write-down of the L-1011 and B-747 fleets ($32.2 million) and the related inventories ($21.5 million) reflecting the planned retirement of these fleets. These costs are based upon management's current estimate. Actual costs could materially differ from these current estimates. See Note 16 to the Consolidated Financial Statements for a further discussion of these special charges. Special charges of $1.7 million were recorded in the third quarter of 1995 related to the shutdown of TWE. All other operating expenses of $767.2 million in 1996 represented an increase of $79.6 million (11.6%) from $687.6 million for the year ended December 31, 1995. An increase in flight cancellations during 1996 28 resulted in increased CRS fees related thereto ($19.4 million) and interrupted trip expenses ($3.7 million). In addition, expenses relating to maintenance services provided under a contract with the military increased approximately $21.6 million in 1996 compared to 1995. The Company also experienced a significant increase in professional/technical fees ($18.7 million) which was primarily due to the use of contract programmers for ongoing development of new systems and external consultants' fees for re-engineering. Other charges (credits) were a net charge of $76.1 million for 1996 as compared to $42.7 million and $353.0 million in the four month and the eight month periods of 1995, respectively (included in the eight month period is a charge of $242.3 million for reorganization items in connection with the application of fresh start reporting pursuant to the '95 Reorganization). Interest expense decreased $42.3 million in 1996 over 1995 as a result of the reduction of debt arising from the '95 Restructuring and additional reductions of debt during 1996. Interest income increased by $3.5 million in 1996 primarily as a result of higher levels of invested funds. Other charges and credits-net improved $35.8 million in 1996 compared to 1995, primarily due to a $19.8 million improvement in the Company's share of earnings of Worldspan and a $2.5 million credit to reflect a litigation settlement. Additionally, other charges and credits-net for 1995 included a $14.0 million charge for restructuring expenses. As a result of the above, the operating loss of $198.5 million for 1996 was $223.6 million unfavorable to the combined operating income of $10.5 million and $14.6 million for the four month and the eight month periods of 1995, respectively. The net loss of $284.8 million for 1996 was $57.4 million greater than the combined loss of $227.4 for 1995. The 1996 net loss included $9.8 million in extraordinary losses related to the early extinguishment of debt, while the 1995 net loss included $144.4 million in extraordinary gains related to the discharge of indebtedness pursuant to the '95 Reorganization and the cancellation of debt between TWE and an aircraft lessor. RESULTS OF OPERATIONS FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995 AND EIGHT MONTHS ENDED AUGUST 31, 1995 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31, 1994 Total operating revenues of $1,098.5 million and $2,218.4 million for the four months ended December 31, 1995 and the eight months ended August 31, 1995, respectively, were, on a combined basis, $90.9 million (2.7%) less than 1994, primarily because of an $80.5 million decrease in other revenues. This decrease is primarily due to the sale of subsidiary companies in 1994 ($51.9 million), a decrease of $13.0 million in TWA Nippon, Inc. ("Nippon") revenues, and a $12.3 million decrease in TWA Getaway Vacations ("Getaway Vacations") revenue. During 1995, passenger revenue remained virtually unchanged from 1994, despite the adverse publicity generated by the '95 Reorganization, and in the four months since emerging from bankruptcy, passenger revenue increased by $48.3 million, a 5.5% improvement over the same period of 1994. System capacity as measured by ASMs was trimmed by 3.2% on a system-wide basis in 1995 versus 1994. International capacity decreased 13.7% due to the termination of flights to several international destinations, while domestic capacity increased slightly (1.1%). During 1995, system traffic volume, as measured by total RPMs, improved slightly (0.1%), the result of a decrease in international traffic by 5.1% and an increase in domestic traffic by 2.3%. TWA's yield per passenger mile for 1995 increased to 11.39 cents from 11.31 cents in 1994 (reflecting a domestic increase to 12.80 cents from 12.66 cents and an international decrease to 7.78 cents from 8.10 cents). Operating expenses of $1,088.0 million and $2,203.7 million for the four months ended December 31, 1995 and the eight months ended August 31, 1995, respectively, were, on a combined basis, $395.5 million (10.7%) less than the operating expenses of $3,687.2 million for 1994, representing a net change in the following expense groups. Employment costs, excluding non-cash stock compensation costs, for the four months ended December 31, 1995 and the eight months ended August 31, 1995 of $373.0 million and $755.7 million, respectively, were, on a combined basis, $164.8 million (12.7%) less than 1994. The reduction in employment costs reflect a full year 29 of savings realized from the '94 Labor Agreements entered into in August 1994 as the average number of employees was reduced from approximately 25,200 in 1994 to approximately 22,900 in 1995. The four months ended December 31, 1995 included the favorable impacts of changes in estimates which reduced employee benefit costs by approximately $6.2 million. Additionally, 1994 employment costs included a non-recurring contractual benefit accrual of approximately $36.3 million. During 1995, the Company distributed shares of stock to employees as part of its financial restructuring which, together with certain other non-cash compensation charges, resulted in an aggregate charge of $58.0 million to operating expense. Additional non-cash compensation charges will be recorded in 1996 and 1997, a substantial portion of which will depend on the market price of the Common Stock at such times. For a further discussion of this charge and future charges related to non-cash compensation, see Notes 11 and 12 to Consolidated Financial Statements. Aircraft fuel and oil expense of $161.8 million for the four months ended December 31, 1995 and $296.8 million for the eight months ended August 31, 1995, reflected a combined decrease of $18.9 million from 1994. The combined effect of decreased fuel usage (5.6%), offset by a slight increase in the unit price (1.8%), resulted in a decrease of 4.0% in fuel costs for 1995. The average unit price of fuel was $0.57 per gallon in 1995 compared to $0.56 in 1994. Effective October 1, 1995, an exemption expired related to a federal fuel tax of 4.3 cents per gallon on commercial jet fuel purchased for use in domestic operations. This additional tax increased fuel costs by $7 million in the fourth quarter of 1995. See "Item 1. Business--Aircraft Fuel". Passenger sales commission expense of $80.0 million in the four months ended December 31, 1995 and $186.0 million in the eight months ended August 31, 1995, respectively, together represent a decrease of $22.0 million (7.6%) from 1994. The decrease is primarily due to incentive commissions and a reduction in the commission rate on international tickets. The four months ended December 31, 1995 included the favorable impacts of changes in estimated commissions which reduced commission expense by approximately $6.7 million. Aircraft maintenance materials and repairs expense of $52.0 million and $95.7 million for the four-month and the eight-month periods of 1995, respectively, together represent a slight increase of $2.3 million (1.6%) over 1994. Depreciation and amortization decreased $21.6 million (11.8%) to the combined $55.2 million for the four months ended December 31, 1995 and the $106.5 million for the eight months ended August 31, 1995 from $183.3 million in 1994. The decrease is generally due to the normal decline in depreciation as property reaches the end of its estimated economic life, partially offset by an increase in the amortization of intangible assets arising from fresh start reporting on the '95 Effective Date and the sale (and simultaneous leaseback) of five Boeing 727 and two Boeing 747 aircraft in March 1995. Operating lease rentals were $96.4 million for the last four months of 1995 and $182.5 million for the first eight months of 1995, a combined increase of $17.6 million (6.7%) over 1994. The increase was principally due to the sale and simultaneous leaseback of five Boeing 727s and two Boeing 747s in March 1995 and the addition of three new MD-83 aircraft in late 1995. The increase was also due to the reclassification of the JFK International Terminal lease from capital to operating ($3.8 million). Passenger food and beverage expenses were $34.7 million and $68.1 million for the four months ended December 31, 1995 and the eight months ended August 31, 1995, respectively, a combined decrease of $18.0 million (14.9%) in 1995 compared to 1994. The decrease is primarily due to decreased international traffic and cost savings as a result of the closing of the JFK and Los Angeles dining units in the fourth quarter of 1994. Special charges of $1.7 million were recorded in the third quarter of 1995 related to the shut-down of TWE. All other operating expenses, excluding special charges, aggregated $232.7 million for the four months ended December 31, 1995 and $454.9 million for the eight months ended August 31, 1995, a combined decrease 30 of $90.9 million (11.7%) compared to 1994. The decrease is primarily the result of the operating subsidiaries sold in 1994 ($34.6 million) and decreases in the operating costs of TWE ($14.2 million) and other subsidiaries ($27.3 million). Other charges (credits) were a net charge of $42.7 million for the last four months of 1995 and a net charge of $352.9 million for the first eight months of 1995 compared to a net charge of $153.4 million in 1994. This increase of $242.3 million was primarily due to a $242.2 million non-recurring charge related to the Company's restructuring. Additionally, interest expense declined by $26.2 million and investment income increased by $5.8 million. See Note 17 to Consolidated Financial Statements. In future periods, the amortization of reorganization value in excess of amounts allocable to identifiable assets and certain other non-deductible items will likely result in the Company's effective tax rate for financial reporting periods exceeding statutory rates. See Note 5 to Consolidated Financial Statements. As a result of the above, the operating profit of $10.4 million for the four months ended December 31, 1995 and $14.6 million for the eight months ended August 31, 1995 reflected, on a combined basis, a $304.5 million improvement from the operating loss of $279.5 million in 1994. The net loss of $30.1 million for the last four months of 1995 and $197.3 million for the first eight months of 1995 was, on a combined basis, $208.4 million less than the net loss of $435.8 million in 1994. LIQUIDITY AND CAPITAL RESOURCES The following is a discussion of the impact of significant factors affecting TWA's liquidity position and capital resources. These comments should be read in conjunction with, and are qualified in their entirety by, the Consolidated Financial Statements and Notes thereto. Liquidity The Company's consolidated cash and cash equivalents balance at December 31, 1996 was $181.6 million (including approximately $28.3 million in cash and cash equivalents held in its international operations and by its subsidiaries which, based upon various foreign monetary regulations and other factors, might not be immediately available to the Company), a $122.7 million decrease from the December 31, 1995 balance of $304.3 million. Due to seasonal factors, the Company's cash balances during the first quarter of each year are typically lower than in other periods. These seasonal factors, when combined with the large anticipated loss in the first quarter of 1997 which would significantly exceed the loss reported in the comparable quarter of 1996, will reduce cash balances significantly below the cash balance at December 31, 1996. In February 1997, in order to improve its liquidity, the Company entered into an agreement with and received approximately $26 million from certain St. Louis business enterprises, representing the advance payment for tickets for future travel by such enterprises. The Company is currently pursuing other projects intended to increase its cash balances. In March 1997, the Company offered 50,000 Units ("Units"), with each Unit consisting of (i) one 12% Senior Secured Note due 2002 (a "Note"), in the principal amount of $1,000, and (ii) one Redeemable Warrant (a "Warrant") to purchase 126.26 shares of Common Stock at an exercise price of approximately $7.92 per share (the "Offering"). The Notes are secured by a lien on certain assets of the Company, including 1) the Company's beneficial interest in its FAA designated take-off and landing slots at three high-density, capacity- controlled airports 2) currently-owned and hereafter-acquired defined ground equipment of the Company used at certain domestic airports, and 3) all of the issued and outstanding stock of (a) a wholly-owned subsidiary of TWA holding the leasehold interest in a hangar at Los Angeles International Airport and (b) three wholly-owned subsidiaries of TWA holding leasehold interests in gates and related support space at certain domestic airports served by the Company. The Company realized $47.175 million (net of discounts and commissions and estimated expenses) in proceeds from the Offering. The Company intends to use a portion of the proceeds from the Offering (not to exceed approximately $5 million) to release certain of the collateral to be used to secure the Notes from a prior existing lien and the remainder of the proceeds for general corporate purposes. The Offering was made pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Units, Notes and Warrants and underlying shares of Common Stock issuable upon exercise of the Warrants are not registered under the federal and state securities laws. The Company has agreed 31 to use its best efforts to file and, if declared effective, to effect, the registration of the Notes and the Warrants under the Securities Act under certain circumstances. The net decrease in cash and cash equivalents during 1996 was due, in large part, to the fact that cash used in operating activities in 1996 was $16.8 million as compared to 1995 when cash provided by operating activities was $212.2 million. The adverse change was primarily attributable to the decrease in 1996 operating income as compared with 1995. Additionally, pursuant to the eight-year Karabu Ticket Program Agreement between the Company and Karabu (the "Karabu Ticket Agreement") net discounted sales from tickets sold under the agreement are excluded from cash provided by operating activities as the related amounts are applied as a $62.9 million reduction of the Icahn Loans and a $6.4 million reduction of the PBGC Notes. At December 31, 1995 approximately $2.0 million of such proceeds had been applied to the principal balance of the Icahn Loans, while no proceeds had been applied to the PBGC Notes. The increase of $79.5 million in trade accounts payable during 1996 was primarily due to the Company utilizing a safe harbor provision with regard to payment of U.S. transportation taxes of $60 million for the period September through December 1996, a significant portion of which was paid in February 1997. Cash used in investing activities increased $106.1 million from $18.9 million in 1995 to $125.0 million in 1996. A large part of this increase was related to capital expenditures ($121.5 million in 1996 versus $59.5 million in 1995) which had been somewhat restricted by fiscal controls in place during most of 1995. Financing activities provided $19.1 million of cash in 1996, compared with a net use of cash of $27.5 million in 1995. Proceeds from long- term debt and sale and leaseback transactions decreased from $22.1 million in 1995 to $16.6 million in 1996. Repayments of long-term debt and capital leases required $15.4 million more cash in 1996 than in 1995. In 1996, net proceeds from the sale of 8% Cumulative Convertible Exchangeable Preferred Stock ("8% Preferred Stock") were $186.2 million while the early redemption of the 12% Mandatorily Redeemable Stock and cash dividends required $81.7 million and $14.5 million, respectively. In 1995 the net proceeds from an equity rights offering generated $51.9 million. As previously described, management has indicated that it is focusing on the improvement of TWA's schedule reliability and on-time performance and that it plans to accelerate the replacement of it's L-1011 and B-747 fleets with B- 757, B-767 and MD-80 aircraft. Management believes that these, as well as other actions which it has taken or expects to take, should substantially improve TWA's unit revenues and reduce its operating costs in 1997. The Company believes that a substantial improvement in its operating results is necessary for TWA to maintain adequate liquidity to meet its obligations throughout the remainder of 1997. The achievement of these improved operating results are subject to significant uncertainties, including the Company's ability to achieve higher revenue yields and load factors, the cost of aircraft fuel, the Company's ability to finance or lease suitable replacement aircraft at reasonable rates and the containment of operating costs. In March 1996 the Company completed the sale of 3,869,000 shares of its 8% Preferred Stock for gross proceeds of approximately $193.5 million and net proceeds to the Company of approximately $186.2 million, after commissions and expenses. A portion of the net proceeds from the offering were used to redeem the Company's outstanding 12% Cumulative Preferred Stock, pursuant to the terms thereof, at an aggregate redemption price of approximately $81.7 million, plus accrued dividends from February 1, 1996 to the redemption date of April 26, 1996. The Company utilized the balance of the net proceeds for general corporate purposes, including but not limited to, capital expenditures and increasing working capital. Pursuant to the '95 Reorganization, the Company issued 600,000 ticket vouchers, each with a face value of $50.00, which may be used for up to 50% discount off the cost of a TWA airline ticket for transportation on TWA ("Ticket Vouchers"). Pursuant to certain agreements, the Company repurchased approximately 236,000 of the Ticket Vouchers at an aggregate cost of $8.8 million. Payments in respect of these Ticket Vouchers were approximately $700,000 in 1995 and approximately $8.1 million in 1996. Concurrently, the Company undertook aircraft lease payment deferrals to increase liquidity and improve the Company's financial condition. Gross deferrals of lease and conditional sale indebtedness payments aggregated approximately $91.0 million with a weighted average repayment period of approximately two years. The aircraft lease payment deferrals contemplated by the '95 Reorganization generally anticipated six month deferrals with various payback periods, extending in some instances over the remaining life of the lease, and in other cases over a specified period. Cash repayments of lease deferrals, including interest, were approximately $9.5 million in the fourth quarter of 1995, $23.8 million in 1996 and are expected to approximate $8.7 million in 1997. 32 On June 14, 1995, the Company signed an agreement (the "Extension and Consent Agreement") with Karabu to extend the term of the Icahn Loans from January 8, 1995 to January 8, 2001, to obtain the consent of Karabu and the Icahn Entities to certain modifications to certain promissory notes issued to the PBGC in connection with the '93 Reorganization (the "PBGC Notes") and to obtain agreement with the Icahn Entities to refrain from exercising the right to terminate certain pension plans, covering employees of the Company as to which Mr. Icahn and the Icahn Entities assumed certain obligations in the '93 Reorganization. Any such termination would not increase the obligations of TWA under the PBGC Notes or other obligations of TWA to Mr. Icahn, the Icahn Entities or the PBGC. Collateral for the Icahn Loans includes a number of aircraft, engines and related equipment, along with substantially all of the Company's receivables. On June 26, 1995, the Company made a $12.6 million interest payment on the Icahn Loans. At December 31, 1996, the outstanding balance of the Icahn Loans was approximately $125.1 million (excluding approximately $4.7 million in accrued and unpaid interest). The notes evidencing the Icahn Loans have been pledged by Mr. Icahn and certain affiliated entities as security for certain obligations of the Icahn Entities to the PBGC and /or in respect of funding obligations on the Company's pre-'93 Reorganization pension plans. On June 14, 1995, in consideration of, among other things, the extension of the Icahn Loans, TWA and Karabu entered into an eight-year Karabu Ticket Program Agreement (the "Ticket Agreement"). There are two categories of tickets under the Ticket Agreement: (1) "Domestic Consolidator Tickets," which are subject to a cap of $610 million, based on the full retail price of the tickets ($120 million in the first 15 months and $70 million per year for seven consecutive years through the term of the Ticket Agreement) and (2) "System Tickets," which are not subject to any cap throughout the term of the Ticket Agreement. Tickets sold by the Company to Karabu pursuant to the Ticket Agreement are priced at levels intended to approximate current competitive discount fares available in the airline industry. The Ticket Agreement provides that no ticket may be included with an origin or destination of St. Louis, nor may any ticket include flights on other carriers. Tickets sold by Karabu pursuant to the Ticket Agreement are required to be at fares specified in the Ticket Agreement, net to TWA, and exclusive of tax. No commissions will be paid by TWA for tickets sold under the Ticket Agreement, and TWA believes that under the applicable provisions of the Ticket Agreement, Karabu may not market or sell such tickets through travel agents. Karabu, however, has been marketing tickets through travel agents. TWA has demanded that Karabu cease doing so and Karabu has stated that it disagrees with the Company's interpretation concerning sales through travel agents. In December 1995, the Company filed a lawsuit against Karabu, Mr. Icahn and affiliated companies seeking damages and to enjoin further violations. Mr. Icahn countered threatening to attempt to declare a default on the Icahn Loans on a variety of claims related to his various interpretations of the security documents related to such loans as well as with respect to alleged violations of the Ticket Agreement by the Company. A violation of the Ticket Agreement by the Company could result in a cross-default under the Icahn Loans. Mr. Icahn also alleged independent violations of the Icahn Loans, including, among other things, that the Company has not been maintaining, as required by the terms of the Icahn Loans, certain aircraft which TWA has retired from service and stored which are pledged as security for the Icahn Loans. To endeavor to eliminate this issue from the various disputes with Mr. Icahn, the Company has deposited an amount equal to the appraised fair market value with a security trustee and requested the release of the liens on such aircraft. To date, the Trustee has not released such liens. The parties negotiated a series of standstill agreements pursuant to which TWA's original lawsuit was withdrawn, while the Company and Mr. Icahn endeavored to negotiate a settlement of their differences and respective claims. Those negotiations reached an impasse and the Company re-filed its suit on March 20, 1996 in the St. Louis County Circuit Court. Also on March 20, 1996, Karabu and certain other companies controlled by Mr. Icahn filed suit against the Company alleging violations by the Company of the Ticket Agreement and federal anti- trust laws. On March 24, 1997, the federal District Court for the Southern District of New York, on the Company's motion, dismissed the suit in its entirety. If Karabu's interpretation as to sales of discount tickets to the general public through travel agents was determined by a court or otherwise to be correct and the Company did not otherwise take appropriate action to mitigate the effect of such sales, the Company could suffer significant loss of revenue so as to reduce overall passenger yields on a continuing basis during the term of the Ticket Agreement. In addition, any default by the 33 Company under the ticket agreement or directly on the Icahn loans which resulted in an acceleration of the Icahn Loans could result in a cross-default to the Company's other indebtedness and leases and otherwise have a material adverse effect on the Company. Domestic Consolidator Tickets sold under the Ticket Agreement are limited to certain origin/destination city markets in which TWA has less than a 5% market share limit except for New York where there is a 10% limit. These restricted markets will be reviewed from time to time to determine any change in TWA's market share, and other markets may be designated as necessary. The purchase price for the tickets purchased by Karabu are required to either, at Karabu's option, be retained by Karabu and the amount so retained credited as prepayments against the outstanding balance of the Icahn Loans, or be paid over by Karabu to a settlement trust established in connection with the '93 Reorganization for TWA's account as prepayments on the PBGC Notes. At December 31, 1996, approximately $64.9 million of such proceeds had been applied to the principal balance of the Icahn Loans and $6.4 million had been applied to the PBGC Notes. The Company elected to pay interest, due August 1, 1995 and February 1, 1996, on its 12% Senior Secured Reset Notes, in shares of Common Stock. The amount of such interest aggregated approximately $10.4 million and $10.2 million, respectively, and resulted in the issuance of approximately 1.9 million and 1.1 million shares of Common Stock on the respective dates. The Company elected to pay dividends due February 1, 1996 on its 12% Preferred Stock for the period from November 1, 1995 to and including January 31, 1996, in the amount of approximately $3.3 million, in shares of Common Stock. Capital Resources TWA has no unused credit lines and must satisfy all of its working capital and capital expenditure requirements from cash provided by operating activities, from external borrowings or from the sale of assets. Substantially all of TWA's strategic assets, including its owned aircraft, ground equipment, gates, slots and overhaul facilities, have been pledged to secure various issues of outstanding indebtedness of the Company. Sales of such assets which are not replaced would, under the terms of applicable financing agreements, generally require payment of the indebtedness secured thereby, which indebtedness in many cases would likely exceed the immediately realizable value of such assets. TWA has relatively few non-strategic assets which it could monetize, substantially all of such assets being subject to various liens and security interests which would restrict and/or limit the ability of TWA to realize any significant proceeds from the sale thereof. To the extent that the Company's access to capital is constrained, the Company may not be able to make certain capital expenditures or implement certain other aspects of its strategic plan, and the Company may therefore be unable to achieve the full benefits expected therefrom. As a result of the redemption of the 12% Mandatorily Redeemable Preferred Stock, certain of TWA's leasehold interests in domestic airport gates were released as collateral and are now unencumbered. As a result of the exchange of common stock for 12% Senior Secured Notes as described in Note 8 to the Consolidated Financial Statements, liens on the stock of wholly owned subsidiary which owns TWA's interest in a hangar at Los Angeles International Airport and a floating lien on certain of TWA's domestic airport ground equipment were released as collateral and are also now unencumbered. In addition, based on the current level of outstanding 12% Senior Secured Notes, TWA expects that certain slots at New York's LaGuardia and JFK airports, as well as Chicago's O'Hare airport, will be released as security for the 12% Senior Secured Notes. Commitments In February 1996, TWA executed definitive agreements providing for the operating lease of 10 new B-757 aircraft to be delivered in 1996 and 1997 with deliveries commencing in July 1996. Although individual aircraft rentals escalate over the term of the leases, aggregate rental obligations are estimated to average approximately $50 million per annum over the lease terms after all 10 aircraft have been delivered. These aircraft have an initial lease term of 10 years. As of February 28, 1997, the Company has taken delivery of six leased B-757 aircraft. The Company also entered into an agreement in February 1996 with Boeing for the purchase of ten B-757 aircraft and related engines, spare parts and equipment for an aggregate purchase price of approximately $500 34 million. The agreement requires the delivery of the aircraft in 1997, 1998 and 1999, and provides for the purchase of up to ten additional aircraft. Furthermore, to the extent TWA exercises its options for additional aircraft, the Company will have the right to an equal number of additional option aircraft. TWA has obtained commitments for debt financing for approximately 80% of the total costs associated with the acquisition of eight of the original ten aircraft and obtained commitments for 100% lease financing of the total costs of the remaining two original aircraft. Such commitments are subject to, among other things, so-called material adverse change clauses which, given the Company's financial results for 1996 and anticipated results for the first quarter of 1997, could make the availability of such debt and lease financing dependent upon the lender's and lessor's ongoing evaluation of and satisfaction with the financial condition of TWA. TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce plc relating to the purchase of ten A330-300 twin-engine wide body aircraft and related engines, spare parts and equipment for an aggregate purchase price of approximately $1.1 billion. The agreements, as amended, require the delivery of the aircraft in 1999 and 2000 and provide for the purchase of up to ten additional aircraft. TWA has not yet made arrangements for the permanent financing of the purchases subject to the agreements. In the event of cancellation, predelivery payments of approximately $18 million would be subject to forfeiture. The Company has entered into an agreement to acquire from the manufacturer fifteen new MD- 83s. The long-term leasing arrangement provides for delivery of the aircraft between the second half of 1997 and April 1999. TWA has elected to comply with the transition requirements of the Noise Act by adopting the Stage 2 aircraft phase-out/retrofit option, which requires that 50% of its base level (December 1990) Stage 2 fleet be phased- out/retrofitted by December 31, 1996, 75% by December 31, 1998 and 100% by December 31, 1999. To comply with the 1996 requirement, the Company has retrofitted, by means of engine hush-kits, 30 of its DC-9 aircraft. The aggregate cost of these hush-kits is estimated to be $49 million, most of which has been financed by lessors with repayments being facilitated through increased rental rates. TWA's capital expenditures for 1997 are currently anticipated to total approximately $107 million, including approximately $91 million for flight equipment related expenditures (e.g., progress payments for aircraft and the purchase of related aircraft engines and spare parts). While the Company is seeking financing for certain of its planned capital expenditures, a substantial portion of such expenditures are expected to utilize internally generated funds. The inability to finance or otherwise fund such expenditures could materially adversely affect the ability of the Company to implement its strategic plan. CERTAIN OTHER CAPITAL REQUIREMENTS Expenditures for facilities and equipment, other than aircraft, generally are not committed prior to purchase and, therefore, no such significant commitments exist at the present time. TWA's ability to finance such expenditures will depend in part on TWA's financial condition at the time of the commitment. Availability of NOLs The Company estimates that it had, for federal income tax purposes, net operating loss carryforwards ("NOLs") amounting to approximately $625 million at December 31, 1996, which includes increases in the NOLs as originally filed. Such NOLs expire in 2008 through 2011 if not utilized before then to offset taxable income. Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations issued thereunder, impose limitations on the ability of corporations to use NOLs, if the corporation experiences a more than 50% change in ownership during certain periods. In connection with the change of ownership caused by the '95 Reorganization, the Company elected to reduce its NOLs in accordance with Section 382 of the Code and regulations issued thereunder. If another ownership change were to occur prior to September 1997, the annual limitation on the Company's utilization of its then existing NOLs would be reduced to zero. Changes in ownership in periods thereafter could substantially restrict the Company's ability to utilize its tax net operating loss carryforwards. There can be no assurance that an ownership change will not occur in the future. In addition, the NOLs are subject to examination by the IRS, and thus, are subject to adjustment or disallowance resulting from any such IRS examination. For financial reporting purposes, the tax benefits from tax net operating loss 35 carryforwards arising prior to the '95 Effective Date will, to the extent realized in future periods, have no impact on the Company's operating results, but instead be applied to reduce reorganization value in excess of amounts allocable to identifiable assets. FORWARD-LOOKING STATEMENTS Certain statements made above relating to plans, conditions, objectives, and economic performance go beyond historical information and may provide an indication of future results. To that extent, they are forward-looking statements within the meaning of Section 21E of the Exchange Act, and each is subject to factors that could cause actual results to differ from those in the forward-looking statement. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements, which appears on page F-1 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item regarding the identification of the Company's directors and executive officers is incorporated by reference to information contained under the caption "Directors and Executive Officers" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 1997. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to information contained under the caption "Executive Compensation" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 1997. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements and Schedules. See Index to Financial Statements and Schedules, which appears on age F-1 hereof. Reports on Form 8-K. The following reports on Form 8-K have been filed. (1) A Form 8-K was filed on October 25, 1996, reporting the resignation of Jeffrey H. Erickson as President and Chief Executive Officer. (2) A Form 8-K was filed on December 16, 1996, reporting the appointment of the Company's interim management team. Exhibits. The exhibits listed on the Exhibit Index following the signature page hereof are filed herewith in response to this Item. 36 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE NO. -------- FINANCIAL STATEMENTS: Independent Auditors' Report.......................................... F-2 Statements of Consolidated Operations for the Year Ended December 31, 1996, the Four Months Ended December 31, 1995, the Eight Months Ended August 31, 1995, and the Year Ended December 31, 1994................ F-3 Consolidated Balance Sheets, December 31, 1996 and 1995............... F-4 Statements of Consolidated Cash Flows for the Year Ended December 31, 1996, the Four Months Ended December 31, 1995, the Eight Months Ended August 31, 1995, and the Year Ended December 31, 1994................ F-6 Consolidated Statements of Shareholders' Equity (Deficiency) for the Year Ended December 31, 1996, the Four Months Ended December 31, 1995, the Eight Months Ended August 31, 1995, and the Year Ended December 31, 1994.................................................... F-8 Notes to Consolidated Financial Statements............................ F-9 SCHEDULE: II Valuation and Qualifying Accounts.................................. S-1
SCHEDULES OMITTED Schedules not filed herewith are omitted because of the absence of conditions under which they are required or because the information called for is shown in the financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Trans World Airlines, Inc. We have audited the accompanying consolidated balance sheets of Trans World Airlines, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related statements of consolidated operations, cash flows and shareholders' equity (deficiency) for the year ended December 31, 1996, the four months ended December 31, 1995, the eight months ended August 31, 1995 and the year ended December 31, 1994. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule for the year ended December 31, 1996, the four months ended December 31, 1995, the eight months ended August 31, 1995 and the year ended December 31, 1994. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trans World Airlines, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the year ended December 31, 1996, the four months ended December 31, 1995, the eight months ended August 31, 1995 and the year ended December 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 3 to the consolidated financial statements, the consolidated financial statements reflect the application of fresh start reporting as of September 1, 1995 and, therefore, are not comparable in all respects to the consolidated financial statements for periods prior to such date. The accompanying consolidated financial statements have been prepared assuming that Trans World Airlines, Inc. and subsidiaries will continue as a going concern. The company's recurring losses from operations and its limited sources of additional liquidity raise substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG PEAT MARWICK LLP Kansas City, Missouri March 24, 1997 F-2 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Operating revenues: Passenger................ $3,077,905 $ 943,077 $1,929,166 $2,875,851 Freight and mail......... 153,076 48,384 94,784 149.932 All other................ 323,426 107,013 194,405 381,919 ---------- ---------- ---------- ---------- Total.................. 3,554,407 1,098,474 2,218,355 3,407,702 ---------- ---------- ---------- ---------- Operating expenses: Salaries, wages and benefits................ 1,254,341 373,041 755,708 1,293,570 Earned stock compensation (Note 12)............... 9,056 2,192 55,767 - Aircraft fuel and oil.... 585,163 161,799 296,833 477,555 Passenger sales commissions............. 268,131 80,045 185,981 288,000 Aircraft maintenance materials and repair.... 208,183 51,998 95,657 145,321 Depreciation and amortization............ 161,822 55,168 106,474 183,283 Operating lease rentals.. 302,990 96,393 182,548 261,365 Passenger food and beverages............... 110,092 34,676 68,137 120,804 Special charges (Note 16)..................... 85,915 -- 1,730 138,849 All other................ 767,241 232,716 454,878 778,449 ---------- ---------- ---------- ---------- Total.................. 3,752,934 1,088,028 2,203,713 3,687,196 ---------- ---------- ---------- ---------- Operating income (loss).... (198,527) 10,446 14,642 (279,494) ---------- ---------- ---------- ---------- Other charges (credits): Interest expense (contractual interest of $141,967 for the eight months ended August 31, 1995).................... 126,822 45,917 123,247 195,352 Interest and investment income................... (21,309) (7,484) (10,366) (12,058) Disposition of assets, gains and losses-net (Note 15)................ 1,135 (3,330) 206 (1,072) Reorganization items (Note 19)...................... -- -- 242,243 - Other charges and credits- net (Note 17)............ (30,598) 7,611 (2,379) (28,847) ---------- ---------- ---------- ---------- Total.................. 76,050 42,714 352,951 153,375 ---------- ---------- ---------- ---------- Loss before income taxes and extraordinary items... (274,577) (32,268) (338,309) (432,869) Provision (credit) for in- come taxes (Note 5)....... 450 1,370 (96) 960 ---------- ---------- ---------- ---------- Loss before extraordinary items..................... (275,027) (33,638) (338,213) (433,829) Extraordinary items, net of income taxes (Note 14).... (9,788) 3,500 140,898 (2,005) ---------- ---------- ---------- ---------- Net loss................... (284,815) (30,138) (197,315) (435,834) Preferred stock dividend requirements.............. 36,649 4,751 11,554 15,000 ---------- ---------- ---------- ---------- Loss applicable to common shares.................... $ (321,464) $ (34,889) $ (208,869) $ (450,834) ========== ========== ========== ========== Per share amounts: Loss before extraordinary item and special dividend requirements............. $ (6.60) $ (1.15) Extraordinary item and special dividend requirements............. (.67) .10 ---------- ---------- Net loss.................. $ (7.27) $ (1.05) ========== ==========
See notes to consolidated financial statements F-3 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
REORGANIZED COMPANY --------------------- 1996 1995 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................... $ 181,586 $ 304,340 Receivables, less allowance for doubtful accounts, $12,939 in 1996 and $13,517 in 1995 (Note 8)........... 239,496 226,451 Spare parts, materials and supplies, less allowance for obsolescence, $11,563 in 1996 and $2,201 in 1995 (Note 8)..................................................... 111,239 143,374 Prepaid expenses and other.............................. 54,121 41,482 ---------- ---------- Total................................................ 586,442 715,647 ---------- ---------- Property (Notes 8,9 and 18): Property owned: Flight equipment....................................... 339,150 303,248 Prepayments on flight equipment........................ 39,072 - Land, buildings and improvements....................... 59,879 54,722 Other property and equipment........................... 60,750 39,032 ---------- ---------- Total owned property................................. 498,851 397,002 Less accumulated depreciation.......................... 71,810 18,769 ---------- ---------- Property owned--net.................................. 427,041 378,233 ---------- ---------- Property held under capital leases: Flight equipment....................................... 172,812 172,812 Land, buildings and improvements....................... 54,761 54,761 Other property and equipment........................... 6,570 6,862 ---------- ---------- Total property held under capital leases............. 234,143 234,435 Less accumulated amortization.......................... 46,977 12,602 ---------- ---------- Property held under capital leases--net.............. 187,166 221,833 ---------- ---------- Total property--net.................................. 614,207 600,066 ---------- ---------- Investments and other assets: Investments in affiliated companies (Note 4)............ 108,173 98,156 Investments, receivables and other (Note 9)............. 188,331 178,347 Routes, gates and slots--net............................ 401,659 450,916 Reorganization value in excess of amounts allocable to identifiable assets--net............................... 783,127 825,079 ---------- ---------- Total................................................ 1,481,290 1,552,498 ---------- ---------- $2,681,939 $2,868,211 ========== ==========
See notes to consolidated financial statements F-4 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
REORGANIZED COMPANY ---------------------- 1996 1995 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current maturities of long-term debt (Note 8)........... $ 92,447 $ 67,566 Current obligations under capital leases (Note 9)....... 42,501 42,835 Advance ticket sales.................................... 241,516 209,936 Accounts payable, principally trade..................... 216,675 137,140 Accounts payable to affiliated companies (Note 4)....... 4,894 6,104 Accrued expenses: Employee compensation and vacations earned............. 116,846 101,637 Contributions to retirement and pension trusts (Note 6).................................................... 14,091 17,716 Interest on debt and capital leases.................... 39,420 44,710 Taxes.................................................. 19,018 16,995 Other accrued expenses................................. 203,184 195,454 ---------- ---------- Total accrued expenses............................... 392,559 376,512 ---------- ---------- Total................................................ 990,592 840,093 ---------- ---------- Long-Term Liabilities and Deferred Credits: Long-term debt, less current maturities (Note 8)........ 608,485 764,031 Obligations under capital leases, less current obligations (Note 9)................................... 220,790 259,630 Postretirement benefits other than pensions (Note 6).... 471,171 461,346 Noncurrent pension liabilities (Note 6)................. 30,716 21,253 Other noncurrent liabilities and deferred credits....... 122,080 157,573 ---------- ---------- Total................................................ 1,453,242 1,663,833 ---------- ---------- Mandatorily redeemable 12% preferred stock,(aggregate liquidation preference of $111,179 in 1995)(Note 10).... -- 61,430 ---------- ---------- Commitments and Contingent Liabilities (Notes 1,2,3,6,7,8,9,11,12,16,18) Shareholders' equity: 8% cumulative convertible exchangeable preferred stock, $50 liquidation preference; 3,869 shares issued and outstanding............................................ 39 - Employee preferred stock, $0.01 liquidation preference; special voting rights; shares issued and outstanding; 1996-5,681; 1995-5,277................................. 57 53 Common Stock, $0.01 par value; shares issued and outstanding; 1996-41,763; 1995-35,129.................. 418 351 Additional paid-in capital.............................. 552,544 332,589 Accumulated deficit..................................... (314,953) (30,138) ---------- ---------- Total................................................ 238,105 302,855 ---------- ---------- $2,681,939 $2,868,211 ========== ==========
See notes to consolidated financial statements F-5 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994 (AMOUNTS IN THOUSANDS)
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Cash Flows from Operating Activities: Net loss.................. $ (284,815) $ (30,138) $ (197,315) $ (435,834) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Employee earned stock compensation............ 9,056 2,192 55,767 -- Depreciation and amortization............ 161,822 55,168 106,474 183,283 Amortization of discount and expenses on debt.... 14,744 3,063 12,472 18,571 Extraordinary loss (gain) on extinguishment of debt.................... 9,788 (3,500) (140,898) -- Interest paid in common stock................... 11,332 11,587 -- -- Equity in undistributed earnings of affiliates not consolidated........ (10,017) 12,169 (2,339) 5,517 Revenue from Icahn ticket program................. (71,534) (4,356) -- -- Net gains-losses on disposition of assets... 1,135 (3,330) 206 (1,072) Non-cash special charges. 85,915 -- -- 119,829 Reorganization items..... -- -- 242,243 -- Change in operating assets and liabilities: Decrease (increase) in: Receivables........... 3,927 69,121 (62,094) 37,628 Inventories........... (4,897) 510 5,866 1,259 Prepaid expenses and other current assets. (10,639) 7,686 2,244 6,963 Other assets.......... 111 (3,088) (1,586) (10,079) Increase (decrease) in: Accounts payable and accrued expenses..... 62,594 (40,047) 105,084 48,587 Advance ticket sales.. 19,698 (39,350) 81,598 (33,890) Benefits, other noncurrent liabilities and deferred credits..... (15,057) (5,559) (27,667) 65,182 ---------- --------- ---------- ---------- Net cash provided (used).............. (16,837) 32,128 180,055 5,944 ---------- --------- ---------- ---------- Cash Flows from Investing Activities: Proceeds from sales of property................. 3,234 7,069 2,221 76,240 Capital expenditures...... (121,547) (42,973) (16,554) (44,897) Net decrease (increase) in investments, receivables and other................ (6,708) 16,397 14,926 23,733 ---------- --------- ---------- ---------- Net cash provided (used).............. (125,021) (19,507) 593 55,076 ---------- --------- ---------- ---------- Cash Flows from Financing Activities: Proceeds from long-term debt issued.............. 2,750 22,100 -- 6,213 Proceeds from sale and leaseback of certain aircraft................. 13,800 -- -- -- Repayments on long-term debt and capital lease obligations.............. (117,203) (39,654) (62,158) (116,331) Net proceeds from sale of preferred stock.......... 186,163 -- -- -- Net proceeds from exercise of equity rights, warrants and options..... 1,034 51,930 -- -- Redemption of 12% Preferred Stock.......... (81,749) -- -- -- Cash dividends paid on preferred stock.......... (14,489) -- -- -- Increase (decrease) in checks outstanding and other.................... 28,798 (2,770) 3,092 276 ---------- --------- ---------- ---------- Net cash provided (used).............. 19,104 31,606 (59,066) (109,842) ---------- --------- ---------- ---------- Net increase (decrease) in cash and cash equivalents. (122,754) 44,227 121,582 (48,822) Cash and cash equivalents at beginning of period.... 304,340 260,113 138,531 187,353 ---------- --------- ---------- ---------- Cash and cash equivalents at end of period.......... $ 181,586 $ 304,340 $ 260,113 $ 138,531 ========== ========= ========== ==========
See notes to consolidated financial statements F-6 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994 (AMOUNTS IN THOUSANDS) SUPPLEMENTAL CASH FLOW INFORMATION
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Cash Paid During the Period for: Interest.............. $102,311 $27,318 $ 55,878 $110,287 ======== ======= ======== ======== Income taxes.......... $ 159 $ 7 $ 39 $ 24 ======== ======= ======== ======== Information About Noncash Operating, Investing and Financing Activities: Promissory notes issued to finance aircraft acquisition. $ 10,565 $ -- $ -- $ -- ======== ======= ======== ======== Promissory notes issued to finance aircraft predelivery payments............. $ 19,862 $ -- $ 12,690 $ 7,000 ======== ======= ======== ======== Property acquired and obligations recorded under new capital lease transactions... $ 4,266 $ -- $ 12,690 $ 7,000 ======== ======= ======== ======== Partial interest on debt paid in kind, issued and valued at principal amount..... $ -- $ 574 $ 18,496 $ -- ======== ======= ======== ======== Common Stock issued in lieu of cash dividends on mandatorily redeemable 12% preferred stock...... $ 3,255 $ -- $ -- $ -- ======== ======= ======== ======== Exchange of long-term debt for common stock: Debt cancelled including accrued interest, net of unamortized discount........... $ 41,021 $ -- $ -- $ -- Common stock issued, at fair value...... 49,182 -- -- -- -------- ------- -------- -------- Extraordinary loss.. $ 8,161 $ -- $ -- $ -- ======== ======= ======== ========
ACCOUNTING POLICY For purposes of the Statements of Consolidated Cash Flows, TWA considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. See Notes to Consolidated Financial Statements F-7 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994 (AMOUNTS IN THOUSANDS)
ADDITIONAL 12% 8% EMPLOYEE PAID-IN PREFERRED PREFERRED PREFERRED COMMON CAPITAL ACCUMULATED STOCK STOCK STOCK STOCK (DEFICIENCY) DEFICIT TOTAL --------- --------- --------- ------ ------------ ----------- --------- PREDECESSOR COMPANY: Balance, December 31, 1993................... $ 125 $ - $ - $ 200 $ 105,925 $ (87,892) $ 18,358 Net loss for 1994....... -- -- -- -- -- (435,834) (435,834) ----- ---- ---- ----- --------- ---------- --------- Balance, December 31, 1994................... 125 -- -- 200 105,925 (523,726) (417,476) Net loss for the eight months ended August 31, 1995................... -- -- -- -- -- (197,315) (197,315) Eliminate Predecessor equity accounts in connection with fresh start reporting........ (125) -- -- (200) (105,925) 35,817 (70,433) Record additional excess of reorganization value over identifiable assets................. -- -- -- -- -- 685,224 685,224 Issuance of Common and Employee Preferred Stock pursuant to Plan of Reorganization...... -- -- 53 172 269,775 -- 270,000 ----- ---- ---- ----- --------- ---------- --------- Balance, August 31, 1995................... -- -- 53 172 269,775 -- 270,000 REORGANIZED COMPANY: Equity rights exercised. -- -- -- 132 51,727 -- 51,859 Interest on 12% Notes paid in Common Stock... -- -- -- 19 11,568 -- 11,587 Options and warrants exercised.............. -- -- -- 28 43 -- 71 Earned Stock Compensation........... -- -- -- -- 2,046 -- 2,046 Amortization of the excess of redemption value over carrying value of Mandatorily Redeemable 12% Preferred Stock........ -- -- -- -- (2,570) -- (2,570) Net loss for the four months ended December 31, 1995............... -- -- -- -- -- (30,138) (30,138) ----- ---- ---- ----- --------- ---------- --------- Balance, December 31, 1995................... -- -- 53 351 332,589 (30,138) 302,855 Warrants exercised...... -- -- -- 4 68 -- 72 Options exercised....... -- -- -- 2 1,248 -- 1,250 Earned Stock Compensation........... -- -- -- -- 6,875 -- 6,875 Allocation of employee preferred stock to ALPA ESOP................... -- -- 6 -- (6) -- -- Conversion of employee preferred stock to Common Stock........... -- -- (2) 2 -- -- -- Net proceeds from issuance of 8% preferred stock........ -- 39 -- -- 186,124 -- 186,163 Dividends on 8% preferred stock paid in cash................... -- -- -- -- (11,349) -- (11,349) Dividends on mandatorily redeemable 12% preferred stock paid in Common Stock........... -- -- -- 3 (3) -- -- Dividends on mandatorily redeemable 12% preferred stock paid in cash................... -- -- -- -- (3,140) -- (3,140) Amortization of the excess of redemption value over carrying value of mandatorily redeemable 12% preferred stock........ -- -- -- -- (328) -- (328) Excess of cash paid for early redemption of mandatorily redeemable 12% preferred stock over carrying value.... -- -- -- -- (19,992) -- (19,992) Common Stock issued in exchange for 12% notes. -- -- -- 45 49,137 -- 49,182 Interest on 12% Notes paid in Common Stock... -- -- -- 11 11,321 -- 11,332 Net loss for 1996....... -- -- -- -- -- (284,815) (284,815) ----- ---- ---- ----- --------- ---------- --------- Balance, December 31, 1996................... $ - $ 39 $ 57 $ 418 $ 552,544 $ (314,953) $ 238,105 ===== ==== ==== ===== ========= ========== =========
See notes to consolidated financial statements F-8 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL CONDITION AND LIQUIDITY: Trans World Airlines, Inc. ("TWA" or the "Company") has undergone two reorganizations under Chapter 11 of the Bankruptcy Code since 1992, as further described in Note 3--Chapter 11 Reorganizations. In August 1995 the Company emerged from the most recent bankruptcy proceeding and thereafter, through the second quarter of 1996, the Company had experienced improvements in its operating performance as operating income had increased to $7.8 million in six months ended June 30, 1996, as compared to an operating loss of $21.9 million in the same period of 1995. However, beginning in the third quarter of 1996, the Company's operating performance substantially deteriorated as the Company's operating profit for the third quarter, typically the strongest period of the year, declined to $26.0 million in the three months ended September 30, 1996, as compared to a combined operating profit (excluding special charges and earned stock compensation charges aggregating $57.9 million) of $103.7 million in the comparable period of the prior year. The results of the fourth quarter of 1996 evidenced a further acceleration of deterioration as the Company reported an operating loss (excluding special charges) of $146.5 million, as compared to operating income of $1.1 million in the same period of 1995. In the second half of 1996, the Company's revenues increased only 2.4%, while capacity operated, measured in ASMs, increased by 6.9%, as compared to the second half of 1995. Operating costs, excluding earned stock compensation and special charges, increased 16.0% over this same period. The most significant increases were; salaries, wages and benefits ($82.4 million), which reflected the increased number of employees and additional overtime costs; fuel ($69.4 million), reflecting significantly higher units costs and increased usage; and maintenance costs. Notwithstanding the actions taken and planned by management to improve the Company's future operating results as described below, management expects that its first quarter 1997 operating loss will significantly exceed that reported in the first quarter of 1996. In light of the deterioration in the Company's operating results, management has over the last several months refocused and accelerated certain aspects of its business strategy, including its fleet modernization and consolidation plan, route structure and facility improvements and efficiencies. Management believes that its recent operating results have been adversely affected by an aggressive increase in capacity, which when combined with unexpected maintenance delays and related costs, has negatively impacted schedule reliability resulting in excessive levels of flight cancellations and deterioration in its on-time performance. The Company believes that this has adversely affected its unit revenues (principally yields) and costs. In response to these issues, management has taken action to accelerate the phase out of all B-747 and L-1011 aircraft, reduce low yield domestic JFK feed service, curtail and/or eliminate historically unprofitable international routes and consolidate for the near term most operations at JFK to a single terminal. The above actions are designed to improve its operational performance and make its product more attractive to the business segment which offers higher yields. The Company has also curtailed the amount of contract maintenance services provided to third parties and redeployed those resources to TWA's aircraft. Furthermore, the Company has reviewed its route structure and fleet plan. The Company recently announced that it would discontinue service to Athens and Frankfurt and that it would undertake to accelerate the replacement of its L-1011 and B-747 aircraft with newer and smaller sized aircraft, specifically B-757, B-767 and MD-80 aircraft. Management believes such aircraft will better match the market demands in cities served and provide efficiencies relative to the costs of fuel, flight crews and maintenance. The Company plans to retire its remaining fleet of L-1011 and B- 747 aircraft in 1997, although the implementation of this plan could be delayed if suitable replacement aircraft can not be obtained within this time frame. The Company has also determined to consolidate a substantial potion of its operations at JFK into a single terminal which should result in reductions in labor and other costs and improve the overall utilization of this facility. In connection with the above described plans, management has announced a comparable reduction in employee headcount. Management may undertake further actions to reduce costs which may result in additional reductions of the number of employees. The Company's consolidated cash and cash equivalents balance at December 31, 1996 was $181.6 million (including approximately $28.3 million in cash and cash equivalents held in its international operations and by F-9 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) its subsidiaries which, based upon various foreign monetary regulations and other factors, might not be immediately available to the Company), a $122.7 million decrease from the December 31, 1995 balance of $304.3 million. Due to seasonal factors, the Company's cash balances during the first quarter of each year are typically lower than in other periods. These seasonal factors, when combined with the large anticipated loss in the first quarter of 1997 which would significantly exceed the loss reported in the comparable quarter of 1996, will reduce cash balances significantly below the cash balance at December 31, 1996. In February 1997, in order to improve its liquidity, the Company entered into an agreement with and received approximately $26 million from certain St. Louis business enterprises, representing the advance payment for tickets for future travel by such enterprises. The Company is currently pursuing other projects intended to increase its cash balances. In March 1997, the Company offered 50,000 Units ("Units"), with each Unit consisting of (i) one 12% Senior Secured Note due 2002 (a "Note"), in the principal amount of $1,000, and (ii) one Redeemable Warrant (a "Warrant") to purchase 126.26 shares of Common Stock at an exercise price of approximately $7.92 per share (the "Offering"). The Notes are secured by a lien on certain assets of the Company, including 1) the Company's beneficial interest in its FAA designated take-off and landing slots at three high-density, capacity- controlled airports 2) currently-owned and hereafter-acquired defined ground equipment of the Company used at certain domestic airports, and 3) all of the issued and outstanding stock of (a) a wholly-owned subsidiary of TWA holding the leasehold interest in a hangar at Los Angeles International Airport and (b) three wholly-owned subsidiaries of TWA holding leasehold interests in gates and related support space at certain domestic airports served by the Company. The Company realized $47.175 million (net of discounts and commissions and estimated expenses) in proceeds from the Offering. The Company intends to use a portion of the proceeds from the Offering (not to exceed approximately $5 million) to release certain of the collateral to be used to secure the Notes from a prior existing lien and the remainder of the proceeds for general corporate purposes. The Offering was made pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Units, Notes and Warrants and underlying shares of Common Stock issuable upon exercise of the Warrants are not registered under the federal and state securities laws. The Company has agreed to use its best efforts to file and, if declared effective, to effect, the registration of the Notes and the Warrants under the Securities Act under certain circumstances. The Company's collective bargaining agreements with all of its union- represented employee groups, which represent approximately 82% of the Company's work force, become amendable after August 31, 1997. While the Company cannot predict the precise wage rates that will be in effect at such time (since such rates will be determined by subsequent events), the wage rates then in effect will likely increase. However, management believes that it is essential that the Company's labor costs remain favorable in comparison to its largest competitors. The Company will seek to continue to improve employee productivity as an offset to any wage increases and will continue to explore other ways to control and/or reduce operating expenses. There can be no assurance that the Company will be successful in obtaining such productivity improvements or unit cost reductions. In the opinion of management, the Company's financial resources are not as great as those of most of its competitors and, therefore, any substantial increase in its labor cost as a result of any new labor agreements or any cessation or disruption of operation due to any strike or work action could be particularly damaging to the Company. As a result of application of fresh start reporting in August of 1995, substantial values were assigned to routes, gates and slots ($458.4 million) and reorganization value in excess of amounts allocable to identifiable assets ($839.1 million). The Company has evaluated its future cash flows and, notwithstanding its substantial operating losses in recent periods, expects that the carrying value of the intangibles at December 31, 1996 will be recovered. However, the achievement of such improved future operating results and cash flows are subject to considerable uncertainties. In future periods these intangibles will be evaluated for recoverability based upon estimated future cash flows. If expectations are not substantially achieved, charges to future operations for impairment of those assets may be required and such changes could be material. F-10 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The accompanying consolidated financial statements have been prepared on a going concern basis which assumes continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company remains highly leveraged and substantially all of TWA's assets are and will likely remain subject to various liens and security interest, and many of its loan agreements contain mandatory prepayment provisions in the event that the assets are sold. Accordingly, management expects that TWA will not be able to rely, in any significant degree, on the proceeds from sales of assets to fund operations and that TWA may have limited sources of additional liquidity other than cash generated by operations. The Company's ability to improve its financial position and meet its financial obligations will depend upon a variety of factors including; significantly improved operating results, favorable domestic and international airfare pricing environments, absence of adverse general economic conditions, more effective operating cost controls and efficiencies, and the Company's ability to attract new capital and maintain adequate liquidity. No assurance can be given that the Company will be successful in generating the operating results or attracting new capital required for future viability. As a result of the redemption of the 12% Mandatorily Redeemable Preferred Stock, certain of TWA's leasehold interests in domestic airport gates were released as collateral and are now unencumbered. As a result of the exchange of common stock for 12% Senior Secured Notes as described in Note 8, liens on the stock of wholly owned subsidiary which owns TWA's interest in a hangar at Los Angeles International Airport and a floating lien on certain of TWA's domestic airport ground equipment were released as collateral and are also now unencumbered. In addition, based on the current level of outstanding 12% Senior Secured Notes, TWA expects that certain slots at New York's LaGuardia and JFK airports and Chicago's O'Hare airport will be released as security for the 12% Senior Secured Notes. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Accounting policies and methods of their application that significantly affect the determination of financial position, cash flows, and results of operations are as follows: (a) Description of Business: TWA is one of the major airlines in the United States serving many of the principal domestic and transatlantic destinations. TWA's principal domestic routes include service to and from its St. Louis and New York-JFK hubs and between other cities in the U.S., both nonstop and through St. Louis. TWA's domestic routes also provide connections with its international service to and from U.S. cities and certain major cities in Europe and the Middle East (see Note 21). The airline industry is highly competitive and the factors affecting competition are subject to rapid change. Many of the Company's competitors are larger and have significantly greater financial resources. In addition, several carriers have introduced or have announced plans to introduce low- cost, short-haul service, which may result in increased competition to the Company. Internationally, TWA competes in several "limited entry" markets in which, as a result of governmental regulations and agreements with foreign governments, TWA has traditionally competed with a limited number of carriers. No assurance can be given that TWA will continue to have the advantage of all of the "limited entry" markets in which it currently operates or that it will not face substantial additional competition. Historically, the airline industry has experienced substantial volatility in profitability as a result of, among other factors, general economic conditions, competitive pricing initiatives, the overall level of capacity operated in the industry and fuel prices. TWA continues to be highly leveraged and has and will continue to have significant debt service obligations. TWA presently has no unused credit lines and substantially all of TWA's strategic assets have been pledged to secure indebtedness of the Company. (b) Fresh Start Reporting: Financial accounting during a Chapter 11 proceeding is prescribed in "Statement of Position 90-7 of the American Institute of Certified Public Accountants", titled "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which TWA adopted effective June 30, 1995. The emergence from the 1995 Chapter 11 proceeding (the "'95 Reorganization") on August 23, F-11 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1995 (the "'95 Effective Date"), resulted in the creation of new reporting entities without any accumulated deficit and with the Company's assets and liabilities restated to their estimated fair values (also see Note 19-Fresh Start Reporting). Because of the application of fresh start reporting, the financial statements for periods after reorganization are not comparable in all respects to the financial statements for periods prior to the '95 Reorganization. For periods during the Chapter 11 proceedings, prepetition liabilities which were unsecured or estimated to be undersecured were classified as "Liabilities Subject to Compromise in the Chapter 11 Reorganization Proceedings." The accrual of interest on such liabilities was discontinued for the period from June 30, 1995 to the '95 Effective Date. (c) Consolidation: The consolidated financial statements include the accounts of TWA and its subsidiaries. All significant inter-company transactions have been eliminated. The results of Worldspan, L.P. ("Worldspan"), a 25% owned affiliate are recorded under the equity method and are included in the Statements of Consolidated Operations in Other Charges (Credits). Certain amounts previously reported have been reclassified to conform with revised classifications. (d) Property and Depreciation: Property and equipment owned are depreciated to residual values over their estimated useful service lives on the straight- line method. Property held under capital leases is amortized on the straight-line method over its estimated useful life, limited generally by the lease period. Estimated remaining useful service lives and residual values are reviewed periodically for reasonableness and any necessary change is effected at the beginning of the accounting period in which the revision is adopted. In connection with the application of fresh start reporting, no significant changes in the estimated useful lives of assets have been made. Estimated useful service lives in effect for the purpose of computing the provision for depreciation, were: Flight equipment (aircraft and engines, including related spares)--16 to 25 years, varying by aircraft fleet type Buildings--20 to 50 years Other equipment--3 to 20 years Leasehold improvements--Estimated useful life limited by the lease period Maintenance and repairs, including periodic aircraft overhauls, are expensed in the year incurred; major renewals and betterments of equipment and facilities are capitalized and depreciated over the remaining life of the asset. (e) Intangible Assets: Route authorities are amortized on a straight line basis over 30 years (1), gates over the term of the related leases and slots over 20 years. Routes, gates and slots consist of the following amounts at December 31 (in thousands):
1996 1995 --------- -------- Routes................................................... $ 248,100 $276,000 Gates.................................................... 86,649 86,649 Slots.................................................... 95,800 95,800 --------- -------- 430,549 458,449 Accumulated Amortization................................. 28,890 7,533 --------- -------- $ 401,659 $450,916 ========= ========
-------- (1) Prior to January 1, 1995, the Company utilized an estimated useful life for route authorities of 40 years (also see Note 16-Special Charges and Other Nonrecurring Items). The reorganization value in excess of amounts allocable to identifiable assets is being amortized over a twenty year period on the straight-line method. Accumulated amortization at December 31, 1996 and 1995 was $55,937,000 and $13,984,000, respectively. F-12 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) When facts and circumstances suggest that intangible and other long-term assets may be impaired, the Company evaluates their recoverability based upon estimated undiscounted future cash flows over the remaining estimated useful lives. The amount of impairment, if any, is measured based on projected undiscounted future operating cash flows. (f) Foreign Exchange: Foreign currency and amounts receivable and payable in foreign currencies are translated into U.S. dollars at current exchange rates on the date of the financial statements. Revenue and expense transactions are translated at average rates of exchange in a manner that produces approximately the same dollar amounts that would have resulted had the underlying transactions been translated into dollars on the dates they occurred. Exchange gains and losses are included in net income for the period in which the exchange rate changes. (g) Inventories: Inventories, valued at standard cost, which approximates actual average unit cost, consist primarily of expendable spare parts used for the maintenance and repair of flight equipment, plus aircraft fuel and other operating supplies. A provision for obsolescence of spare parts is accrued at annual rates which will provide an allowance such that the unused inventory, at the retirement date of the related aircraft fleet, is reflected at the lower of cost or estimated net realizable value. (h) Passenger Revenue Recognition: Passenger ticket sales are recognized as revenue when the transportation service is rendered. At the time of sale a current liability for advance ticket sales is established and subsequently is eliminated either through carriage of the passenger by TWA, through billing from another carrier that renders the service, or by refund to the passenger. Under TWA's "Frequent Flight Bonus Program" ("FFB"), frequent travelers may accumulate certain defined unit mileage credits which entitle them to a choice of various awards, including certain free air transportation on TWA at a future date. When the free travel award level is achieved by a frequent traveler, a liability is accrued and TWA's operating expense is charged for the estimated incremental cost which will be incurred by TWA upon the future redemption of the free travel awarded. Pursuant to the 1995 Restructuring, TWA issued 600,000 ticket vouchers, each having a face value of $50, which may be used for a discount of up to 50% off the cost of a ticket for transportation on TWA. Concurrently, TWA entered into an agreement, as amended, to purchase for cash from a third party any ticket vouchers acquired by the stand-by purchaser. The ticket vouchers were initially recorded as a liability at their estimated fair value, approximately $26.2 million. The liability will be relieved in future periods as vouchers are redeemed for cash or will be reflected as revenue when the transportation is provided for tickets purchased with vouchers. Approximately 180,000 and 396,000 vouchers were outstanding at December 31, 1996 and 1995, respectively. (i) Interest Capitalized: Interest cost associated with funds expended for the acquisition of qualifying assets is capitalized. Interest capitalized was $5,463,000 in 1996 and $2,133,000 in 1994. There was no interest capitalized during 1995. (j) Income Taxes: TWA accounts for income taxes based on Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This statement requires the use of the liability method to record the deferred income tax consequences of differences between the financial reporting and income tax bases of assets and liabilities. (k) Postretirement Benefits Other Than Pensions: TWA accounts for postretirement benefits other than pensions based on SFAS No. 106 which requires that the expected cost of providing such benefits be accrued over the years that the employee renders service, in a manner similar to the accounting for pension benefits. (l) Deferred Credit-Aircraft Operating Leases: The present value of the excess of contractual rents due under aircraft operating leases over the fair rentals for such aircraft were recorded as deferred credits as part of the application of fresh start reporting. The deferred credit will be increased through the accrual of interest F-13 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) expense and reduced through a reduction in operating lease rentals over the terms of the respective aircraft leases. At December 31, 1996 and 1995, the unamortized balance of the deferred credits were $31,408,000 and $41,727,000 respectively. (m) Environmental Contingencies: TWA is subject to numerous environmental laws and regulations and is subject to liabilities and compliance costs arising from its past and current handling, processing, recycling, storing and disposing of hazardous substances and hazardous wastes. It is TWA's policy to accrue environmental remediation costs when it is probable that a liability has been incurred and an amount can be reasonably estimated. As potential environmental liabilities are identified and assessments and remediation proceed, these accruals are reviewed periodically and adjusted, if necessary, as additional information becomes available. The accruals for these liabilities can significantly change due to factors such as the availability of additional information on the nature or extent of the contamination, methods and costs of required remediation and other actions by governmental agencies. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. (n) Mandatorily Redeemable 12% Preferred Stock: The Mandatorily Redeemable 12% Preferred Stock issued in connection with the 1995 Reorganization was initially recorded at its estimated fair value. Until its redemption in April 1996, the carrying amount was being increased by amortization of the difference between the redemption value and the carrying amount, using the interest method. Such amounts were recorded as additional preferred stock dividend requirements. A special dividend requirement of approximately $20.0 million was recorded in 1996 to reflect the excess of the early redemption price over the carrying value of the Mandatorily Redeemable 12% Preferred Stock. (o) Earnings (Loss) Per Share: In computing the loss applicable to common shares for 1996 and the four months ended December 31, 1995, the net loss has been increased by dividend requirements on the Mandatorily Redeemable 12% Preferred Stock (including amortization of the difference between the carrying amount and the redemption value and the special dividend requirement related to the early redemption in 1996) and on the 8% Cumulative Convertible Exchangeable Preferred Stock from the date of issuance in March 1996. In computing the related net loss per share, the loss applicable to common shares has been divided by the aggregate average number of outstanding shares of Common Stock (38.5 million in 1996 and 28.0 million in 1995) and Employee Preferred Stock (5.7 million in 1996 and 5.3 million in 1995) which, with the exception of certain special voting rights, is the functional equivalent of Common Stock. No effect has been given to stock options, warrants or potential issuances of additional Employee Preferred Stock as the impact would have been anti-dilutive. Earnings per share of the predecessor company are not presented as the amounts are not meaningful. (p) Concentration of Credit Risk: TWA does not believe it is subject to any significant concentration of credit risk. At December 31, 1996 most of the Company's receivables related to tickets sold to individual passengers through the use of major credit cards (37%) or to tickets sold by other airlines (16%) and used by passengers on TWA. These receivables are short- term, generally being settled shortly after sale or in the month following usage. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts. (q) Use of Estimates: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (r) Stock-Based Compensation: TWA applies APB Opinion No. 25 and related interpretations in accounting for its plans. This opinion allows for stock-based employee compensation to be recognized based on the intrinsic value. (s) Presentation: Certain prior period amounts have been reclassified to conform with current year presentation. F-14 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. CHAPTER 11 REORGANIZATIONS: On January 31, 1992, TWA commenced a reorganization case (the "'93 Reorganization") by filing a voluntary petition for relief under Chapter 11, Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). TWA's subsidiary companies did not file for Chapter 11 protection. On August 12, 1993 the Bankruptcy Court entered an order confirming the '93 Reorganization, which was jointly proposed by TWA and the Official Unsecured Creditors' Committee. The '93 Reorganization became effective on November 3, 1993 (the "'93 Effective Date"). Pursuant to the '93 Reorganization Plan, on the '93 Effective Date: (i) all prepetition interests in TWA (including TWA's previously existing preferred stock, preference stock and common stock) were cancelled without any consideration being distributed on account of those interests; (ii) nine million shares of newly authorized TWA common stock, representing 45% of TWA's then authorized common stock, were issued to trusts established for the benefit of TWA's domestic unionized and domestic non-unionized and management employees (the "Employee Stock Trusts") in exchange for certain wage, benefit and claim concessions granted pursuant to certain agreements entered into by TWA with its domestic unionized and domestic non-unionized and management employees (the "'92 Labor Agreements"); (iii) 11 million shares of newly authorized common stock, representing 55% of TWA's authorized common stock, were issued to a voting trust established on the '93 Effective Date for the benefit of certain creditors of TWA in partial satisfaction and discharge of their claims, which trust issued 11 million Voting Trust Certificates ("VTCs") evidencing the rights of the VTC holders in the Voting Trust; (iv) 12.5 million shares of newly authorized preferred stock were issued for the benefit of certain creditors of TWA in partial satisfaction and discharge of their claims; (v) new five year notes (the "10% Senior Secured Notes"), new seven year notes (the "8% Senior Secured Notes"), new eight year, 8% secured notes (the "IAM Back Pay Notes"), new equipment trust certificate notes (the "11% ETC Notes") and Aircraft Financing Secured Notes with varying interest rates and maturity dates (the "Aircraft Financing Notes"), the aggregate principal amount of which was approximately $730.6 million, were issued to certain creditors of TWA in full satisfaction and discharge of their claims; (vi) all claims except for certain claims to be reinstated under the '93 Reorganization Plan were discharged; (vii) certain contingent and/or unliquidated claims were settled and (viii) executory contracts and unexpired leases to which TWA was a party were assumed or rejected, in each case on the terms and subject to the conditions set forth in the '93 Reorganization. Notwithstanding the reductions in levels of debt and obligations achieved through the '93 Reorganization, TWA's operating results and cash flows did not meet the projected levels upon which the '93 Reorganization Plan was formulated, and in 1994 it was determined that a recapitalization of the Company was needed. In the second quarter of 1995, the Company solicited and received sufficient acceptances to effect the proposed "prepackaged" plan of bankruptcy. Therefore, on June 30, 1995, the Company filed a prepackaged Chapter 11 plan of reorganization, which with certain modifications was confirmed by the United States Bankruptcy Court for the Eastern District of Missouri (the "Bankruptcy Court") on August 4, 1995. On August 23, 1995, approximately eight weeks after filing the prepackaged Chapter 11 plan, the '95 Reorganization became effective and the Company emerged from the protection of this second Chapter 11 proceeding. In connection with the '95 Reorganization, the Company (i) exchanged certain of its then outstanding debt securities for a combination of newly issued Mandatorily Redeemable 12% Preferred Stock, Common Stock, warrants to purchase Common Stock and debt securities, (ii) converted the then outstanding preferred stock of the Company to shares of Common Stock, warrants and equity rights, (iii) obtained certain short-term lease payment and conditional sale indebtedness deferrals amounting to approximately $91 million and other modifications to certain aircraft leases and (iv) obtained an extension of the Company's approximately $190 million principal amount of indebtedness to certain entities controlled by Mr. Carl C. Icahn (the "Icahn Loans"). The Company also (i) effected a reverse stock split of its then outstanding common stock for Common Stock, (ii) completed an equity rights offering, (iii) distributed certain warrants to its then current equity holders and (iv) implemented certain amendments to the Company's Certificate of Incorporation. F-15 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In connection with and as a precondition to the '95 Reorganization, in August and September of 1994, the Company entered into new three-year labor agreements (the "'94 Labor Agreements"), amending existing collective bargaining agreements with the three labor unions representing approximately 84% of the Company's employees, the IAM, ALPA and IFFA. The '94 Labor Agreements provided for waiver of certain contractually agreed wage concessions, modifications to work rules and the deletion of certain provisions of the then existing labor agreements, including eliminating so called snapbacks, i.e., the automatic restoration of the wage reductions granted in such agreements upon their expiration. During 1994 and 1995, the Company also implemented a number of similar saving initiatives with respect to domestic non-union and management employees, primarily through reducing head count, altering benefit packages, and eliminating certain planned restorations of wage reductions. On June 14, 1995, as one of the transactions contemplated by the extension of the Icahn Loans, TWA and an entity affiliated with Mr. Icahn, Karabu Corporation ("Karabu"), entered into an agreement for the sale of tickets (the "Ticket Agreement"). There are two categories of tickets under the Karabu Ticket Program: (1) "Domestic Consolidator Tickets" which are subject to a cap of $610 million, based on the full retail price of the tickets ($120 million in the first fifteen months and $70 million per year for seven consecutive years through the term of the Ticket Agreement) and (2) "System Tickets" and "Matching Tickets" which are not subject to any cap throughout the term of the Ticket Agreement. The Ticket Agreement provides for the sale of tickets to Karabu at prices significantly lower than the full retail price. Domestic Consolidator Tickets sold under the Ticket Agreement are limited to certain origin/destination city markets in which TWA has less than a 5% market share, except for the New York market, which has a 10% market share limit. These restricted markets will be reviewed from time to time to determine any change in TWA's market share, and other markets may be designated as necessary. Ticket sales under the Ticket Program, which commenced in September 1995, were $139.7 million in 1996 and $16.0 million in 1995 at full published fares. The aggregate net sales, after applicable discounts under the Ticket Agreement, were $76.9 million in 1996 and $8.8 million in 1995. Of these amounts, $71.5 million and $4.4 million is included as passenger revenues for 1996 and the four months ended December 31, 1995, respectively, as the related transportation had been provided. Substantially all ticket sales under the Ticket Program to date have been "System Tickets". The purchase price for the tickets purchased by Karabu are required to either, at Karabu's option and with certain restrictions, be retained by Karabu and the amount so retained shall be credited as prepayments against the outstanding balance of the Icahn Loans, or be paid over to the settlement trust established in connection with the '93 Reorganization for TWA's account as prepayments on the PBGC Notes. At December 31, 1996, approximately $64.9 million of such proceeds had been applied to the principal balance of the Icahn Loans, and $6.4 million had been applied to the PBGC Notes, which resulted in a $1.6 million extraordinary charge related to the early extinguishment of PBGC Notes (See Note 14). Tickets sold to Karabu pursuant to the Ticket Agreement are priced at levels intended to approximate current competitive discount fares available in the airline industry. The Ticket Agreement provides that no ticket may be included with an origin or destination of St. Louis, nor may any ticket include flights on other carriers. Tickets sold pursuant to the Ticket Agreement are required to be at fares specified in the Agreement, net to TWA, and be exclusive of tax. No commissions will be paid by TWA for tickets sold under the Ticket Agreement, and in general TWA believes that under the applicable provisions of the Ticket Agreement such tickets may not be marketed or sold through travel agents. Karabu, however, has been marketing tickets through travel agents. TWA has demanded that Karabu cease doing so and Karabu has stated that it disagrees with the Company's interpretation concerning sales through travel agents. In December 1995, the Company filed a lawsuit against Karabu, Mr. Icahn and affiliated companies seeking damages and to enjoin further violations. Mr. Icahn countered threatening to attempt to declare a default on the Icahn Loans on a variety of claims related to his F-16 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) various interpretations of the security documents related to such loans as well as with respect to alleged violations of the Ticket Agreement by the Company. The parties then negotiated a series of standstill agreements pursuant to which the lawsuit was temporarily withdrawn while the parties endeavor to negotiate a settlement of their differences and respective claims. Those negotiations reached an impasse and the Company re-filed its suit on March 20, 1996 in the St. Louis County Circuit Court. Also on March 20, 1996, Karabu and certain other companies controlled by Mr. Icahn filed suit against the Company alleging violations by the Company of the Ticket Agreement and federal anti-trust laws. On March 24, 1997, the federal District Court for the Southern District of New York, on the Company's motion, dismissed Karabu's suit in its entirety. If Karabu's interpretation as to sales of discount tickets to the general public through travel agents was determined by a court or otherwise to be correct and the Company did not otherwise take appropriate action to mitigate the effect of such sales, the Company could suffer significant loss of revenue so as to reduce overall passenger yields on a continuing basis during the eight year term of the Ticket Agreement. In addition, any default by the Company under the ticket agreement or directly on the Icahn loans which resulted in an acceleration of the Icahn Loans could result in a cross-default to the Company's other indebtedness and leases and otherwise have a material adverse effect on the Company. 4. INVESTMENTS: TWA, through a wholly-owned subsidiary, has a 25% partnership interest in Worldspan, a joint venture among TWA, Delta Airlines, Inc., Northwest Airlines, Inc. and ABACUS Distribution Systems PTE Ltd. Worldspan owns, markets and operates a global computer airline passenger reservation system on behalf of subscriber travel agents and contracting airlines who pay booking fees to Worldspan for such reservation service. TWA accounts for its investment in the partnership on the equity basis. TWA's share of the combined net earnings (loss) of the partnership was approximately $11,919,000 for the year ended December 31, 1996, $(11,535,000) for the four months ended December 31, 1995, $3,607,000 for the eight months ended August 31, 1995 and $(3,616,000) for the year ended December 31, 1994, which is included in Other Charges (Credits) in TWA's Statements of Consolidated Operations. The excess of TWA's carrying value for its investment in Worldspan over its share of the underlying net assets of Worldspan is being amortized over a period of 20 years. At December 31, 1996 and 1995, the unamortized balance of this excess amounted to approximately $32.0 million and $33.9 million, respectively. The partnership provides passenger reservations services, communication facilities and other computer services which are purchased by TWA on a recurring basis. The aggregate cost of the services purchased from the partnership, which is included in all other operating expenses in TWA's Statements of Consolidated Operations, is approximately as follows (in thousands): Year Ended December 31, 1996........................................ $54,611 Four Months Ended December 31, 1995................................. $16,566 Eight Months Ended August 31, 1995.................................. $29,604 Year Ended December 31, 1994........................................ $43,638
Summary financial data for Worldspan is as follows:
DECEMBER 31 ----------------- 1996 1995 -------- -------- Current assets............................................... $172,368 $ 84,854 Non-current assets........................................... 384,653 410,901 -------- -------- Total assets............................................... $557,021 $495,755 ======== ======== Current liabilities.......................................... $126,774 $101,219 Non-current liabilities...................................... 125,255 137,220 Partners' equity............................................. 304,992 257,316 -------- -------- Total liabilities and equity............................... $557,021 $495,755 ======== ========
F-17 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, ----------------- 1996 1995 -------- -------- Revenues..................................................... $548,419 $498,138 Costs and expenses........................................... 500,743 529,852 -------- -------- Net income (loss).......................................... $ 47,676 $(31,714) ======== ========
5. INCOME TAXES: Income tax liabilities at December 31, 1996 and 1995, included in other noncurrent liabilities, consist of the following (in millions):
1996 1995 ----- ----- Current taxes................................................... $ -- $ -- Deferred taxes: Federal....................................................... 10.7 10.7 Other income and franchise taxes.............................. .3 .3 ----- ----- Total income tax liability...................................... $11.0 $11.0 ===== =====
Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996 and 1995 are as follows (in millions):
1996 1995 ------- ------- Deferred tax assets: Postretirement benefits, other than pensions............ $ 198.5 $ 194.6 Pension obligations..................................... 82.3 83.4 Employee compensation and other benefits................ 36.5 60.2 Capital leases, net..................................... 54.3 56.6 Net operating loss carryforwards........................ 247.1 207.8 Other, net.............................................. 84.0 86.7 ------- ------- Total deferred tax assets............................. 702.7 689.3 ------- ------- Deferred tax liabilities: Property and spare parts, net........................... $ (34.6) $ (24.7) Routes, gates, and slots, net........................... (158.7) (178.1) Investment in affiliate................................. (42.7) (38.8) ------- ------- Total deferred tax liabilities........................ $(236.0) $(241.6) ======= ======= Net deferred tax asset before valuation allowance......... 466.7 447.7 Deferred tax asset valuation allowance.................. (477.7) (458.7) ------- ------- Net deferred tax asset (liability).................... $ (11.0) $ (11.0) ======= =======
The valuation allowance arises primarily from the amortization of intangibles, representing taxable temporary differences, the reversal of which extends beyond the period in which deductible temporary differences are expected to reverse. The net deferred tax liability, after giving effect to the valuation allowance, arises primarily in years after 2020. F-18 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of the provision (credit) for income taxes is as follows (amounts in thousands):
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Current, primarily foreign............................................... $450 $1,370 $(96) $960 Deferred................................................................. -- -- -- -- ---- ------ ---- ---- Total provision (benefit) for income taxes, net...................... $450 $1,370 $(96) $960
Income tax expense for the periods presented below differs from the amounts which would result from applying the federal statutory tax rate to pretax income, as follows:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Income tax benefit at United States statutory rates...................... $(93,652) $(11,294) $(118,408) $(151,504) Amortization of reorganization value in excess of amounts allocable to identifiable assets..................................................... 14,683 4,894 1,976 2,870 Meals and entertainment disallowance .................................... 4,257 1,419 2,838 4,663 Foreign taxes............................................................ 450 1,370 (96) 960 Net operating loss not benefited and other items......................... 74,712 4,981 113,594 143,971 -------- -------- --------- --------- Income tax expense (benefit)......................................... $ 450 $ 1,370 $ (96) $ 960
A provision for income tax on the extraordinary gain from the extinguishment of debt in the eight months ended August 31, 1995 was not required as such income is excluded from taxation under the Internal Revenue Code of 1986, as amended. In May 1993, TWA and the Internal Revenue Service reached an agreement (the "IRS Settlement") to settle both: (i) the IRS' proof of claim in the '93 Reorganization in the amount of approximately $1.4 billion covering prepetition employment and income taxes of TWA, and (ii) the audit of TWA's federal income tax returns through 1992. Pursuant to the IRS Settlement, TWA paid $6 million to the IRS through the application of funds owed to TWA by certain governmental agencies and issued a note in the amount of $19 million payable in quarterly installments over a six year period (also see Note 8 - Debt). As a result of the IRS Settlement, TWA increased its tax basis in certain of its assets and will be allowed no benefit of any federal net operating loss or credit carryforward from 1992 or any prior year. Federal income tax losses incurred by TWA subsequent to 1992 may not be carried back to pre-1993 years. The Company estimates that it has tax net operating loss carryforwards amounting to approximately $625 million at December 31, 1996 expiring in 2008 through 2011 if not utilized before then to offset taxable income. Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations issued thereunder, imposed limitations on the ability of corporations to use NOLs if the corporation experiences a more than 50% change in ownership during certain periods. In connection with the change of ownership caused by the '95 F-19 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Reorganization, the Company elected to reduce its NOLs in accordance with Section 382 of the Code and regulations issued thereunder. If another ownership change were to occur prior to September 1997, the annual limitations on the Company's utilization of its then existing NOLs would be reduced to zero. Changes in ownership in periods thereafter could substantially restrict the Company's ability to utilize its tax net operating loss carryforwards. In addition, the tax net operating loss carryforwards are subject to examination by the IRS and thus are subject to adjustment or disallowance resulting from any such IRS examination. For financial reporting purposes, the tax benefits from substantially all of the tax net operating loss carryforwards will, to the extent realized in future periods, have no impact on the Company's operating results, but instead be applied to reduce reorganization value in excessive amounts allocable to identifiable assets. 6. EMPLOYEE BENEFIT PLANS: Substantially all of TWA's employees are covered by noncontributory defined benefit retirement plans that were frozen on January 1, 1993. While many of TWA's employees continue participation in these plans, they have not accrued any additional benefits since the date the plans were frozen. Employees hired after the freeze are not entitled to participate in these defined benefit retirement plans. TWA's policy has been to fund the defined benefit plans in amounts necessary for compliance with the funding standards established by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The retirement plans for Pilots, Flight Attendants and Dispatchers provide benefits determined from career average earnings, with Pilots having minimum benefits after ten years of service. Employees (other than Passenger Service Employees) represented by the IAM earn retirement plan benefits of stated amounts for each year of service. The Retirement Plan for U.S. Noncontract Employees (including Passenger Service Employees) provides pension benefits that are based on the employee's compensation during the last five years prior to retirement, with compensation subsequent to 1988 frozen at the 1988 pay level. Foreign plans provide benefits that meet or exceed local requirements. Normal retirement is age 60 for Pilots and Flight Attendants, and age 65 for nonflight personnel. The age at which employees can receive supplemental benefits for early retirement varies by labor group, but ranges from age 45 to age 64. As noted above, in January 1993, TWA's defined benefit plans covering domestic employees (the "Pension Plans") were frozen and Pichin Corporation, a Delaware corporation formed by the Icahn Entities, assumed sponsorship of the Pension Plans and is now responsible for management and control of the Pension Plans. Pursuant to an agreement (the "Comprehensive Settlement Agreement") among the Company, the Icahn Entities, the Pension Benefit Guarantee Corporation (the "PBGC") and unions representing TWA employees, TWA retains only specified obligations and liabilities in respect of the Pension Plans, which include (i) payment obligations under the PBGC Notes, and (ii) the obligation to continue to act as the benefits administrator responsible for, among other things, determining and administering the payment of Pension Plan benefits (also see Note 8-Debt). Pichin Corporation is obligated to make the required minimum funding payments to each of the Pension Plans, subject to reduction for any payments made under the PBGC Notes. The PBGC may not terminate the Pension Plans, except under section 4042(a)(2) of ERISA or at the request of Pichin Corporation, so long as the Icahn Entities and Pichin Corporation have complied with all terms of the Comprehensive Settlement Agreement relating to the PBGC. Upon the occurrence of certain significant events (as defined) including, but not limited to, a sale of substantially all of TWA's assets, a merger involving TWA or a liquidation under Chapter 7 under the Bankruptcy Code, and at the request of Pichin Corporation, the Pension Plans will be terminated. After such a termination, the liability of Pichin Corporation and all members of its controlled group will be limited to an obligation to make annual payments of $30 million to the PBGC for a period of eight years. Mr. Icahn has F-20 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) advised TWA that Pichin Corporation is entitled to terminate the Pension Plans in a non-standard termination at any time after January 1, 1995. In connection with the Comprehensive Settlement Agreement, Mr. Icahn and each of the Icahn Entities surrendered all of the equity and debt securities of TWA and its affiliates owned beneficially or of record by them. Pursuant to the Comprehensive Settlement Agreement, each of the parties to the agreement mutually released the various claims of the other parties to the agreement. The net periodic pension expense recorded for TWA's foreign defined benefit retirement plans is presented below.
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Service cost............................................................. $ 577 $ 274 $ 493 $ 1,190 Interest cost............................................................ 992 583 1,040 3,053 Actual return on assets.................................................. (505) (100) (200) (864) Net amortization and deferral............................................ (355) -- -- -- - - -------------------------------------------------- ----- ----- ------- ------- Net pension expense..................................................... $ 709 $ 757 $ 1,333 $ 3,379
Actuarial assumptions used for determining pension costs were:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Discount rate for interest cost...................... 7.50% 7.00% 8.50% 8.50% Rate of increase in future compensation levels....... 5.50% 5.50% 5.50% 7.50% Expected long-term rate of return on plan assets..... 9.00% 11.00% 11.00% 11.00%
F-21 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The funded status (with benefit obligations determined using the current estimated discount rate of 7.5% and 7.0% at December 31, 1996 and 1995 respectively) and amounts recognized in the Consolidated Balance Sheets at December 31, 1996 and 1995, for defined benefit plans covering foreign employees, are as follows (amounts in thousands):
DECEMBER 31, ----------------------------------------------------- 1996 1995 ------------------------------ ---------------------- PLANS IN WHICH PLANS IN WHICH ------------------------------ ------------------------------ ASSETS ACCUMULATED ASSETS EXCEED BENEFITS EXCEED ACCUMULATED ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS BENEFITS ASSETS BENEFITS ASSETS ----------- ------------------ --------- ----------- Actuarial present value of benefit obligations: Vested benefit obligation........... $ 44,200 $ 7,153 $ 23,986 $ 13,958 Nonvested benefit obligation........... -- 1,198 14 2,338 -------- -------- --------- -------- Accumulated benefit obligation........... 44,200 8,351 24,000 16,296 Projected benefit obligation more than accumulated benefit obligation........... 3,983 5,882 1,327 8,273 -------- -------- --------- -------- Projected benefit obligation........... 48,183 14,233 25,327 24,569 Plan assets at fair value (a).............. 50,703 -- 47,814 - -------- -------- --------- -------- Projected benefit obligation more (less) than plan assets at fair value. (2,520) 14,233 (22,487) 24,569 Unrecognized net gain (loss)................. 7,307 11,696 -- 949 -------- -------- --------- -------- Pension liability (asset) before adjustment............. 4,787 25,929 (22,487) 25,518 Adjustment to reduce pension assets to estimated recoverable amount................. -- -- 18,222 (b) - -------- -------- --------- -------- Pension liability (asset) recognized in Consolidated Balance Sheets............... $ 4,787 $ 25,929 $ (4,265) $ 25,518 ======== ======== ========= ========
- - -------- (a) Plan assets are invested in cash equivalents, international stocks, fixed income securities and real estate. (b) The adjustment at December 31, 1995 represented the amount by which the net pension asset exceeded the amount estimated to be recoverable pursuant to a planned termination of a pension plan covering certain foreign employees. United Kingdom law requires the reduction of retirement plan assets when such assets exceed 105% of plan liabilities. In 1996, assets in TWA's United Kingdom Pension Plan exceeded liabilities by approximately $20 million. This surplus was eliminated by terminating the existing UK Pension Plan and establishing a new pension plan for UK employees. The surplus assets were split between TWA and the participants of the UK Plan, with plan participants receiving their share in enhanced pension benefits, and TWA receiving, in December 1996, a reversion from the original plan of $9.7 million. TWA has several defined contribution plans covering most of its employees. Total pension expense for these plans was $58.0 million, $14.1 million, $26.8 million, $46.0 million, for the year ended December 31, 1996, the four months ended December 31, 1995, the eight months ended August 31, 1995 and the year ended December 31, 1994, respectively. Such defined contribution plans include: (a) trust plans established pursuant to collective bargaining agreements with certain employee groups providing for defined Company contributions generally F-22 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) determined as a percentage, ranging from 2% to 11%, of pay; and (b) retirement savings plan for Noncontract Employees to which the Company contributes amounts equal to 25% of voluntary employee after-tax contributions up to a maximum of 10% of the employee's pay. Pursuant to the '92 Labor Agreements, Company contributions were suspended for certain defined contribution plans for the period September 1, 1992 through August 31, 1995. Such suspension has been extended through August 31, 1997. In connection with the Comprehensive Settlement Agreement, TWA agreed to make contributions to defined contribution plans aggregating 2% of eligible wages for 1993 through 1995, and 3.3% thereafter. The Company made the 1994 contribution payment on June 20, 1995. Commencing on July 1, 1995, TWA is required to make such contributions on a monthly basis. In addition to providing retirement benefits, TWA provides certain health care and life insurance benefits for retired employees, their spouses and qualified dependents. Substantially all employees may become eligible for these benefits if they reach specific retirement age criteria while still actively employed by TWA. SFAS No. 106 requires that the expected cost of providing postretirement benefits other than pensions be accrued over the years that the employee renders service, in a manner similar to the accounting for pension benefits. The following table sets forth a reconciliation of the accrued postretirement benefit cost as of December 31, 1996 and 1995 (in millions):
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Accumulated postretirement benefit obligation: Actives fully eligible......................... $ 163 $ 165 Other actives.................................. 144 150 Retirees....................................... 225 208 ----- ----- Total APBO................................... 532 523 Unrecognized cumulative loss..................... (29) (30) ----- ----- Accrued postretirement benefit cost.............. $ 503 $ 493 ===== =====
The components of net periodic postretirement benefit cost are as follows (in millions):
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Service cost............ $10.0 $ 3.0 $ 5.4 $ 9.5 Interest cost........... 35.4 11.0 25.5 34.5 ----- ----- ----- ----- Total................. $45.4 $14.0 $30.9 $44.0 ===== ===== ===== =====
The discount rate used to determine the APBO was 7.5% at December 31, 1996 and 7.0% at December 31, 1995. The discount rate used to determine net periodic postretirement benefit costs was 7.0% for the year ended December 31, 1996, 7.0% for the four months ended December 31, 1995, 8.5% for the eight months ended August 31, 1995 and 7.0% for the year ended December 31, 1994. The assumed health care cost trend rate used in measuring the APBO was 8.0% in 1997 declining by 1% per year to an ultimate rate of 5%. If the assumed health care cost trend rate was increased by 1 percentage point, the APBO at December 31, 1996 would be increased by approximately 10% and 1996 periodic postretirement benefit cost would increase approximately 10%. F-23 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. CONTINGENCIES: On July 17, 1996, TWA Flight 800 crashed shortly after departure from JFK en route to Paris, France. There were no survivors among the 230 passengers and crew members aboard the Boeing 747 aircraft. The Company is cooperating fully with all federal, state and local regulatory and investigatory agencies to ascertain the cause of the crash, but to date a cause has not been determined. While TWA is currently the defendant in a number of lawsuits, TWA is unable to predict the amount of claims relating to the crash which may ultimately be made against the Company and how those claims might be resolved. TWA maintains substantial insurance coverage and, at this time, management has no reason to believe that such insurance coverage will not be sufficient to cover the claims arising from the crash. Therefore, TWA believes that the resolution of such claims will not have a material adverse effect on its financial condition or results of operations. The Company is unable to identify or predict the extent of any adverse effect on its revenues, yields, or results of operations which has resulted or may result from the public perception of the crash. During 1992, TWA and several other major airlines agreed to settle certain class action antitrust litigation. Pursuant to the settlement agreement, which was approved by the United States District Court for the Northern District of Georgia in 1994, TWA paid $1 million and, together with five other carriers, issued approximately $400 million in face amount of certificates for discounts of approximately 10% on future domestic air travel on any of the six carriers. TWA will reflect the certificates that are redeemed for travel on TWA as a reduction in revenue as the transportation is provided. While TWA presently does not have any reason to expect that the face amount of the discount coupons that will be redeemed for travel on TWA in the future will not reasonably approximate the face amount of discount coupons that TWA contributed to the settlement, it is reasonably possible that the actual face amount of discount coupons redeemed by TWA could be substantially different, considering the interchangeability of the discount coupons and that the face amount of the discount coupons contributed by all of the participating carriers and distributed to claimants aggregated approximately $400 million. Therefore, while the settlement agreement could have the effect of reducing TWA's future revenues and cash flows from levels that might otherwise be realized, because of the uncertainties as to the face amount of the discount coupons that will ultimately be redeemed by TWA and uncertainties as to the impact that the distribution of discount coupons will have on traffic levels, TWA is unable to reasonably estimate any such effects. On October 22, 1991, a judgment in the amount of $12,336,127 was entered against TWA in an action in the New York District Court by Travellers International A.G. and its parent company, Windsor, Inc. (collectively, "Travellers"). On November 4, 1991, TWA posted a cash undertaking of $13,693,101, which was charged to expense, for a stay of execution of the judgment pending the appeal. On March 10, 1992, the Company commenced an adversary proceeding against Travellers in the Bankruptcy Court seeking to avoid the cash undertaking on the grounds that it constitutes a preferential transfer or, in the alternative, to find that the cash undertaking constitutes property of the estate. In March 1993, Travellers filed a petition for a writ of certiorari in the United States Supreme Court seeking to require TWA to litigate its claims against Travellers in the New York District Court and not the Bankruptcy Court. The petition was denied by the United States Supreme Court in April 1993. A trial of the adversary proceeding took place in Bankruptcy Court in February 1994 and in December of 1994, the Bankruptcy Court reached a decision in this proceeding which is favorable to the Company. Upon appeal, the District Court affirmed in part and reversed in part the bankruptcy courts decision. Both parties have appealed the matter to the Third Circuit Court of Appeals. The Company believes that in the event the District Court's decision is affirmed, the ultimate result will not be materially different than the decision of the bankruptcy court. Pursuant to the Icahn Financing Facilities, amounts received pursuant to these proceedings must be used to repay, in part, TWA's obligations thereunder. TWA is subject to numerous environmental laws and regulations administered by various state and federal agencies. Although the Company believes adequate reserves have been provided for all known environmental F-24 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) contingencies, it is possible that additional reserves might be required in the future which could have a material effect on the results of operations or financial condition of the Company. However, the Company believes that the ultimate resolution of known environmental contingencies should not have a material adverse effect on the financial position or results of operations based on the Company's knowledge of similar environmental sites. Since May 1991, TWA's employees in Israel have claimed that the Company should be required to collateralize its contingent payment of termination indemnities. This matter deals only with collateralization of a contingent payment obligation. The employees have asserted that the amount necessary to collateralize the contingent payment of termination indemnities could be as much as $25 million. The Company denies any obligation to collateralize and asserts that any obligation to collateralize any termination indemnity is not a current obligation. In February 1995, a number of actions were commenced in various federal district courts against TWA and six other major airlines alleging that the companies conspired and agreed to fix, lower and maintain travel agent commissions on the sale of tickets for domestic air travel in violation of the United States antitrust laws. Generally the complaints in these actions seek treble damages and injunctive relief on behalf of a nationwide class of travel agents. Certain of these actions also claim violations of various state laws. On May 9, 1995 TWA announced settlement, subject to court approval, of the referenced actions and reinstated the traditional 10 percent commission on domestic air fares. A final court order has not yet been entered; however, there has been entered an interim order approving the settlement. On November 9, 1995, ValuJet Air Lines, Inc. ("ValuJet") instituted a lawsuit against TWA and Delta Air Lines ("Delta") in the United States District Court for the Northern District of Georgia, alleging breach of contract and violations of certain antitrust laws with respect to the Company's lease of certain takeoff and landing slots at LaGuardia International Airport in New York. On November 17, 1995, the court denied ValuJet's motion to temporarily enjoin the lease transaction and the Company and Delta consummated the lease of the slots. ValuJet subsequently amended its original complaint. On July 12, 1996, the Federal Court in Atlanta granted summary judgment in TWA' s favor in the ValuJet litigation on all claims and counts raised in the ValuJet amended complaint. The order granting summary judgment to TWA was not a final order and was not directly appealable due to an outstanding claim against Delta. While ValuJet's counsel has stated that an appeal will be filed at a later date, the Company intends to vigorously defend itself in any future action and believes all of the allegations that have been made to date are without merit. In addition, based on certain written grievances or complaints filed by ValuJet, the Company was informed that the United States Department of Justice ("DOJ"), Antitrust Division, was investigating the circumstances of the slot lease transaction to determine whether an antitrust violation has occurred. During the course of its investigation, the DOT was informed of the summary judgment described above. Since the date of the judgment, TWA is unaware of whether the DOJ has undertaken further investigative efforts, the status of the investigation or any future plans of the DOJ or other regulatory bodies with respect to the ValuJet lawsuit. While TWA is hopeful the summary judgment will be persuasive to the various regulatory bodies petitioned by ValueJet, it will cooperate with any further investigations and strongly believes that the slot lease transaction was not in violation of antitrust laws. On September 6, 1995 TWA announced that the operations of its wholly owned subsidiary, Trans World Express, Inc. ("TWE"), would be discontinued on November 6, 1995. TWA has entered into an agreement with an unaffiliated entity, Trans States Airlines, Inc., to provide feeder service into TWA's JFK hub, which commenced on November 7, 1995. TWA does not currently expect that the liquidation of TWE will have a material adverse impact on the financial position or results of operations of TWA. F-25 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pursuant to the '92 Labor Agreements, the Company agreed to pay to employees represented by the IAM a cash "bonus' for the amount by which overtime incurred by the IAM from September of 1992 through August 1995 was reduced below specified thresholds. This amount was to be offset by the amount by which medical savings during the period for the same employees did not meet certain specified levels of savings. The obligation is payable in three equal annual installments beginning in 1998. The Company has estimated the net overtime bonus owed to the IAM to be approximately $26.3 million and has reflected this amount as a noncurrent liability in the accompanying balance sheets. Such amount reflects a reduction of approximately $10.0 million pursuant to the final calculation of the liability and an agreement to reduce proportionately the obligation based upon the size of the reduction of indebtedness achieved by the '95 Reorganization. The IAM, while not providing a calculation of its own, has disputed the method by which management has computed the net overtime bonus and has indicated that they believe the amount due to the IAM is much greater than the amount which has been estimated by management. In connection with certain wage increases afforded to non-contract employees, employees represented by the IFFA have asserted and won an arbitration ruling that, if sustained, would require that the Company provide additional compensation to IFFA represented employees. The Company estimates that at December 31, 1996 such additional compensation would aggregate approximately $6 million. The Company denies any such obligation and has filed an appeal of the arbitration ruling. As such, no liability has been recorded by the Company at December 31, 1996. In connection with the '95 Reorganization, the Company entered into a letter agreement with employees represented by the ALPA whereby if the Company's flight schedule, as measured by block hours, does not exceed certain thresholds a defined cash payment would be made to the ALPA. The defined thresholds were exceeded during the measurement periods through December 31, 1996 and no amount was therefore owed to the ALPA as of that date. The Company, however, anticipates that a liability will be incurred during 1997 as a result of the Company's planned reductions in capacity. The amount of the liability, if any, will be dependent on the amount by which the targeted block hours flown during the year exceed the actual block hours flown. Based upon current plans, the Company estimates its obligation under this agreement will not exceed $12.0 million in 1997. The Company is also defending a number of other actions which have arisen in the ordinary course of business, and are insured or the likely outcome of which the management of the Company does not believe may be reasonably be expected to be materially adverse to the Company's financial condition or results of operations. F-26 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. DEBT: Substantially all of TWA's assets are subject to liens and security interests relating to long-term debt and other agreements. Long-term debt (net of unamortized discounts) outstanding at each balance sheet date was:
DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (AMOUNTS IN THOUSANDS) 12% Senior Secured Reset Notes due 1998 (a)............. $ 111,799 $ 145,184 12% Contingent Payment Rights due 1996 (b).............. -- 11,265 8% IAM Backpay Notes (c)................................ 12,090 11,037 PBGC Notes (d).......................................... 198,672 201,164 Icahn Financing Facilities (e).......................... 125,102 187,977 Equipment Trust Certificates (f)........................ 8,963 17,929 Various Secured Notes, 4.0% to 12.4, due 1997-2001 (g).. 75,478 103,847 Installment Purchase Agreements, 10.0% to 10.53%, due 1997--2003 (h)......................................... 109,034 111,033 Predelivery Financing Agreement (i)..................... 19,862 -- IRS Deferral Note (j)................................... 8,708 10,937 WORLDSPAN Note (k)...................................... 31,224 31,224 ----------- ---------- Total long-term debt.................................. 700,932 831,597 Less current maturities............................... 92,447 67,566 ----------- ---------- Long-term debt, less current maturities............... $ 608,485 $ 764,031 =========== ==========
- - -------- (a) The 12% Senior Secured Reset Notes due 1998 pay interest semi-annually, payable either in cash or, as to the first four interest payments, at the Company's option, in whole or in part, in Common Stock, beginning August 1, 1995, subject to certain conditions. The Company elected to pay interest due and payable for the first two periods and one-half of the interest due and payable February 1, 1997 (fourth period) in common stock. The outstanding notes have a stated principal amount of $124.8 million and $170.0 million at December 31, 1996 and 1995, respectively, and are reflected net of the unamortized discount of $13.0 million and $24.8 million at December 31, 1996 and 1995. The notes are secured by a first lien on certain slots, equipment and spare parts. During 1996, the Company consummated a series of privately negotiated exchanges with a significant holder of the 12% Senior Secured Reset Notes which resulted in the return to the Company of approximately $45.3 million principal amount of 12% Senior Secured Reset Notes and $1.5 million in accrued interest thereon in exchange for the issuance of approximately 4.5 million shares of Company Common Stock (See Note 14). (b) The Contingent Payment Rights, arising under the terms of the '95 Reorganization, were paid in 1996. (c) The 8% IAM Backpay Notes have a stated principal amount of $22.0 million and $22.9 million at December 31, 1996 and 1995, respectively. The notes are reflected net of the unamortized discount of $9.9 million and $11.9 million at December 31, 1996 and 1995, respectively, which reflects an effective interest rate of approximately 24.4% at December 31, 1996. The notes mature in 2001 and pay interest semi-annually. The notes are secured by a subordinate lien on TWA's interest in Worldspan and a lien on approximately $2.2 million in proceeds from the sale of Midcoast Aviation. During December 1996, ownership of the notes was transferred from the Indenture Trustee to current and former IAM union members who participated in the 1992 labor agreement. F-27 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (d) The PBGC Notes have a stated unpaid principal balance of $232.9 million and $244.3 million at December 31, 1996 and 1995, respectively. The notes are reflected net of unamortized discounts of $34.3 million and $43.2 million at December 31, 1996 and 1995, respectively, to reflect an effective interest rate of approximately 13.0%. Interest on the PBGC Notes is payable semi-annually at an average stated rate of 8.19% per annum. Principal payments are due in semi-annual installments beginning in 1999 through 2003, however, due to certain note provisions mandatory prepayments are required. Additional prepayments could arise from the election of Karabu to apply the purchase price for tickets purchased under the Ticket Agreement to a reduction of the PBGC Notes (see Note 3). The Notes are non-recourse notes secured by first liens on TWA's international routes and TWA's leasehold interest in the Kansas City maintenance facility and certain fixtures and equipment. (e) The Icahn Financing Facilities include a $75 million Asset Based Facility and a $125 million Receivables Facility, which had principal balances of $46.9 million and $78.2 million, respectively, at December 31, 1996. The loans are due in January 2001 and interest is payable monthly at a rate of prime plus 1.75% per annum. Collateral for the Icahn Loans include a number of aircraft, engines, and related equipment, along with substantially all of the Company's receivables. The notes evidencing the Icahn Loans are security for certain obligations of the Icahn Entities to the PBGC. Prepayments of the Icahn Loans could arise from the election of Karabu to apply the purchase price for tickets purchased under the Ticket Agreement to a reduction of the Icahn Loans (see Note 3). (f) The Equipment Trust Certificates pay interest semi-annually at a rate of 11% per annum and are subject to mandatory redemptions beginning in April 1994 and continuing until September 1997. The certificates are secured by certain aircraft, engines and other equipment. (g) Various Secured Notes represent borrowings to finance the purchase or lease of certain flight equipment and other property. (h) Installment Purchase Agreements represent borrowings to finance the purchase of four Boeing 767-231 and one Boeing 747-238 aircraft. The borrowings mature in monthly installments through 2003, and require interest at rates ranging from 10.0% to 10.53% per annum. (i) The Predelivery Financing Agreements represent borrowings from the engine manufacturer to finance prepayments on the purchase of five Boeing 757 aircraft. The borrowings mature upon delivery of the aircraft beginning in February 1997 and continuing through October 1997. Interest is payable quarterly at a rate of LIBOR plus 3.5%. (j) The IRS Deferral Note represents unpaid amounts due under the terms of a settlement reached in 1993 for taxes and interest owed to the IRS. The note requires payment of interest quarterly at a rate of 7% per annum and matures in 1999. (k) The Worldspan Note represents amounts owed to Worldspan, a 25% owned affiliate of TWA, for prior services and advances. The note pays interest at maturity at a rate of prime plus 1% per annum and matures in 1999. The note is secured by a pledge of TWA's partnership interest in Worldspan. (l) At December 31, 1996, aggregate principal payments due for long-term debt for the succeeding five years were as follows:
(AMOUNTS IN YEAR THOUSANDS) ---- ----------- 1997............................................ $92,447 1998............................................ 181,915 1999............................................ 95,990 2000............................................ 73,347 2001............................................ 201,558
F-28 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) TWA discontinued, effective June 30, 1995, the accrual of interest on prepetition debt that was unsecured or estimated to be undersecured through the '95 Effective Date. Contractual interest expense for the eight months ended August 31, 1995 was approximately $18.7 million in excess of reported interest expense. 9. LEASES AND RELATED GUARANTEES: Eighteen of the aircraft in the Company's fleet at December 31, 1996 were leased under capital leases. The remaining lease periods for these aircraft range from one to ten years. The Company has options and/or rights of first refusal to purchase or re-lease most of such aircraft at market terms upon termination of the lease. The Company has guaranteed repayment of certain of the debt issued by the owner/lessor to finance some of the aircraft under capital lease to the Company; however, the scheduled rental payments will exceed the principal and interest payments required of the owner/lessor. Aggregate annual rentals in 1997 will be approximately $42.3 million for the 18 aircraft held under capital leases. One hundred twenty nine of the aircraft in TWA's fleet at December 31, 1996 were leased under operating leases. Other than seven leases on a month-to- month basis, the remaining lease periods range from three months to 15 years. Upon expiration of the current leases, TWA has the option to re-lease most of such aircraft for specific terms and/or rentals with some of the renewal options being subject to fair market rental rates. Buildings and facilities leased under capital and operating leases are primarily for airport terminals and air transportation support facilities. Leases of equipment, other than flight equipment, include some of the equipment at airports and maintenance facilities, flight simulators, computers and other properties. Pursuant to an agreement between the City of St. Louis and TWA in November 1993 (the "Asset Purchase Agreement"), the City of St. Louis waived a $5.3 million pre-petition claim and provided TWA with two installments of $24.7 million and $40 million pursuant to sale/leaseback transactions involving certain of TWA's assets located at Lambert-St. Louis Airport and other property and assets located in St. Louis including gates, terminal support facilities at the airport, hangar/St. Louis Ground Operations Center complex, Flight Training Center and equipment and tenant improvements at these various St. Louis facilities. Under the Asset Purchase Agreement, TWA leased back the properties involved under a month-to-month agreement subject to automatic renewal so long as TWA is not in default thereunder, such agreement having a term otherwise expiring December 31, 2005. Such term is subject to early termination in the event of certain events of default, including non-payment of rents, cessation of service, or failure to relocate and maintain its corporate headquarters within the City or County of St. Louis, or relocate and maintain a reservations office within the City of St. Louis. Under the Asset Purchase Agreement, TWA has the right to use 57 gates and terminal support facilities at Lambert-St. Louis Airport. The City has certain rights of redesignation of TWA's gates in the event TWA's flight activity at St. Louis is reduced below a threshold level of 190 daily flight departures during any given monthly period. The related leases are classified as capital leases for financial reporting purposes. The Company's acquisition of 11 new aircraft during 1982 and 1983, one Lockheed L-1011 and ten Boeing 767s, created certain tax benefits that were not of immediate value in the Company's federal income tax returns and, therefore, such tax benefits were sold to outside parties under so-called "Safe Harbor Leases" as permitted by IRS regulations. Pursuant to the sales agreements, the Company is required to indemnify the several purchasers if the tax benefits cannot be used because of circumstances within the control of the Company. As of December 31, 1996, the Company's contingent indemnification obligations in connection with the tax benefit transfers were collateralized by bank letters of credit aggregating $11,510,000 for which the Company has posted $11,510,000 in cash collateral to secure its reimbursement obligations and the bank letters of credit. In addition, the Company has pledged $7,413,000 in cash collateral to secure its obligation with respect to four of the tax F-29 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) benefit transfers and has pledged flight equipment having a net book value of $23,359,000 to secure its obligation with respect to two of the tax benefit transfers. At December 31, 1996 future minimum lease payments for capital leases and future minimum lease payments, net of sublease rentals of immaterial amounts, for long-term leases, were as follows:
MINIMUM LEASE PAYMENTS ----------------------- CAPITAL OPERATING LEASES LEASES ---------- ------------ YEAR ---- (AMOUNTS IN THOUSANDS) 1997................................................ $ 64,601 $ 302,811 1998................................................ 56,416 304,226 1999................................................ 52,664 303,802 2000................................................ 49,249 284,538 2001................................................ 45,008 265,714 Subsequent.......................................... 87,173 1,704,364 ---------- ------------ Total............................................. 355,111 $ 3,165,455 ============ Less imputed interest............................... 91,820 ---------- Present value of capital leases..................... 263,291 Less current portion................................ 42,501 ---------- Obligations under capital leases, less current portion............................................ $ 220,790 ==========
Included in the Minimum Lease Payments for Operating Leases are increased rental rates related to lessor financing of engine hush-kits for 21 aircraft plus estimates of increased rentals for nine additional aircraft yet to be financed. The estimated amounts assume an eight year extension of the respective aircraft leases from date of hush-kit installation. Also included in the Minimum Lease Payments for Operating Leases are rentals related to an agreement entered into in 1996 providing for the lease of ten Boeing 757 aircraft, with delivery of the first aircraft in July 1996 and the final aircraft in July 1997, as well as estimated rentals related to an agreement entered into in 1996 for the lease of fifteen new and three used McDonnell Douglas MD-83 aircraft, with delivery of the aircraft between February 1997 and April 1999. 10. MANDATORILY REDEEMABLE 12% PREFERRED STOCK: Pursuant to the '95 Reorganization the Company issued 1,089,991 shares of the 1,510,000 authorized shares of Mandatorily Redeemable 12% Preferred Stock to the holders of the 8% Senior Secured Notes. The Mandatorily Redeemable 12% Preferred Stock had an aggregate redemption value of approximately $109.0 million, was cumulative, and had an initial liquidation preference of $100 per share. Commencing November 1995, dividends accrued at the rate of 12% of the liquidation preference per share per annum, payable quarterly in arrears on the first day of each February, May, August and November. Subject to certain limitations, the dividends could be paid in Common Stock at the option of the Company, and the Company elected to pay the February 1, 1996 dividend in Common Stock and subsequently issued 317,145 shares. For purposes of determining the number of shares of Common Stock to distribute, such Common Stock was valued at 90% of the fair market value, based upon trading prices for the twenty days prior to the record date for the dividend payment. On March 22, 1996, the Company announced a call for redemption on April 26, 1996 (the "Redemption Date") of all of its issued and outstanding 12% Preferred Stock at a redemption price per share equal to $75.00, plus accrued dividends to and including the Redemption Date of $2.8667 per share. On April 26, 1996, the F-30 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Company paid an aggregate of $84.9 million in redemption of the 12% Preferred Stock and payment of accrued dividends. 11. CAPITAL STOCK: The Company has the authority to issue 300 million shares of capital stock, consisting of 150 million shares of Common Stock, 12.5 million shares of cumulative preferred stock and 137.5 million additional shares of preferred stock. On the '95 Effective Date of the '95 Reorganization, TWA issued approximately 17.2 million shares of Common Stock, 6.4 million shares of Employee Preferred Stock (including approximately 1.7 million shares which are attributable to ALPA represented employees, see Note 12), Equity Rights for the purchase of approximately 13.2 million shares of Common Stock, warrants for the purchase of approximately 1.7 million shares of Common Stock exercisable over a seven year period at $14.40 per share (the "Seven Year Warrants"), warrants for the purchase of up to 1.15 million shares of Common Stock (for nominal consideration), and $109.0 million aggregate liquidation value of Mandatorily Redeemable 12% Preferred Stock (the "12% Preferred Stock"). In addition, each of the 12.5 million shares of the then existing preferred stock were converted into, and holders received, 0.1024 shares of Common Stock, 0.0512 Equity Rights and 0.1180 Seven Year Warrants. Holders of then existing common stock, other than shares held by trusts for employees, received 0.0213 shares of Common Stock, 0.0107 Equity Rights and 0.0246 Seven Year Warrants. In October 1995, TWA received approximately $55.3 million in gross proceeds from the exercise of 13,206,247 Equity Rights and issued 13,206,247 shares of Common Stock. The Company paid a fee of approximately $3.4 million in September to certain standby purchasers of shares covered by the Equity Rights. TWA subsequently issued 2.07 million additional shares of Common Stock to previous holders of TWA's 10% Senior Secured Notes based upon the trading prices of securities distributed pursuant to the '95 Reorganization. The Employee Preferred Stock is the functional equivalent of Common Stock except for an exclusive right to elect a certain number of directors to the Board of Directors and its liquidation preference of $0.01 per share. Employee Preferred Stock does not have redemption rights. Each share will automatically convert into one share of Common Stock upon the withdrawal of such share from the employee stock trust in which such share is held. There were 1,742,922 and 1,746,874 Seven Year Warrants outstanding at December 31, 1996 and 1995, respectively. All warrants to purchase shares of Common stock for nominal consideration had been exercised at December 31, 1996. In March 1996, the Company completed an offering, pursuant to Rule 144A of the Securities Act of 1933 (the "Act"), of 3,869,000 shares of its 8% Preferred Stock, with a liquidation preference of $50 per share. Each share of the 8% Preferred Stock may be converted at any time, at the option of the holder, unless previously redeemed or exchanged, into shares of Common Stock at a conversion price of $20.269 per share (equivalent to a conversion rate of approximately 2.467 shares of Common Stock for each share of 8% Preferred Stock), subject to adjustment. The 8% Preferred Stock may not be redeemed prior to March 15, 1999. On or after March 15, 1999, the 8% Preferred Stock may be redeemed, in whole or in part, at the option of the Company, at specified redemption prices. The 8% Preferred Stock may be exchanged, in whole but not in part, at the option of the Company, for the Company's 8% Convertible Subordinated Debentures Due 2006 (the "Debentures") on any dividend payment date beginning March 15, 1998 at the rate of $50 principal amount of Debentures for each share of 8% Preferred Stock outstanding at the time of exchange; provided that all accrued and unpaid dividends, whether or not earned or declared, on the 8% Preferred Stock to the date of exchange have been paid or set aside for payment F-31 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and certain other conditions are met. Pursuant to the registration rights agreement between the Company and the initial purchases of the 8% Preferred Stock, the Company was obligated to register resales of the 8% Preferred Stock, the Debentures, and the underlying shares of Common Stock issuable upon conversion thereof. In addition, the Company must use its best efforts to keep the shelf registration effective until March 22, 1999. If the shelf registration does not remain effective until such date, the Company may be required to pay liquidated damages in amounts of up to $0.0125 per week per share of 8% Preferred Stock. In December 1995, the Company adopted a Shareholders Rights Plan. Each holder of Common Stock or Employee Preferred Stock received a dividend of one right for each share, entitling the holder to buy one one- hundredth of a share of a new series of preferred stock at a purchase price of $47.50. The rights may become exercisable only under certain conditions whereby certain persons (as defined) become the owner of or commence a tender offer for certain specified percentages of TWA's voting stock and may be redeemed by TWA at $0.01 per right prior to such time. In the event the rights become exercisable, holders would be entitled to receive, without payment of a purchase price, additional shares of Common Stock or be entitled to purchase Common Stock having a market value of twice the purchase price. 12. EARNED STOCK COMPENSATION: Pursuant to the '94 Labor Agreements and '95 Reorganization, on the '95 Effective Date, approximately 4.7 million shares of Employee Preferred Stock and 1.0 million shares of Common Stock were distributed and allocated to employees through employee stock ownership plans for the benefit of union (other than the ALPA represented employees) and noncontract employees, respectively. The distribution of these shares resulted in a charge to operations in the eight months ended August 31, 1995 of $43.2 million, based upon the market price of TWA's Common Stock at the time. Additionally, a "Rabbi Trust" was established to receive the distribution of approximately 1.7 million shares of Employee Preferred Stock attributable to ALPA represented employees. The Rabbi Trust will distribute to an employee benefit plan (the "ESOP") one-third of the shares annually beginning August 1995, subject to certain conditions. Accordingly, operating results for 1996, the four months ended December 31, 1995 and the eight months ended August 31, 1995 include charges of approximately $6.9 million, $2.0 million and $5.1 million, respectively, representing the value of shares allocated and shares earned, but unallocated, for such periods, based upon the market price of TWA's Common Stock. The charge to earnings for shares to be allocated to ALPA represented employees in the future will be based upon the value of the shares at that time. Accordingly, material changes in this non-cash charge may occur in periods prior to the allocation of the shares and such changes may be unrelated to the Company's operating performance during such periods. Operating results for the eight months ended August 31, 1995 include a non- cash charge of approximately $8.0 million, representing the excess of the fair market value of the shares distributed to employees over the purchase price paid for shares which were sold to employees pursuant to the Equity Rights offering. Also pursuant to the '94 Labor Agreements and the '95 Reorganization, the Company has adopted a seven year employee stock incentive program (the "ESIP") pursuant to which TWA will grant its union and non- union employees additional shares of Employee Preferred Stock and Common Stock (the "Incentive Shares"), respectively, and such employees will be entitled to purchase additional shares of such stock under certain circumstances through an employee stock purchase arrangement. The ESIP has been designed to enable TWA's employees to increase their level of ownership from 30% to 40% of the combined total number of outstanding Common Stock and Employee Preferred Stock over the seven year period. The first stock grant under the ESIP is to be made on July 15, 1997 in an amount that would increase the level of employee ownership by 2% of the combined total number of then outstanding shares of Common Stock F-32 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and Employee Preferred if the closing price of the Common Stock exceeds a target price of $11.00 per share following January 1, 1997 or would be made on any date thereafter if the price of the Common Stock exceeds such target price. In subsequent years through the end of the seven year term of the ESIP, the increase in the number of shares of Employee Preferred Stock to be granted under this program would be equivalent to 1.5% in 1998, 1.5% in 1999, 1.0% in 2000, 1.0% in 2001 and 1.0% in 2002 of the combined total number of shares of Common Stock and Employee Preferred Stock, and the target prices would increase to $12.10 in 1998, $13.31 in 1999, $14.64 in 2000, $16.11 in 2001 and $17.72 in 2002. If TWA issues additional shares of Common Stock with an aggregate value of more then $20 million to third parties for cash or a reduction in debt at a price equal to or greater then $11.00 per share, the last two scheduled installments of the ESIP would be aggregated and these shares allocated equally to the remaining installments in the program. In addition, pursuant to the ESIP, employees would have the right after July 15, 1997, to purchase over the seven year term of the ESIP additional shares of Employee Preferred Stock in amounts up to an aggregate of 2% of the combined total number of outstanding Common Stock and Employee Preferred Stock at a discount of 20% from the market price. The employees' right to purchase additional shares of Employee Preferred Stock would be accelerated and become immediately exercisable if there is a merger, sale or consolidation of TWA (where TWA is not the surviving entity) at a merger, sale or consolidation price equivalent to or in excess of $17.72 per share of Common Stock at a 20% discount from the merger, sale or consolidation price relating to such a transaction. The percentage of employee ownership could decline below 30% in the event the Company issues additional Common Stock to third parties for cash or property or in lieu of cash payments on the 12% Senior Secured Reset Notes. To the extent that as a result of the sale for cash of additional capital stock, the percentage of employee ownership of the combined total number of shares of Common Stock and Employee Preferred Stock declines below a level equal to the Adjusted Maximum Percentage (as defined below) minus eight percentage points plus the percentage equivalent to any Incentive Shares already issued, one- quarter of the difference between the new percentage of employee ownership and the level just determined (but in no event greater than 1% in each year) times the combined total number of shares of Common Stock and Employee Preferred Stock outstanding would be added to the amount of Employee Preferred Stock to union employees and Common Stock to non-union employees to be issued under the ESIP in each of the years 1999 through 2002 assuming the target prices are met in each of such years. In the event of a merger, sale or consolidation of TWA where TWA is not the surviving entity, TWA would issue to employees at or prior to the consummation of such a transaction: (i) a number of shares of Employee Preferred Stock and Common Stock to which the employees would have otherwise been entitled under the ESIP during its seven year term assuming the trading price of the Common Stock during such term was the merger, sale or consolidation price, provided, that if the merger, sale or consolidation price falls between two target prices, the number of shares to be issued will be based on an interpolation between the target prices, (ii) if the employee ownership percentage is less than 35% of the combined total number of outstanding shares of Common Stock and Employee Preferred Stock, a number of shares of Employee Preferred Stock and Common Stock equal to the difference between the number of shares already distributed under the ESIP and a number of shares equivalent to 2.0%, 3.5% or 5.0%, respectively, of the then combined total number of outstanding Common Stock and Employee Preferred Stock depending on the merger, sale or consolidation price, but in no event shall shares issued pursuant to this paragraph increase the employee ownership percentage above 35%, or (iii) if, following the issuance by the Company of additional shares of Common Stock to third parties for cash or property equal to 1% of the number of shares of Common Stock outstanding immediately following the Restructuring and the employee ownership percentage is below the lesser of 35% and the Adjusted Maximum Percentage, TWA shall at the option of each employee effect an immediate cash contribution to the employee's respective pension plan or make an immediate cash payment to each employee equal to an amount determined as the number of shares necessary to increase the employee ownership percentage to the lesser of 35% and the Adjusted Maximum Percentage of the merger, sale or consolidation price. The Adjusted Maximum Percentage is F-33 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) defined to mean a level of the percentage of employee ownership following a reduction below 38% but to no lower than 30% in a manner proportionate to the aggregate proceeds, if any, received from the issuance of additional Common Stock to third parties for cash or property up to $200 million. The ESIP also provides that if additional shares are distributed following the '95 Effective Date in respect of the '95 Reorganization, employees will be entitled to receive an additional number of shares of Common Stock and Employee Preferred Stock such that the employees will retain the same level of ownership. Pursuant to the '95 Reorganization, TWA issued 2,069,898 shares of common stock as conditional consideration to the 12% Senior Secured Notes. Union representatives and the Company have tentatively agreed that the number of "Fill-Up Shares" to be issued pursuant to the ESIP is approximately 932,000. Under the agreement, approximately 526,000 shares will be distributed immediately (the "Initial Fill-Up Shares") and the remaining shares (the "Credit Shares") will be issued in July of 1997 if the 1997 target price is not met. If the 1997 ESIP target price is not met, the Credit Shares distributed may be used as a credit against future grants under the ESIP. TWA will record a charge in 1997 for the fair value of the Initial Fill-Up Shares as of the date those shares are distributed. The Company's Board of Directors approved the issue of the Fill-up shares on March 27, 1997. The number of shares of Employee Preferred Stock outstanding at December 31, 1996 does not reflect any such additional shares. Shares granted or purchased at a discount under the ESIP will generally result in a charge equal to the fair value of shares granted and the discount for shares purchased a the time when such shares are earned. If the ESIP's target prices for the Common Stock are realized, the minimum aggregate charge for the years 1997 to 2002, based on the number of Common Stock and Employee Preferred Stock outstanding at December 31, 1996 (including Initial Fill-Up Shares) and excluding the impact of any merger, sale or consolidation of TWA, would be approximately $58 million. The charge for any year, however, could be substantially higher if the market prices of the Common Stock exceed the respective yearly target prices. 13. STOCK OPTION PLANS: The Company's 1994 Key Employee Incentive Stock Plan (the "KESIP"), as amended, provides for the award of incentive and nonqualified stock options for up to 7% of the Common Stock and Employee Preferred Stock outstanding as of the start of each fiscal year (approximately 3.4 million shares at January 1, 1997). Options granted under the KESIP have a five year life after the final vesting period and vest at the rate of 34% upon the first anniversary of the award date, 33% upon the second and 33% upon the third anniversary of the award date. Unvested shares are subject to forfeiture under certain circumstances. A summary of the Company's outstanding stock options as of December 31, 1996 and 1995, and changes during the years ended on those dates is presented below:
1996 1995 ------------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- -------------- --------- -------------- Outstanding at beginning of year....................... 2,228,000 $4.68 1,398,576 $4.64 Granted..................... 453,000 11.65 829,424 4.74 Exercised................... (191,316) 4.64 -- -- Forfeited................... (463,300) 7.43 -- -- --------- --------- Outstanding at end of year 2,026,384 $5.61 2,228,000 $4.68 ========= ========= Options exercisable at year- end........................ 1,307,530 475,516 Weighted average fair value of options granted during the year................... $ 6.79 $ 3.03
F-34 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The per share weighted average fair value of options granted during 1996 and 1995 were estimated using the Black Scholes option pricing model assuming risk-free interest rates of 6.6% and 6.0% in 1996 and 1995, respectively, an expected volatility factor of 85% and an expected life of three years. The following table summarizes information about fixed stock options at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ---------------------------- RANGE NUMBER WEIGHTED-AVERAGE NUMBER OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 4.64 to 6.78......... 1,757,184 3.0 years $4.64 1,255,850 $4.64 7.06 to 8.12......... 20,000 3.8 years 7.95 6,800 7.95 10.62 to 15.81......... 238,100 7.4 years 11.97 39,780 10.64 16.25 to 18.37......... 11,100 4.3 years 17.85 5,100 18.37 --------- --------- $ 4.64 to 18.37......... 2,026,384 1,307,530 ========= =========
As permitted under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. However, pro forma disclosures as if the Company adopted the fair value based method of measurement for stock-based compensation plans under SFAS 123 in 1996 and 1995 are presented below. Had compensation cost for the Company's grants for stock-based compensation plans been determined using the fair value method under SFAS No. 123, the Company's net loss pro forma, and net loss per common share for 1996 and 1995 would approximate the amounts below (in millions except per share data):
YEAR ENDED FOUR MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 --------------------- --------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- Net loss........................... (284,815) (285,716) (30,138) (30,350) Net loss per common share.......... (7.27) (7.30) (1.05) (1.06)
The pro forma amounts do not give any effect to options granted prior to January 1, 1995. Operating results include charges of $2.2 million, $0.2 million and $0.2 million for the year ended December 31, 1996, the eight months ended August 31, 1995 and the four months ended December 31, 1995, respectively, to reflect the excess of the market price of TWA's common stock on the date of grant over the exercise price, over the vesting period. The 1996 charge includes $1.8 million in respect to the accelerated vesting of certain awards in connection with the severance of certain officers. 14. EXTRAORDINARY ITEMS: In 1996, the Company consummated a series of privately negotiated exchanges with a significant holder of the 12% Senior Secured Reset Notes which resulted in the return to the Company of approximately $45.3 million in 12% Senior Secured Reset Notes and approximately $1.5 million in accrued interest thereon in exchange for the issuance of approximately 4.5 million shares of Company Common Stock. As a result of the exchange of the 12% Senior Secured Notes, the Company recorded an extraordinary non-cash charge of $8.2 million representing the difference between the fair value of the common stock issued (based upon the trading price of the Company's common stock on the dates of exchanges) and the carrying value of the Senior Secured Reset Notes retired. F-35 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1996, the Company recorded an extraordinary charge of approximately $1.6 million due to the early extinguishment of a portion of the PBGC Notes as a result of Karabu applying approximately $6.4 million in ticket proceeds as prepayments on the PBGC Notes. The extraordinary gain recorded in the four months ended December 31, 1995 was due to the cancellation of debt as a result of a settlement between Trans World Express, Inc. ("TWE"), a subsidiary, and an aircraft lessor. The extraordinary gain recorded in the eight months ended August 31, 1995 was for the discharge of indebtedness pursuant to the Company's '95 Reorganization. The extraordinary charge recorded in 1994 was for a prepayment premium of approximately $2.0 million related to the sale and lease back of four McDonnell Douglas MD-80 aircraft. 15. DISPOSITION OF ASSETS: Disposition of assets resulted in net losses of approximately $1,135,000 and $206,000 during 1996 and for the eight months ended August 31, 1995, respectively, and net gains of $3,330,000 and $1,072,000 for the four months ended December 31, 1995 and during 1994, respectively. In 1996, TWA recorded a gain of approximately $8.0 million in connection with the hull insurance settlement for the aircraft destroyed in the Flight 800 incident. The gain was offset by a loss of $8.3 million on the sale of expendable aircraft parts and losses on other miscellaneous dispositions. In November 1995, TWA entered into an agreement to sublease certain of TWA's leased commissary facilities in Los Angeles. As part of this agreement, TWA sold its commissary furnishings and equipment, resulting in a gain of $2.0 million. The 1994 net gain included a gain of approximately $1.3 million on the divestiture of three subsidiaries, Midcoast Aviation, Inc., Travel Marketing Services, Inc. and World Marketing Services, Inc. 16. SPECIAL CHARGES AND OTHER NONRECURRING ITEMS: The 1996 operating loss includes an aggregate of approximately $85.9 million in special charges and nonrecurring items, primarily as follows: (i) approximately $26.7 million to reflect the write-off of the carrying value of TWA's New York-Athens route authority over which TWA has elected to discontinue service, (ii) approximately $53.7 million to reflect the reduction in carrying value of TWA's owned L-1011 and B-747 aircraft and related spare parts which are expected to be retired from service over the next year and (iii) approximately $5.5 million for employee severance liabilities related to the termination of service to Athens and Frankfurt. The write-down of owned aircraft and related spare parts was based upon managements estimates of the net proceeds to be received upon the disposition of these assets. Additionally, the Company has obligations under operating leases for B-747 aircraft aggregating approximately $50 million over the next seven years. Management currently estimates that it will be able to recover substantially all of these costs pursuant to subleases of these aircraft and, accordingly, no provision has been made for any such costs at this time. Management's estimates relative to the costs of the retirement of the L-1011 and B-747 fleets and related spare parts are based upon current market conditions, preliminary discussions with interested parties and other factors. The actual costs could differ materially from the current estimates. The operating income for the eight months ended August 31, 1995, includes a special charge of $1.7 million for shut-down related expenses of TWE. The 1994 operating loss includes an aggregate of $175.1 million in costs associated with special charges and nonrecurring items as further described below. F-36 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In the fourth quarter of 1994, TWA recorded a charge of $36.3 million to salaries, wages and benefits to reflect the estimated portion of the obligation earned to date for payments due to employees represented by the IAM for overtime savings in excess of certain targeted levels established in the '92 Labor Agreement (see Note 7). During 1994, TWA undertook several strategic operational initiatives to improve its competitiveness and reduce its cost structure. Special charges recorded in 1994 include the following principal components: (i) approximately $61 million to reflect the write-off of the carrying value of certain international route authorities which were no longer expected to be utilized in connection with the restructuring of such operations, (ii) approximately $34 million to reflect the write-off of pre-delivery payments and related capitalized interest for certain aircraft on order (also see Note 18--Aircraft Commitments), (iii) approximately $24 million to reflect the reduction in the carrying value of certain owned aircraft and spare parts which, under the Company's fleet plan, were expected to be retired and sold and (iv) approximately $15 million for furlough pay and severance costs related to reduction in the number of employees. 17. OTHER CHARGES AND CREDITS:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------------- ------------------------- YEAR FOUR MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ (AMOUNTS IN THOUSANDS) Expenses associated with the restructuring of debt and flight equipment leases.................................................................. -- 3,000 11,000 11,100 Provisions for losses resulting from claims and litigation judgments against TWA............................................................. 235 26 351 200 Foreign currency transaction (gains) losses-net.......................... (642) 1,156 384 (1,941) Finance charge income earned on receivables carried by TWA............... (8,030) (2,662) (6,198) (9,557) Credits related to settlement of various contract disputes, litigation and other matters....................................................... (2,500) -- -- -- Equity in (earnings)/losses of TWA's investment in Worldspan............. (11,919) 11,535 (3,607) 3,616 Miscellaneous other nonoperating charges (credits)-net (a)............... (7,742) (5,444) (4,309) (32,265) -------- ------ ------- -------- Total Other Charges and Credits.......................................... $(30,598) $7,611 $(2,379) $(28,847) - - -------------------------------------------------- ======== ====== ======= ========
- - -------- (a) The amount for 1994 includes certain nonrecurring income amounts aggregating approximately $21.1 million relating to the reduction of certain liabilities established on the '93 Effective Date (also see Note 20-Supplemental Financial Information (Unaudited)). 18. AIRCRAFT COMMITMENTS: TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce plc relating to the purchase of ten A330-300 twin-engine wide body aircraft and related engines, spare parts and equipment for an aggregate purchase price of approximately $1.1 billion. The agreements, as amended, require the delivery of the aircraft in 1999 and 2000 and provide for the purchase of up to ten additional aircraft. TWA has not yet made arrangements F-37 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) for the permanent financing of the purchases subject to the agreements. In the event of cancellation, predelivery payments of approximately $18 million would be subject to forfeiture. During 1996 TWA entered into a purchase agreement with the Boeing Company relating to the purchase of ten Boeing Model 757-231 aircraft and related engines, spare parts and equipment for an aggregate purchase price of approximately $500 million. The agreement requires the delivery of the aircraft in 1997, 1998 and 1999, and provides for the purchase of up to ten additional aircraft. Furthermore, to the extent TWA exercises its options for additional aircraft, the Company will have the right to an equal number of additional option aircraft. TWA has obtained commitments for debt financing for approximately 80% of the total costs associated with the acquisition of eight of the original ten aircraft and obtained commitments for 100% of the total costs of the remaining two original aircraft. Such commitments are subject to the lender's and lessor's ongoing evaluation of the financial condition of TWA. Required future expenditures under the purchase agreements described above, including an estimate of price escalation as defined in the subject agreements and exclusive of secured financing, are as follows (amounts in millions):
AVSA BOEING ----- ------ 1997.......................................................... 49.1 248.5 1998.......................................................... 49.8 97.0 1999.......................................................... 515.4 143.0 2000.......................................................... 532.5 --
19. FRESH START REPORTING: Pursuant to SOP 90-7, TWA adopted fresh start reporting which has resulted in the creation of a new reporting entity and the Company's assets and liabilities being adjusted to reflect fair values on the '95 Effective Date. For accounting purposes, the '95 Effective Date was deemed to be September 1, 1995. In the fresh start reporting, an aggregate value of $270 million was assigned to TWA's Common Stock and Employee Preferred Stock. These values were established by management with the assistance of its financial advisors. These valuations considered TWA's expected future performance, relevant industry and economic conditions, and analyses and comparisons with comparable companies. The reorganization value of TWA has been allocated to the Reorganized Company's assets and liabilities in a manner similar to the purchase method of accounting for a business combination. Management obtained valuations from independent third parties which, along with other market and related information and analyses, were utilized in assigning fair values to assets and liabilities. A summary of the impact of the '95 Reorganization and the related fresh start adjustments is presented below. The fresh start adjustments resulted in, among other things, the allocation of substantial amounts to reorganization value in excess of amounts allocable to identifiable assets, the amortization of which, while not requiring the use of cash, will significantly affect future operating results. F-38 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of the impact of the '95 Reorganization Plan and the related fresh start adjustments is presented below (amounts in thousands).
SEPTEMBER 1, 1995 ------------------------------------------------------------------- PREDECESSOR DEBT FRESH START OTHER REORGANIZED COMPANY DISCHARGE(A) ADJUSTMENTS(B) ADJUSTMENTS(C) COMPANY ----------- ------------ -------------- -------------- ----------- Current Assets: Cash and cash equivalents........... $ 239,796 $ -- $ -- $ -- $ 239,796 Receivables............ 297,022 (1,449) -- -- 295,573 Spare parts, materials and supplies.......... 146,191 -- -- -- 146,191 Prepaid expenses and other................. 60,947 -- -- -- 60,947 ---------- --------- ---------- --------- ---------- Total Current Assets.. 743,956 (1,449) -- -- 742,507 ---------- --------- ---------- --------- ---------- Property and Equipment.. 631,087 -- (24,239) -- 606,848 ---------- --------- ---------- --------- ---------- Other Assets: Investment in affiliated companies.. 110,325 -- -- -- 110,325 Other investments and receivables........... 163,715 -- -- -- 163,715 Routes, gates and slots................. 737,171 -- (278,722) -- 458,449 Reorganization value in excess of amounts allocable to identifiable assets... 153,840 -- -- 685,224 839,064 Other assets........... 28,531 -- ( 9,392) -- 19,139 ---------- --------- ---------- --------- ---------- Total Other............ 1,193,582 -- (288,114) 685,224 1,590,692 ---------- --------- ---------- --------- ---------- Total................... $2,568,625 $ (1,449) $ (312,353) $ 685,224 $2,940,047 ========== ========= ========== ========= ========== Current Liabilities: Current maturities of long-term debt........ $ 472,510 $(404,665) $ -- $ -- $ 67,845 Current obligations under capital leases.. 42,643 -- (647) -- 41,996 Advance ticket sales... 253,642 -- -- -- 253,642 Accounts payable and other accrued expenses.............. 518,030 24,466 3,739 -- 546,235 ---------- --------- ---------- --------- ---------- Total.................. 1,286,825 (380,199) 3,092 -- 909,718 ---------- --------- ---------- --------- ---------- Liabilities Subject To Chapter 11 Reorganization Proceedings............ 748,855 (748,855) -- -- -- ---------- --------- ---------- --------- ---------- Noncurrent Liabilities and Deferred Credits: Long-term debt, less current maturities.... -- 765,435 -- -- 765,435 Obligations under capital leases, less current obligations... 317,196 -- (42,440) -- 274,756 Other noncurrent liabilities and deferred credits...... 673,428 18,612 (30,762) -- 661,278 ---------- --------- ---------- --------- ---------- Total.................. 990,624 784,047 (73,202) -- 1,701,469 ---------- --------- ---------- --------- ---------- Redeemable Preferred Stock.................. -- 58,860 -- -- 58,860 ---------- --------- ---------- --------- ---------- Shareholders' Equity (Deficiency): Old Preferred Stock.... 125 -- -- (125) -- Old Common Stock....... 200 -- -- (200) -- Employee Preferred Stock................. -- -- -- 53 53 New Common Stock....... -- -- -- 172 172 Additional paid-in capital............... 161,692 143,800 -- (35,717) 269,775 Accumulated Deficit.... (619,696) 140,898 (242,243) 721,041 -- ---------- --------- ---------- --------- ---------- Total.................. (457,679) 284,698 (242,243) 685,224 270,000 ---------- --------- ---------- --------- ---------- Total................... $2,568,625 $ (1,449) $ (312,353) $ 685,224 $2,940,047 ========== ========= ========== ========= ==========
- - -------- (a) To record the discharge of indebtedness pursuant to the '95 Reorganization and reclassification of debt between current and non-current based upon its revised terms. Debt securities, Mandatorily Redeemable 12% Preferred Stock, Ticket Vouchers and Contingent Payment Rights issued pursuant to the '95 Reorganization have been recorded at their estimated fair values. The excess of indebtedness eliminated F-39 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) over the fair value of securities issued in settlement of those claims, approximately $140.9 million, is reflected as an extraordinary item in the eight months ended August 31, 1995. (b) To record adjustments to reflect assets and liabilities at fair values. The adjustments to record the fair values of assets and liabilities resulted in a nonrecurring charge to reorganization items of approximately $228.8 million in the eight months ended August 31, 1995. Charges to reorganization items were recorded for various fees and expenses related to the consummation of the '95 Plan aggregating approximately $13.4 million. Significant elements of the adjustments to record the fair value of assets and liabilities are summarized below: --Adjustments to reflect the fair value of owned property and equipment under capital leases. --Adjustments to reflect the fair value of TWA's international route authorities, take-off and landing time slots and airport gate leaseholds. --Adjustments to record the present value of the liabilities for postretirement medical and life insurance benefits and certain foreign pension plans to reflect the current postretirement benefit obligation and projected benefit obligation, respectively, utilizing current discount rates. --An adjustment to reduce deferred income taxes to reflect the impact of the preceding adjustments. (c) To record adjustments to reflect the elimination of the remaining deficit in shareholders' equity after the adjustments arising from (a) and (b) above and to reflect the associated reorganization value in excess of amounts allocable to identifiable assets. F-40 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 20. SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED): Selected consolidated financial data (unaudited) for each quarter within 1996 and 1995 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- -------- ---------- --------- (AMOUNTS IN THOUSANDS) REORGANIZED COMPANY YEAR ENDED DECEMBER 31, 1996 Operating revenues.............. $ 782,433 $965,808 $1,002,867 $ 803,299 ========= ======== ========== ========= Special charges (note 16)....... $ -- $ -- $ -- $ 85,915 ========= ======== ========== ========= Operating income (loss)......... $ (54,191) $ 62,028 $ 26,019 $(232,383) ========= ======== ========== ========= Disposition of assets, gains (losses)--net.................. $ (214) $ 239 $ (87) $ (1,073) ========= ======== ========== ========= Income (loss) before extraordinary item............. $ (37,107) $ 25,262 $ (6,905) $(256,277) ========= ======== ========== ========= Extraordinary items............. $ -- $ -- $ (7,420) $ (2,368) ========= ======== ========== ========= Net income (loss)............... $ (37,107) $ 25,262 $ (14,325) $(258,645) ========= ======== ========== ========= Per share amounts: Earnings (loss) before extraordinary items and special dividend requirements. $ (.98) $ .46 $ (.24) $ (5.51) ========= ======== ========== ========= Extraordinary items and special dividend requirements......... $ (.48) $ -- $ (.16) $ (.05) ========= ======== ========== ========= Net income (loss).............. $ (1.46) $ .46 $ (.40) $ (5.56) ========= ======== ========== ========= REORGANIZED COMPANY FOUR MONTHS ENDED DECEMBER 31, 1995 Operating revenues.............. $ -- $ -- $ 293,890 (a) $ 804,584 ========= ======== ========== ========= Operating income................ $ -- $ -- $ 9,308 (a) $ 1,138 ========= ======== ========== ========= Disposition of assets, gains (losses)--net.................. $ -- $ -- $ (50)(a) $ 3,380 ========= ======== ========== ========= Loss before extraordinary item.. $ -- $ -- $ (2,347)(a) $ (31,291) ========= ======== ========== ========= Extraordinary items............. $ -- $ -- $ -- (a) $ 3,500 ========= ======== ========== ========= Net loss........................ $ -- $ -- $ (2,347)(a) $ (27,791) ========= ======== ========== ========= Per share amounts: Loss before extraordinary items......................... $ -- $ -- $ (.16)(a) $ (.93) ========= ======== ========== ========= Extraordinary item............. $ -- $ -- $ -- (a) $ .09 ========= ======== ========== ========= Net loss....................... $ -- $ -- $ (.16)(a) $ (.84) ========= ======== ========== ========= PREDECESSOR COMPANY EIGHT MONTHS ENDED AUGUST 31, 1995 Operating revenues.............. $ 692,320 $860,506 $ 665,529 (b) $ -- ========= ======== ========== ========= Special charges (note 16)....... $ -- $ -- $ 1,730 (b) $ -- ========= ======== ========== ========= Operating income (loss)......... $ (76,261) $ 54,382 $ 36,521 (b) $ -- ========= ======== ========== ========= Reorganization items............ $ -- $ -- $ 242,243 (b) $ -- ========= ======== ========== ========= Disposition of assets, gains (losses)--net.................. $ (271) $ (67) $ 132 (b) $ -- ========= ======== ========== ========= Income (loss) before extraordinary item............. $(122,795) $ 5,168 $ (220,586)(b) $ -- ========= ======== ========== ========= Extraordinary items............. $ -- $ -- $ 140,898 (b) $ -- ========= ======== ========== ========= Net income (loss)............... $(122,795) $ 5,168 $ (79,688)(b) $ -- ========= ======== ========== =========
- - -------- (a) One month ended September 30, 1995 (b) Two months ended August 31, 1995 F-41 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The results for each period include all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The consolidated financial results on an interim basis are not necessarily indicative of future financial results on either an interim or annual basis. TWA's air transportation business is highly seasonal with the second and third quarters of the calendar year historically producing substantially better operating results than the first and fourth quarters. The results for the fourth quarter of 1996 includes an adjustment to reduce aircraft fuel and oil costs by approximately $8.8 million, as a result of federal fuel excise taxes paid which are expected to be refunded to the Company. The results for the fourth quarter of 1995 include several adjustments to operating expenses to reflect changes in estimates, including a reduction in passenger sales commissions of approximately $6.7 million and a reduction in employee benefits and workers compensation costs of $6.2 million. 21. FOREIGN OPERATIONS: TWA conducts operations in various foreign countries, principally in Europe and the Middle East. Operating revenues from foreign operations were approximately $719.2 million in the year ended December 31, 1996, $228.7 million in the four months ended December 31, 1995, $474.4 million in the eight months ended August 31, 1995 and $794.1 million in the year ended December 31, 1994. 22. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires disclosures with regards to fair values of all financial instruments, whether recognized or not recognized in the balance sheet, subject to certain exceptions. Solely for purposes of complying with this accounting standard, the Company has estimated the fair value of certain of its financial instruments, as further described below. Because no market exists for a significant portion of TWA's financial instruments, fair value estimates provided below are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The discussion of financial instruments below conforms with the presentation in the Consolidated Balance Sheet and relates to the amounts at December 31, 1996 and 1995. (a) Cash, cash equivalents and receivables: The carrying amounts of these assets is estimated to approximate fair value due to the generally short maturities of these instruments. (b) Other investments and receivables: The carrying amount of these assets are estimated to approximate fair value due to the generally short maturities of the underlying instruments which are, however, classified as long-term assets because TWA's ability to access these amounts is generally restricted by contractual provisions. (c) Accounts payable and other accrued liabilities: The carrying amount of these liabilities are estimated to approximate fair value due to the generally short maturities of these instruments. (d) Debt: At December 31, 1996 and December 31, 1995, approximately $111.8 million and $145.2 million, respectively, of the carrying value of TWA's debt was traded publicly. The aggregate market value of such debt was approximately $126.0 million and $160.4 million on those dates, respectively. The Company F-42 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) believes the fair value of the remaining debt which had an aggregate carrying value of approximately $589.1 million and $686.4 million at December 31, 1996 and 1995, respectively, was approximately $466.4 million and $644.5 million on those dates. (e) Mandatorily Redeemable 12% Preferred Stock: At December 31, 1995 the carrying value of TWA's Mandatorily Redeemable 12% Preferred Stock was $61.4 million. The aggregate market value of such stock was approximately $74.1 million on that date. F-43 SCHEDULE II TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1996, THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1994 (AMOUNTS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ------------ ---------- ---------- ---------- ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS & END OF DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD ----------- ------------ ---------- ---------- ---------- Year Ended December 31, 1996 Reserves deducted from assets to which they apply: Allowance for doubtful ac- counts..................... $13,517 $ 8,037 $ 8,615(a) $ 12,939 ======= ======= ======= ======== Allowance for obsolescence.. $ 2,201 $10,989 $ 1,627 $ 11,563 ======= ======= ======= ======== Four Months Ended December 31, 1995 Reserves deducted from assets to which they apply: Allowance for doubtful ac- counts..................... $16,155 $ 700 $ 3,338(a) $ 13,517 ======= ======= ======= ======== Allowance for obsolescence.. $ -- $ 2,308 $ 107 $ 2,201 ======= ======= ======= ======== Eight Months Ended August 31, 1995 Reserves deducted from assets to which they apply: Allowance for doubtful ac- counts..................... $14,832 $ 6,781 $ 5,458(a) $ 16,155 ======= ======= ======= ======== Allowance for obsolescence.. $20,928 $ 4,604 $25,532(b) $ -- ======= ======= ======= ======== Year Ended December 31, 1994 Reserves deducted from assets to which they apply: Allowance for doubtful ac- counts..................... $11,159 $16,267 $12,594(a) $ 14,832 ======= ======= ======= ======== Allowance for obsolescence.. $ 1,470 $19,837 $ 379 $ 20,928 ======= ======= ======= ========
- - -------- (a) Accounts written off, less recoveries. (b) Includes adjustment to eliminate allowance for obsolescence in the amount of $25,146 in connection with fresh start reporting. (c) Includes adjustment to eliminate allowance for obsolescence in the amount of $61,252, in connection with fresh start reporting. S-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 31, 1997 TRANS WORLD AIRLINES, INC. By: /s/ Gerald L. Gitner --------------------- Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Gerald L. Gitner Director, Chairman of the March 31, 1997 - - ------------------------------------ Board and Chief Executive Officer (Principal Executive Officer) Gerald L. Gitner /s/ Michael J. Palumbo Senior Vice President and March 31, 1997 - - ------------------------------------ Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Michael J. Palumbo John W. Bachmann* Director March 31, 1997 - - ------------------------------------ John W. Bachmann William F. Compton* Director March 31, 1997 - - ------------------------------------ William F. Compton Eugene P. Conese* Director March 31, 1997 - - ------------------------------------ Eugene P. Conese Gerald L. Gitner* Director March 31, 1997 - - ------------------------------------ Gerald L. Gitner William M. Hoffman* Director March 31, 1997 - - ------------------------------------ William M. Hoffman Thomas H. Jacobsen* Director March 31, 1997 - - ------------------------------------ Thomas H. Jacobsen
D-1
SIGNATURE TITLE DATE --------- ----- ---- Myron Kaplan* Director March 31, 1997 - - ------------------------------------ Myron Kaplan David M. Kennedy* Director March 31, 1997 - - ------------------------------------ David M. Kennedy Jewel Lafontant-Mankarious* Director March 31, 1997 - - ------------------------------------ Jewel Lafontant-Mankarious Thomas F. Meagher* Director March 31, 1997 - - ------------------------------------ Thomas F. Meagher William O'Driscoll* Director March 31, 1997 - - ------------------------------------ William O'Driscoll G. Joseph Reddington* Director March 31, 1997 - - ------------------------------------ G. Joseph Reddington Lawrence K. Roos* Director March 31, 1997 - - ------------------------------------ Lawrence K. Roos Director March , 1997 - - ------------------------------------ Stephen M. Tumblin William W. Winpisinger* Director March 31, 1997 - - ------------------------------------ William W. Winpisinger *By: /s/_____Richard P. Majurno_____ March 31, 1997 Attorney-in-fact
D-2 EXHIBIT INDEX
EXHIBITS DESCRIPTION -------- ----------- *2.1 Joint Plan of Reorganization, dated May 12, 1995 (Appendix B to the Company's Registration Statement on Form S-4, Registration Number 33- 84944, as amended.) *2.2 Modifications to Joint Plan of Reorganization, dated July 14, 1995 and Supplemental Modifications to Joint Plan of Reorganization dated August 2, 1995 (Exhibit 2.5 to 6/95 10-Q) *2.3 Findings of Fact, Conclusions of Law and Order Confirming Modified Joint Plan of Reorganization, dated August 4, 1995, with Exhibits A-B attached (Exhibit 2.6 to 6/95 10-Q) *2.4 Final Decree, dated December 28, 1995, related to the '95 Reorganization (Exhibit 2.7 to 1995 10-K) *3(i) Third Amended and Restated Certificate of Incorporation of Trans World Airlines, Inc. (Exhibit 3(iv) to Company's Registration Statement on Form S-3, Reg. No. 333-04977) *3(ii) Amended and Restated By-Laws of Trans World Airlines, Inc., effective May 24, 1996 (Exhibit 3(ii) to 6/96 10-Q) *4.1 Voting Trust Agreement, dated November 3, 1993, between TWA and LaSalle National Trust, N.A., as trustee (Exhibit 4.3 to 9/93 10-Q) *4.2 IAM TWA Employees' Stock Ownership Plan and related Trust Agreement, dated August 31, 1993, between TWA, the IAM Plan Trustee Committee and the IAM Trustee (Exhibit to 9/93 10-Q) *4.3 IFFA TWA Employees' Stock Ownership Plan and related Trust Agreement, dated August 31, 1993, between TWA, the IFFA Plan Trustee Committee and the IFFA Trustee (Exhibit 4.5 to 9/93 10-Q) *4.4 TWA Employee Stock Ownership Plan, dated August 31, 1993, First Amendment thereto, dated October 31, 1993, and related Trust Agreement, dated August 31, 1993, between TWA and the ESOP Trustee (Exhibit 4.6 to 9/93 10-Q) *4.5 ALPA Stock Trust, dated August 31, 1993, between TWA and the ALPA Trustee (Exhibit 4.7 to 9/93 10-Q) *4.6 Stockholders Agreement, dated November 3, 1993, among TWA, LaSalle National Trust, N.A., as Voting Trustee and the ALPA Trustee, IAM Trustee, IFFA Trustee and Other Employee Trustee (each as defined therein), as amended by the Addendum to Stockholders dated November 3, 1993 (Exhibit 4.8 to 9/93 10-Q) *4.7 Indenture between TWA and Shawmut Bank, National Association, dated November 3, 1993 relating to TWA's 10% Senior Secured Notes Due 1998 (Exhibit 4.10 to 9/93 10-Q) *4.8 Indenture between TWA and American National Bank and Trust Company of Chicago, N.A., dated November 3, 1993 relating to TWA's 8% Secured Notes Due 2001 (Exhibit 4.12 to 9/93 10-Q) *4.9 Indenture between TWA and Shawmut Bank Connecticut, National Association, dated November 3, 1993 relating to TWA's 11% Senior Secured Notes Due 1997 (Exhibit 4.13 to 9/93 10-Q) *4.10 The TWA Air Line Pilots 1995 Employee Stock Ownership Plan, effective as of January 1, 1995 (Exhibit 4.12 to 9/95 10-Q) *4.11 TWA Air Line Pilots Supplemental Stock Plan, effective September 1, 1994 (Exhibit 4.13 to 9/95 10-Q) *4.12 TWA Air Line Pilots Supplemental Stock Plan Trust, effective August 23, 1995 (Exhibit 4.14 to 9/95 10-Q)
E-1
EXHIBITS DESCRIPTION -------- ----------- *4.13 TWA Air Line Pilots Supplemental Stock Plan Custodial Agreement, effective August 23, 1995 (Exhibit 4.15 to 9/95 10-Q) *4.14 Form of Indenture relating to TWA's 8% Convertible Subordinated Debentures Due 2006 (Exhibit 4.16 to Registrant's Registration Statement on Form S-3, Registration No. 333-04977) *10.1.1 Icahn Asset-Based Facility Loan documents, dated January 5, 1993 (Exhibit 10(iv)(4) to '92 10-K) *10.1.2 Icahn Asset-Based Facility Loan documents, dated January 5, 1993 (Exhibit 10(iv)(5) to '92 10-K) *10.2.1 Asset Purchase Agreement, dated as of November 4, 1993, between TWA and St. Louis (Exhibit 10.2 to 9/93 10-Q) *10.2.2 Equipment Operating Lease Agreement, dated November 4, 1993, between TWA and St. Louis (Exhibit 10.2 to 9/93 10-Q) *10.2.3 Cargo Use Amendment, dated November 4, 1993 between TWA and St. Louis (Exhibit F to the Asset Purchase Agreement) (Exhibit 10.2 to 9/93 10- Q) *10.2.4 Use Amendment 1993, dated November 4, 1993, between TWA and St. Louis (Exhibit E to the Asset Purchase Agreement) (Exhibit 10.2 to 9/93 10- Q) *10.3.1 Amendment Number One to the Note Purchase and Security Agreement, dated October 26, 1993, between TWA and Rolls-Royce (Exhibit 10.3 to 9/93 10-Q) *10.3.2 Amendment Number One to the Equipment Purchase Contract, dated October 26, 1993, between TWA and Rolls-Royce (Exhibit 10.3 to 9/93 10-Q) *10.4 Amendment Number Two to the AVSA Agreement dated June 1, 1989 between TWA and AVSA, dated August 25, 1993 (Exhibit 10.4 to 9/93 10-Q) *10.5.1 First Amendment to Aircraft Installment Sale Agreement, dated November 1, 1993, among TWA, the Vendors, and ITOCHU with respect to aircraft N605TW (Exhibit 10.5 to 9/93 10-Q) *10.5.2 First Amendment to Aircraft Installment Sale Agreement, dated November 1, 1993, among TWA, the Vendors, and ITOCHU with respect to aircraft N603TW (Exhibit 10.5 to 9/93 10-Q) *10.5.3 First Amendment to Security Agreement and Chattel Mortgage, dated November 1, 1993, among TWA, the Vendors, and ITOCHU, as to ITOCHU Amendment No. 1 (Exhibit 10.5 to 9/93 10-Q) *10.5.4 First Amendment to Security Agreement and Chattel Mortgage, dated November 1, 1993, among TWA, the Vendors, and ITOCHU, as to ITOCHU Amendment No. 2 (Exhibit 10.5 to 9/93 10-Q) *10.6.1 Deferral Agreement and First Amendment to Aircraft Installment Sale Agreement No. 1, dated November 1, 1993, among TWA, the Vendors, and ORIX with respect to aircraft N601TW (Exhibit 10.6 to 9/93 10-Q) *10.6.2 Deferral Agreement and First Amendment to Aircraft Installment Sale Agreement, dated November 1, 1993, among TWA, the Vendors, and ORIX with respect to aircraft N603TW (Exhibit 10.6 to 9/93 10-Q) *10.6.3 First Amendment to Security Agreement and Chattel Mortgage, dated November 1, 1993, among TWA, the Vendors, and ORIX, as to ORIX Amendment No. 1 (Exhibit 10.6 to 9/93 10-Q) *10.6.4 First Amendment to Security Agreement and Chattel Mortgage, dated November 1, 1993, among TWA, the Vendors, and ORIX, as to ORIX Amendment No. 2 (Exhibit 10.6 to 9/93 10-Q) *10.7.1 Purchase Agreement, dated October 5, 1993, between TWA and Pacific AirCorp 747, Inc. with respect to aircraft N93107 and N93108 (Exhibit 10.7 to 9/93 10-Q)
E-2
EXHIBITS DESCRIPTION -------- ----------- *10.7.2 Lease Agreement 107, dated October 5, 1993, between Pacific AirCorp 747, Inc. and TWA with respect to aircraft N93107 (Exhibit 10.7 to 9/93 10-Q) *10.7.3 Lease Agreement 108, dated October 5, 1993, between Pacific AirCorp 747, Inc. and TWA with respect to aircraft N93107 (Exhibit 10.7 to 9/93 10-Q) *10.8 Comprehensive Settlement Agreement, dated January 5, 1993 (Exhibit 10(iv)(1) to '92 10-K) 10.8.1 Omnibus Amendment and Supplement to Agreements between TWA and Karabu Corp. dated as of March 28, 1994(1) *10.9 Letter Agreement, dated April 15, 1994, between TWA and Richard P. Magurno relating to employment by TWA (Exhibit 10.14 to 3/94 10-Q) *10.10 Form of Indemnification Agreement between TWA and individual members of the TWA Board of Directors relating to indemnification of director (Exhibit 10.16 to 6/94 10-Q) 10.11.1 Purchase Agreement, dated as of December 15, 1993 between TWA and Pacific AirCorp DC9, Inc. with respect to aircraft N927L and N928L(1) 10.11.2 Lease Agreement 927, dated as of December 15, 1993, between Pacific AirCorp DC9, Inc. and TWA with respect to aircraft N927L(1) 10.11.3 Lease Agreement 928, dated as of December 1, 1993, between Pacific AirCorp DC9, Inc. and TWA with respect to aircraft N928L(1) 10.12.1 Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.), Inc. dated March 31, 1994, with respect to aircraft N950U(1) 10.12.2 Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.), Inc., dated March 31, 1994, with respect to aircraft N953U(1) 10.12.3 Lease Agreement, dated as of March 31, 1994 between Mitsui & Co. (U.S.A.), Inc. and TWA with respect to aircraft N950U and N953U(1) 10.12.4 Aircraft Purchase Agreement between TWA and McDonnell Douglas Finance Corporation, dated March 31, 1994, with respect to aircraft N951U(1) 10.12.5 Aircraft Purchase Agreement between TWA and McDonnell Douglas Finance Corporation, dated March 31, 1994, with respect to aircraft N952U(1) 10.12.6 Lease Agreement, dated as of March 31, 1994 between McDonnell Douglas Finance Corporation and TWA with respect to aircraft N951U and N952U(1) 10.13.1 Aircraft Purchase Agreement, dated March 31, 1994, between McDonnell Douglas Finance Corporation and TWA with respect to aircraft N306TW (formerly N534AW)(1) 10.13.2 Purchase Money Chattel Mortgage, dated as of March 31, 1994, by TWA, as Mortgagor, and McDonnell Douglas Finance Corporation, as Mortgagee, with respect to N306TW (formerly N534AW)(1) 10.13.3 Chattel Mortgage, dated as of March 31, 1994 by TWA as Mortgagor, in favor of McDonnell Douglas Finance Corporation, as Mortgagee, with respect to aircraft N306TW (formerly N534AW)(1) 10.14 Commuter Air Service Agreement dated October 27, 1993, between TWA and Alpha Air(1) 10.15 Air Service Agreement dated October 1, 1994, between TWA and Trans States Airlines, Inc.(1) 10.16 Consulting Agreement between TWA and Fieldstone, Private Capital Group, L.P. dated July 11, 1994(1) 10.17 Consulting Agreement dated July 15, 1994, between TWA and Simat, Helliesen & Eichner, Inc.(1) 10.17.1 Agreement for Purchase and Sale dated as of August 29, 1994, between TWA and Browsh & Associates, Inc.(1)
E-3
EXHIBITS DESCRIPTION -------- ----------- 10.17.2 Agreement for Purchase and Sale dated as of August 29, 1994, between TWA and Travel Marketing Holding Corporation(1) *10.18.1 Addendum to Stock Purchase Agreement (identified in 10.29.2) dated October 31, 1994 (Exhibit 10.29.3 to 9/94 10-Q) *10.18.2 Addendum to Stock Purchase Agreement (identified in 10.29.2) dated November 2, 1994 (Exhibit 10.29.4 to 9/94 10-Q) 10.19.1 Form of Agreement dated as of August 31, 1994, between TWA and Air Line Pilots Association, International(1) 10.19.2 Form of Agreement dated as of September 1, 1994, between TWA and the International Association of Machinists and Aerospace Workers (1) 10.19.3 Form of Agreement dated as of September 1, 1994, between TWA and the Independent Federation of Flight Attendants(1) *10.19.4 Form of Agreement dated as of September 1, 1994, between TWA and the Transport Workers Union of America (Exhibit 10.31.4 to 9/94 10-Q) 10.20.1 Trust Agreement dated as of August 29, 1994 between and among TWA, the International Association of Machinists and Aerospace Workers, the Independent Federation of Flight Attendants, the Air Line Pilots Association, International, United States Trust Company of New York(1) 10.20.2 Stock Pledge and Intermediator Agreement dated as of August 24, 1994 among TWA, TWA Stock Holding Company, Inc. and United States Trust Company of New York(1) 10.21.1 Key Employee Stock Incentive Plan(1) 10.21.2 Form of Opinion Agreements for options issued pursuant to the 1994 Key Employee Stock Incentive Plan(1) *10.22 Extension, Refinancing and Consent Agreement between TWA, Karabu Corp, Pichin Corp and Carl C. Icahn and the "Icahn Entities" dated as of June 14, 1995 (Exhibit 10.37 to 9/95 10-Q) *10.22.1 Karabu Ticket Program Agreement between TWA and Karabu Corp. dated as of June 14, 1995 *10.23 Trans World Airlines, Inc. Stock Purchase Warrant to Purchase Shares of Common Stock, dated August 23, 1995 (Exhibit 10.38 to 9/95 10-Q) *10.24 Stand-By Purchase Agreement dated as of August 8, 1995 between Trans World Airlines, Inc., M.D. Sass Re/Enterprise Partners L.P., a Delaware limited partnership and M.D. Sass Re/Enterprise International Ltd. a British Virgin Islands Company (Exhibit 10.39 to 9/95 10-Q) *10.25 Voucher Purchase Agreement dated as of October 18, 1995 between TWA and M.D. Sass Re/Enterprise Partners L.P., a Delaware limited partnership and M.D. Sass Re/Enterprise International Ltd. a British Virgin Islands Company (Exhibit 10.40 to 9/95 10-Q) *10.26 Purchase Agreement, dated February 9, 1996 between The Boeing Company and TWA relating to Boeing Model 757-231 Aircraft (Purchase Agreement Number 1910) (Exhibit 10.48 to 1995 10-K) *10.27 Employee Stock Incentive Program dated as of August 23, 1995 by TWA (Exhibit 10.49 to 1995 10-K) *10.28 Letter Agreement dated July 26, 1996 between Trans World Airlines, Inc. and Robert A. Peiser (Exhibit 10.52 to Pre-effective Amendment No. 2 to Registrant's Registration Statement on Form S-3, Registration No. 333-04977) *10.29 Letter Agreement dated July 26, 1996 between Trans World Airlines, Inc. and Mark J. Coleman (Exhibit 10.53 to Pre-effective Amendment No. 2 to Registrant's Registration Statement on Form S-3, Registration No. 333-04977)
E-4
EXHIBITS DESCRIPTION -------- ----------- *10.30 Exchange Agreement dated as of June 10, 1996 between Trans World Airlines, Inc. and Elliott Associates, L.P., as amended (Exhibit 10.1 to 9/20/96 8-K) *10.31 Exchange Agreement dated as of June 10, 1996 between Trans World Airlines, Inc. and Westgate International, L.P., as amended (Exhibit 10.2 to 9/20/96 8-K) *10.32 Agreement dated as of September 3, 1996 between Trans World Airlines, Inc. and Roden A. Brandt relating to employment by TWA (Exhibit 10.6 to 9/96 10-Q) 10.33 Letter Agreement dated January 6, 1997, between the Company and Edward Soule. 10.34 Agreement dated as of October 1, 1996, between the Company and Michael J. Palumbo. 10.35 Agreement dated as of November 11, 1996, between the Company and Jeffrey H. Erickson. 11 Statement re Computation of Per Share Earnings 21 Subsidiaries of TWA 23.1 Consent of KPMG Peat Marwick LLP 24 Powers of Attorney 27 Financial Data Schedule (submitted only in electronic format)
- - -------- *Incorporated by reference (1) Incorporated herein by reference to the exhibit of the same number in TWA's Registration Statement on Form S-4, Registration Number 33-849444. (2) Incorporated herein by reference to Exhibit 3.1.3 to TWA's Registration STatement on Form S-4, Registration Number 33-84944. REPORTS ON FORM 8-K Current Report on Form 8-K filed October 25, 1996. Current Report on Form 8-K filed December 16, 1996. E-5 EX-10.33 2 LETTER AGREEMENT EXHIBIT 10.33 [LETTERHEAD OF TRANS WORLD AIRLINES, INC. APPEARS HERE] January 6, 1997 Mr. Edward Soule 7370 Kingsbury University City, MO 63130 Dear Mr. Soule: This will confirm our agreement concerning the termination of your employment with Trans World Airlines, Inc. ("TWA"). In this connection, TWA and you have agreed as follows: 1. Your employment by TWA terminated as of December 19, 1996. 2. On or about the first week of January, 1997, you will receive: (a) severance pay in the aggregate amount of $100,000.00, which will be paid to you in a lump sum (less any applicable federal and state income and employment tax withholdings and less any excess payment made in advance pursuant to the Company's policy of paying executive officers on the 15th day of each month); and (b) all accrued vacation, generally payable to employees on termination, in the aggregate amount of $4,467.25 (less any applicable federal and state income and employment tax withholdings). 3. 39,100 of the non-qualified stock options issued to you under TWA's Key Employee Stock Incentive Program ("KESIP") will be treated as vested options and such vested options will be exercisable by you in accordance with the terms of the KESIP until their expiration on August 19, 2004. All remaining unvested options lapsed as of December 19, 1996. 4. You will be entitled to Class 1 pass privileges for you and your spouse and your dependent children for a period for six months from the effective date of your termination. A non-ID Term Pass will be issued to you, and when you receive it you will promptly return your current ID term pass to the undersigned on behalf of TWA. Use of the above pass will be subject to TWA's pass policy and applicable restrictions published in its Management Policy and Procedure Manual, as the same may be in effect from time to time. You will promptly return to the undersigned on behalf of TWA all term passes issued to you by other air carriers. 5. All retirement benefits to which you are entitled under TWA"s Retirement Savings Plan for Non-Contract Employees are vested. 6. All TWA group medical and dental insurance currently provided to you and your spouse and dependent children by TWA will be maintained in force and effect by TWA under the Mr. Edward Soule December 30, 1996 Page 2 same terms and conditions currently in effect (provided that any generally applicable changes in such terms and conditions as are hereafter made shall apply to you) including but not limited to the payment by you of fees for additional life insurance and ADD coverage, for the period until the earlier of (i) the date you are re-employed full time and become covered by your new employer's comparable benefit plans, or (ii) the expiration of six (6) months after December 19, 1996. Any generally applicable changes in the terms and conditions of such coverage which may hereafter be made shall also apply to you and your spouse during the period specified. 7. You will continue to be entitled, with respect to claims by third parties against you in your capacity as an officer of TWA or an officer or director of any of its subsidiaries relating to periods which you were employed by TWA, to be indemnified under the provisions of TWA's bylaws and under the terms of that certain Indemnification Agreement dated as of the 17th day of September, 1996 (a copy of which is attached) and you are entitled to be covered by such officers' and directors' liability insurance coverage as shall be maintained by TWA from time to time. 8. You will upon execution of this letter agreement return to the undersigned on behalf of TWA any computers and all accessories, software and appurtenances thereto, or pages, which are the property of or leased by TWA and in your possession, and all other TWA property, documents or material that may be in your possession. 9. You agree that for a period of two (2) years after the termination of your employment with TWA you will not for any reason solicit (or assist or encourage the solicitation of) any employee of TWA or any of its subsidiaries or affiliated companies to be employed by you or any entity in which you own or expect to own an equity interest in excess of five (5) percent of any class of the outstanding securities thereof, or by which you are employed or for which you serve or expect to serve in any capacity. For purposes of this paragraph, the term "solicit" shall mean your contacting or providing information to others who may be expected to contact, any employee of TWA or of any of its subsidiaries or affiliated companies regarding their employment status, job satisfaction, interest in seeking employment with you, any person affiliated with you or by whom you are employed or any other person or concerning any related matter, but shall not include general print advertising for personnel or responding to an unsolicited request for a personal recommendation for or evaluation of an employee of TWA or any of its subsidiaries or affiliated companies. 10. You agree to make yourself reasonably available (taking into consideration your then current employment circumstances) and to cooperate with TWA as may be reasonably necessary in connection with any litigation or other proceedings which have arisen or may Mr. Edward Soule December 30, 1996 Page 3 arise, directly or indirectly, out of or in connection with the performance of your duties while you were employed by TWA. TWA will compensate you for said services pursuant to its standard compensation of an hourly rate based upon your last salary while still employed by TWA or, if greater your then current salary. You agree not to serve as an expert witness or otherwise testify against TWA in any litigation against TWA brought by any third parties unless you are under a court order or subpoena to do so. You will promptly notify TWA if you are so subpoenaed or ordered by any court to so testify in any litigation against TWA. 11. You agree: a) That you will not disclose or make public to anyone, or release to the media any nonpublic TWA commercial, operational or financial information, including costs, strategies, forecasts or trade secrets for a period of twelve (12) months after your signing this Agreement, unless you are under a court order or subpoena to do so. b) That you will not discuss or disclose to the media the circumstances or terms of your termination of employment from TWA for a period of two (2) years after your signing this Agreement and you will not publicly disparage or denigrate the Company or any of its officers, directors or practices. c) With the exception of claims arising out of any breach of this Agreement, you irrevocably and unconditionally release, remise, acquit and forever discharge TWA, its past and present shareholders, subsidiaries, divisions, controlling parties, officers, directors, agents, employees, successors and assigns (separately and collectively "TWA Releases") jointly and individually, of and from any and all claims, demands, causes of action, obligations, damages or liabilities in law or in equity, arising from all bases, however denominated, known or unknown, directly or indirectly arising out of or relating to your employment by TWA and the termination thereof, including but not limited to any claims of employment discrimination under any federal, state or local law, rule or regulation. This release extends to any relief, no matter how denominated, including but not limited to back pay, front pay, reinstatement, compensatory damages, punitive damages, or damages from pain and suffering. you further agree that you will not file nor permit to be filed on your behalf any such claim, will not permit yourself to be a member of any class seeking relief against TWA Releases, and will not counsel or assist in the prosecution of any claims against the TWA Releases whether those claims are on behalf of yourself or others, unless you are under a subpoena court order compelling you to do so. Mr. Edward Soule December 30, 1996 Page 4 d) This Agreement is intended to be a total accord, settlement and satisfaction of any and all claims which you have or may have had against the TWA Releases, including but not limited to any and all contract, tort, and statutory claims, including but not limited to claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, 29 U.S.C. (S) 621 et. seq., the -- --- Civil Rights Act of 1991, or under state or federal statute or law. e) You further acknowledge that the only consideration for signing this Agreement and all that you are ever to receive from the TWA Releases are the terms stated in this Agreement and that, except as set forth herein, no other promises or agreements of any kind have been made to you or with you by any person or entity whatsoever to cause you to sign this Agreement, and that you have signed this Agreement as your free and voluntary act. You further acknowledge that pursuant to the terms of this Agreement you are and will be receiving benefits from TWA which are above and beyond those benefits normally provided under TWA's corporate policies and procedures governing termination of employment; that you have had a full, fair and adequate opportunity to reflect upon and consider the terms of this Agreement, to negotiate with TWA and its representatives concerning the same, and to discuss the same if desired with legal counsel of your choice; that no duress or pressure of any kind has been applied to you with respect to your entering into this Agreement; and that you are satisfied with the terms and provisions of this Agreement. f) The execution of this Agreement, including the general release set forth above, is knowing and voluntary and that you understand this Agreement and the general release set forth in (c) above. You acknowledge that you have been advised by TWA in writing to consult with an attorney prior to executing this Agreement, you have in fact consulted with an attorney prior to executing this Agreement, and you have twenty-one (21) days from tender of this Agreement within which to consider this Agreement. For a period of seven (7) days following execution of this Agreement, you may revoke this Agreement and this Agreement will not become effective or enforceable until after the revocation period has expired. Said revocation must be delivered in writing on or before 5:00 PM on the 7th day after execution of this Agreement to the undersigned. 12. This Agreement shall be binding upon and inure to the benefit of TWA and you, to the successors and assigns of TWA and to your heirs and personal representatives. Mr. Edward Soule December 30, 1996 Page 5 13. This Agreement contains the entire agreement between the parties regarding its subject matter and supersedes all prior agreements between the parties. This Agreement may only be modified in writing signed by the parties. If this Agreement accurately reflects our understanding, please sign the enclosed copy of this letter in the space provided and return same to me. Sincerely, TRANS WORLD AIRLINES, INC. By: /s/ Richard P. Magurno ------------------------- Richard P. Magurno Senior Vice President & General Counsel Read, Acknowledged and Agreed to this 6th day of January, 1997. /s/ Edward Soule - - ------------------ Edward Soule INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of the 17th day of September, 1996, by and between Trans World Airlines, Inc., a Delaware corporation, having its principal offices at One City Centre, 515 N. Sixth Street, St. Louis, MO 063101 ("TWA" or the "Company"), and Edward Soule, residing at 7370 Kingsbury, University City 63130 (the "Indemnitee"). WHEREAS, it is essential for TWA, a corporation recently reorganized and emerged from bankruptcy protection, to retain and attract as directors and officers the most capable persons available; and WHEREAS, Indemnitee is an executive officer of the Company; and WHEREAS, both TWA and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to maintain Indemnitee's continued service to the Company in an effective manner and to provide Indemnitee with specific contractual assurance that the protection included in the Company's Third Amended and Restated Certificate on Incorporation and Restated By-Laws will be available to Indemnitee, the Company desires to provide in this Agreement for the indemnification and the advance of expenses to Indemnitee as set forth in this Agreement and, to the extent officers' and directors' liability insurance is maintained by the Company, to provide for the continued coverage of Indemnitee under the Company's officers' and directors' liability insurance policies; NOW THEREFORE, in consideration of the covenants contained in this Agreement and of Indemnitee's continuing service to the Company directly or, at its request, through other enterprises, and intending to be legally bound, the parties agree as follows: 1. The Company hereby irrevocably, absolutely and unconditionally indemnifies and holds harmless the Indemnitie from and against any claim against the Indemnitee, other than as identified in Paragraph 2 below, based upon any act, omission, neglect, or breach of duty that the Indemnitee may commit, omit or suffer while acting in his capacity as a director/officer of the Company, and agrees to reimburse the Indemnitee, upon ten (20) days written notice, for any payments made or losses which the Indemnitee becomes legally obligated to pay in connection with any such claim (the "Indemnified Claim"). 2. As used in this Indemnity Agreement, the Indemnified Claim shall not include the following: (i) any claim which is based upon the Indemnitee's gaining any personal profit or advantage to which he is not legally entitled, (ii) any claim which is for an accounting of profits made from the purchase or sales by Indemnitee of securities of the Company within the meaning of Section 18(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of Delaware Law, or (iii) any claim which is based upon the Indemnitee's knowingly fraudulent, deliberately dishonest or willful misconduct. 3. Subject to the provisions of Paragraph 4 below, the Company shall reimburse the Indemnitees for all costs and expenses incurred by the Indemnitee in defending or investigating any Indemnified Claim and all such costs and expenses shall be paid by the Company in advance of the final disposition thereof unless the Company, its independent legal counsel, the stockholders of the Company or a court of competent jurisdiction determines that: (i) the Indemnitee did not act in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Company, (ii) in the case of any criminal action or proceeding, the Indemnitee had reasonable cause to believe his conduct was unlawful; or (iii) the Indemnitee intentionally breached his duty to the Company or its stockholders. 4. The Indemnitee hereby agrees to repay the Company for any costs or expenses advanced to the Indemnitee if it shall ultimately be determined by a court of competent jurisdiction in a final, non-appealable adjudication, that the Indemnitee is not entitled to indemnification under the terms of this Indemnity Agreement. 5. If any Indemnified Claim is formally asserted or brought against the Indemnitee which does or might entitle the Indemnitee to any or all of the benefits of this Indemnity Agreement, the Indemnitee shall give prompt notice thereof to the Company, together with true copies of all process, pleadings and other papers received from the Claimants. The Company shall confirm to the Indemnitee, by notice within three (3) business day thereafter, that the Company will negotiate and/or defend (as the case may be) such Indemnified Claim, advising briefly therein of the action the Company intends to take. The Company shall promptly commence and proceed with due diligence to negotiate and/or defend such Indemnified Claim, at the Company's sole expense, by appropriate procedures and/or proceedings. The Company shall keep the Indemnitee reasonably and currently apprised through such negotiations and/or defense of the status thereof and shall promptly pay the amount of all final judgments and agreed settlements, including attorneys' fees and costs. The Indemnitee shall cooperate with the Company in all reasonable ways in such negotiations and/or defense, but at the sole expense of the Company and without incurring or being deemed to have incurred any obligation or liability of any kind, nature or description by reason thereof. 6. Except as set forth in Paragraph 4 above, the Company hereby irrevocably waives any and all rights which it might otherwise have to be reimbursed for, or require contribution from the Indemnitee on account of all or any party of any Indemnitee Claim. 7. All notices, demands, request, or other communications ("Notices") required or permitted to be given under or which are given with respect to this indemnity Agreement shall be in writing and shall be sent by certified mail, return receipt requested, postage prepaid, addressed to the party to be notified at its last known address. Notices given as provided herein shall be deemed received two (2) days after the date so mailed. 8. This indemnity Agreement may not be amended or otherwise modified except by a writing executed and delivered by both of the parties hereto. 9. This indemnity Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without giving effect to the principles of conflicts of law. 10. All rights and remedies afforded to the Indemnitee by reason of this indemnity Agreement and/or by law are separate and cumulative and the exercise of one shall not in any way limit or prejudice the exercise of any other such right or remedy. No purported waiver or delay in exercising any of such right or remedy by the Indemnitee shall be deemed made by the Indemnitee under any circumstances unless in writing and duly signed by the indemnitee. 11. This Agreement shall inure to the benefit of the Indemnitee and his successors and assigns and shall be binding upon and enforceable against the Company. 12. The Company agrees to maintain an insurance policy or policies providing directors' and officers' liability insurance. Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any director or officer of the Company. 13. The provisions of this Agreement shall be severable if any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Executed as of the 17th day of September, 1996. TRANS WORLD AIRLINES, INC. By: /s/ Richard P. Magurno ----------------------------- Richard P. Magurno Senior Vice President & General Counsel ACCEPTED AND AGREED: /s/ Edward Soule - - -------------------------- Edward Soule EX-10.34 3 AGREEMENT BETWEEN THE COMPANY AND MICHAEL PALUMBO EXHIBIT 10.39 AGREEMENT, dated as of October 1, 1996, between Trans World Airlines, Inc. ("Company"), and Michael J. Palumbo ("Executive"); WHEREAS, the Company's Board of Directors has determined that it is in the best interest of the Company and its Shareholders, in order to assure continuity in the management of the Company and to provide certain additional benefits to the Company pursuant to the additional undertakings by you hereinafter set forth, to amend and restate your existing employment agreement with the Company by entering into this Agreement with you pursuant to which you and the Company give certain contractual undertakings each to the other, and WHEREAS, the parties desire to set forth the entirety of their agreements and understandings; NOW, THEREFORE, in consideration of the mutual promises contained herein the parties agree as follows: 1. Employment. The Company hereby agrees to continue the employment of ---------- the Executive to render the service hereinafter described and the Executive hereby accepts such employment and agrees to render such services, upon and subject to the terms and conditions described in this Agreement. 2. Term. Executive's employment will continue for an indefinite period ---- until terminated at any time by Company or Executive with or without cause. Nothing in this Agreement or otherwise shall be construed as entitling Executive to employment for any definite term. 3. Duties. ------ (a) Executive shall serve at the pleasure of the Company in such executive positions as Executive shall be assigned from time to time by the President, and shall perform such executive, advisory and/or administrative and managerial assignments and duties as may be assigned to Executive from time to time by the President or the President's designee, all according to the direction and control of the President. Executive will carry out and perform all such duties and assignments and all directions of any officer to whom Executive directly or indirectly reports. Executive also will comply with and carry out all rules and policies of the Company, and will serve, without additional compensation, as an officer and/or director or any subsidiary, affiliated or related corporation or business, or of any company in which Company may hold any interest. (b) The Executive will, on any exclusive basis, devote his full time during normal business hours to the business and affairs of the Company and use his best efforts to promote the interests of the Company and to perform faithfully and efficiently the responsibilities assigned to Executive in accordance with the terms of this Agreement. 4. Compensation and Other Terms of Employment. During the period in which ------------------------------------------ Executive is employed by Company, the Executive shall receive the following: (a) Salary. The Executive will continue to be paid at his current annual ------ rate of pay on a regular basis, not less frequently than one time per month, on a regular Company pay day. This rate of pay ("Base Salary") is subject to adjustment from time to time, and will be reviewed on a regular basis. All such payments will be subject to withholding for taxes and amounts owed by the Company, if any. (b) Stock Incentive Plan. The Executive continues to be eligible to -------------------- participate in the Company's Key Employee Stock Incentive Plan ("KESIP"). The Executive's current grant of shares is subject in its entirety to the terms and conditions set forth in the KESIP Agreement between the Executive and the Company. To the extent that there is any inconsistency between the terms and conditions of this Agreement and those of the KESIP, the terms and conditions of this Agreement shall control. (c) Passes. The Executive and his eligible family members will be ------ entitled to card-type Class 1 "term" passes on the Company's routes worldwide. (e) Medical, Dental, Insurance and Accident Insurance. (i) The Executive ------------------------------------------------- and his eligible dependents will be eligible to participate in the Company-paid comprehensive Medical and Dental Plan and the Travel Accident Insurance Program offered by the Company, on the same terms and conditions applicable to other officers. (ii) The Executive will be eligible for coverage under the Company's Group Term Life Insurance Plan under the Company currently provides Basic Life Insurance of $50,000 at no cost to the Executive. Assuming that the Executive is insurable at standard rates, the Executive will also have the option to purchase Additional Group Life Insurance in an amount up to three times the Executive's Base Salary, less the Basic $50,000 coverage. The monthly cost of this Additional Life Insurance is currently $4.50 per $10,000 and such monthly cost may increase from time-to-time. (iii) The Executive will be eligible to participate in the Company's Voluntary Personal Accident Insurance Plan. The maximum coverage for this plan is currently $150,000 at a monthly cost of $6.60 and such monthly cost may increase from time-to-time. (iv) The Executive will be covered for Long-Term Disability protection pursuant to plan provisions at standard rates and subject to standard conditions. Nothing herein shall be construed to prevent the Company from amending or altering any such plans or programs set forth herein so long as the Executive continues to have the opportunity to receive in the aggregate benefits at a level no less favorable than those set forth herein. 5. Vacation. The Executive will be eligible for 3 weeks vacation. -------- 6. Termination of Employment. ------------------------- (a) Death. This Agreement shall terminate automatically upon the ----- Executive's death. All benefits and compensation then accrued hereunder, and under any related plans, shall be paid when due to the Executive's beneficiaries or legal representatives, as appropriate. (b) Termination Without Cause. The Company shall have the right to ------------------------- terminate the Executive's employment without cause at any time and without advance notice. In - 2 - such event the Company shall pay to the Executive an amount equal to the Executive's then rate of annual Base Salary and any accrued, earned unpaid salary and unused vacation as of the effective date of such termination. Such payment (other than accrued, earned salary and unused vacation) may be made at the Company's option in a single lump sum or in equal installments payable over up to a twelve month period. Upon the making of such payments, the Company shall have no further obligation to the Executive under this Agreement and Executive accepts such payments in full satisfaction of all claims against the Company. (c) Termination For Cause. The Company shall have the right to --------------------- terminate the Executive's employment at any time and without advance notice for Cause. For the purposes of this Agreement, "Cause" shall mean that (i) the Executive is convicted of or engages in conduct which constitutes a felony, or a misdemeanor involving moral turpitude; or (ii) the Executive is found by the Company's Board of Directors to have willfully engaged in conduct which is demonstrably and materially injurious to the Company; or (iii) the Executive is found by the Company's Board of Directors to have failed or refused to in any material respect to competently perform his duties and responsibilities (after notice and opportunity to cure if such material failure or refusal can be cured); or (iv) the Executive has breached his duty of loyalty to, or committed any act of fraud, theft or dishonesty against or involving, the Company or any of its affiliated companies; or (v) the Executive has breached any provision of this Agreement. If the Executive's employment is terminated for Cause, the Company shall pay the Executive his unpaid, accrued salary through the date of such termination at the rate in effect at the time of such termination and any accrued, earned or unused vacation through the effective date of such termination. Upon the making of such payment, the Company shall have no further obligation to the Executive under this Agreement. (d) Termination by the Executive. If the Executive voluntarily ---------------------------- terminates his employment, the Executive must give the Company thirty (30) calendar days advance notice in writing. If the Executive fails to do so, the Executive shall not be entitled to any accrued rights and benefits to which the Executive might be entitled under this or any related agreement and the Company will have no further obligation to the Executive except for unpaid salary earned by the Executive up to and including the effective date of such termination. Upon termination of employment and otherwise upon demand, Executive will turn over to Company all Company property and documents and all computer passwords, and will (after copying the same to 3.5 disks and returning the disks to the Company) delete all Company information from any computer which is not Company property. Upon termination, all benefits and compensation ceases except as described above. 7. Termination Obligations. The Executive agrees that during his ----------------------- employment and following his termination under any of the circumstances set forth herein: (a) he shall not during his employment or for a period of two years following the effective date of his termination, directly or indirectly solicit (or assist or encourage the solicitation of) any employee of the Company or any of its subsidiaries or affiliated companies to be employed by the Executive or by any entity in which the Executive owns or expects to own - 3 - any equity interest in excess of five (5) percent of any class of the outstanding securities thereof, or by any entity by which the Executive is employed or for which the Executive serves or expects to serve in any capacity; nor (after his employment ends and during such 2 year period) encourage or induce any Company employee to terminate his or her Company employment. For the purposes of this paragraph, the term "solicit" shall mean any contact by the Executive with or providing information to others who may be expected to contact any employees of the Company or of any of its subsidiaries or affiliated companies regarding their employment status, job satisfaction, interest in seeking employment with the Executive, with any person affiliated with the Executive or by whom the Executive is employed but shall not include print advertising for personnel or responding to any unsolicited request for a personal recommendation for or evaluation of a Company employee or an employee of any of the Company's subsidiaries or affiliated companies. (b) he shall hold forever hereafter in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries or affiliated companies, including but not limited to commercial, operational, marketing, pricing, or financial information including costs, strategies, forecasts or trade secrets, acquisition strategies or candidates or personnel acquisition plans ("confidential information") which shall have been obtained by the Executive during or by reason of his employment by the Company or by any of its subsidiaries or affiliated companies and which shall not be public knowledge. During and after the end of the term of employment, the Executive shall not, without the prior written consent of the Company or unless required to do so by reason of a court order or subpeona (in which case Executive shall give Company prompt notice of any such other subpeona or order, or request therefore, so as to provide Company the maximum opportunity to contest the same), communicate or divulge any such confidential information to anyone other than the Company or those designated by it, except that while employed by the Company in the business of and for the benefit of the Company the Executive may provide confidential information as appropriate to those persons who in the Executive's judgment have a need to know such confidential information. (c) he shall not for a period of two years following the effective date of his termination discuss or disclose to the media or Company personnel the circumstances or terms of his termination of employment. (d) he shall not publicly disparage or denigrate the Company or any of its officers, directors or practices. To the extent that any covenant or agreement contained in this Section 7 shall be determined by a Court to be invalid or unenforceable in any respect or to any extent, the covenant or agreement shall not be rendered void, but instead shall be automatically amended to such lesser scope or to such lesser extent as will grant Company the maximum restriction on Executive's conduct and activities permitted by applicable law in such circumstances. 8. No Assignment. This Agreement is personal to the Executive and -------------- without the Company's prior written consent it shall not be assignable by the Executive other than by will or - 4 - the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the legal representatives of Executive's estate, and otherwise is freely assignable by Company. 9. Assistance. For a period of three (3) years following termination of ---------- employment, Executive will, upon reasonable notice, make himself available for consultation with Company counsel, to meet with Company counsel and prepare to testify as a witness or deponent, and to testify as a witness at a trial, deposition or proceeding, concerning any legal matter involving or affecting the Company. The Company will pay for all reasonable and necessary out of pocket travel and telephone costs and expense incurred by Executive in connection with any such activity. 10. Miscellaneous. ------------- (a) This Agreement shall be governed by and be construed in accordance with the internal laws of the State of Missouri, without reference to principles of conflicts of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. Neither this Agreement nor any of its terms may be amended, waived, added to or modified other than by written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by regular or registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Michael J. Palumbo One City Centre 515 North 6th Street St. Louis, Missouri 63101 If to the Company: Trans World Airlines, Inc. One City Centre 515 North 6th Street St Louis, Missouri 63101 Attn: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. - 5 - (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) This Agreement contains the entire understanding between the parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, among the parties with respect thereto. The terms of any employee manual, handbook, or any policy of the Company, shall not modify, alter, or invalidate any term of this Agreement nor alter Employee's at will status, and in case of any conflict between a term of this Agreement and any such policy, handbook or manual, the terms of this Agreement control, except for benefit plans and Stock option awards described herein (to the extent not otherwise provided in this Agreement). (e) Executive represents that or he is not a party to any agreement, or under any legal obligation, which could preclude or in any way impair Executive's performance of Executive's duties for Company. Executive has not provided, and will not provide, to Company any trade secret of another person whose secrecy he is obligated to maintain. (f) Notwithstanding any provision hereof to the contrary, nothing in this Agreement shall be deemed to entitle the Executive to employment beyond the Term hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed in its corporate name, and the Executive has hereunto set his hand, all as of the day and year first above written. /s/ Michael J. Palumbo - - --------------------------- MICHAEL J. PALUMBO /s/ Richard P. Magumo - - --------------------------- TRANS WORLD AIRLINES, INC. By: /s/ Richard P. Magumo Sr. V.P. Legal EX-10.35 4 AGREEMENT BETWEEN THE COMPANY AND JEFFREY ERICKSON EXHIBIT 10.35 SEVERANCE AGREEMENT This agreement is entered into by and between Trans World Airlines, Inc. ("TWA") and Jeffrey H. Erickson ("Erickson") on this 11th day of November, 1996. This Agreement is a modification and supplement to the Memorandum of Understanding dated April 13, 1994 between TWA and Erickson relating to Erickson's employment by TWA (the "Memorandum"). Except as herein expressly set forth, the Memorandum shall continue in full force and effect and its provisions shall apply to and govern this Agreement. In the event of any inconsistency between this Agreement and the Memorandum, this Agreement shall prevail. The parties hereto have, in connection with Erickson's termination of employment with TWA, agreed as follows: 1. Continuing Employment. Erickson will continue as President and --------------------- Chief Executive Officer of TWA, with all the authority and powers previously exercised by him, until the first to occur of (i) January 15, 1997, or (ii) his replacement is approved by TWA's Board and available to commence his employment by TWA ("Termination Date"). In consideration for Erickson's remaining on and fulfilling his duties until the Termination Date, Erickson will continue to be paid his salary and will be entitled to all benefits through January 15, 1997 (even if the Termination Date occurs prior thereto). Erickson's resignation as a member of the Board of Directors of TWA will become effective on the Termination Date. 2. Salary Continuation. On January 15, 1997, Erickson will be paid a ------------------- twelve month-period salary continuation, in a lump sum. However, in the event that his termination of employment is later than January 15, 1997, the lump sum payment will be deferred until the actual date of termination of employment. 3. Stock options. In consideration for Erickson's agreeing to remain ------------- on and fulfill his duties under the Memorandum until the Termination Date, the parties have agreed to treat Erickson's resignation as if it had been an involuntary termination of employment without cause under the Memorandum (enabling Erickson's second installation of Stock Options to purchase Common Stock of TWA to vest), and TWA has further agreed that so long as Erickson continues to fulfil his obligations under the Memorandum until the Termination Date, Erickson's final (or third) installment of Stock Options to purchase Common Stock of TWA will vest upon termination of his employment (even if such termination in fact occurs before January 1, 1997. 4. Lifetime Passes. Erickson, his spouse and his children (until a --------------- certain age) have been granted lifetime Class A travel, that is unlimited free passes for first class air travel on TWA, on the same terms and conditions as the other members of TWA's Board of Directors. 5. Life Insurance, Medical & Dental Benefits. Erickson and his family ----------------------------------------- will be entitled to the continuation in accordance with TWA's regular practices and policies of the group life insurance, medical and dental benefits provided by TWA to it's senior executives until the first to occur of (i) twelve months following his termination of employment or (ii) his employment by another company. 6. Outplacement Services. Outplacement services will be provided to --------------------- Erickson in accordance with TWA's usual practice as to its departing senior executives for up to a one-year period following his termination of employment. 7. Other Benefits. Erickson will be entitled to receive other standard -------------- benefits received by departing TWA senior executives in accordance with TWA's usual practices and policies. Trans World Airlines, Inc. /s/ Jeffrey H. Erickson by /s/ Richard P. Magumo - - -------------------------------- ----------------------------------- Jeffrey H. Erickson Richard P. Magumo - 2 - EX-11 5 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Amounts in Thousands, Except Per Share Amount)
Reorganized Company --------------- Year Ended December 31, 1996 --------------- Adjustment to Net Income (loss) Loss before extraordinary items........................... $ (275,027) Preferred stock dividend requirements..................... (16,658) Special dividend requirement relating to redemption of 12% Preferred Stock.................................. (19,991) ------------ Loss before extraordinary items applicable to common stock for primary calculation........................... (311,676) Extraordinary item........................................ (9,788) ------------ Net loss applicable to common stock for primary calculation............................................. (321,464) Fully diluted adjustment - dividend requirements on 8% Preferred Stock assumed to be converted.............. 11,994 ------------ Net loss applicable to common stock for fully diluted calculation............................... $ (309,470) ============ Adjustments to Outstanding Shares Average number of shares of common stock (1)............ 44,189 Primary Adjustments Incremental shares associated with the assumed exercise of options and warrants (2)................ 1,121 ------------ Total average number of common and common equivalent shares used for primary calculation................... 45,310 ============ Average number of shares of common stock (1)............ 44,189 Fully Diluted Adjustments Incremental shares associated with the assumed exercise of options and warrants (2).................. 1,121 Common shares assumed to be issued upon conversion of 8% Preferred Stock.................... 7,408 ------------ Total average number of common and common equivalent shares for fully diluted calculation.................. 52,718 ============ Per share amounts: Loss before extraordinary item and special preferred dividend Average number of shares of Common Stock............. (6.60) Primary (3).......................................... (6.44) Fully diluted (3).................................... (5.31) Net loss Average number of shares of Common Stock............. (7.27) Primary (3).......................................... (7.09) Fully diluted (3).................................... (5.87)
- - ------------ (1) Includes 5,681 shares of Employee Preferred Stock which, except for a liquidation preference of $.01 per share and the right to elect a certain number of directors to the Board of Directors, is the functional equivalent of Common Stock. (2) Pursuant to an employee stock incentive plan (ESIP or the Plan), the Company is required to distribute additional shares of common stock and Employee Preferred Stock as a result of the distribution of additional shares following the effective date of the "95 Reorganization. No shares have as yet been distributed to employees under this provision and discussions are being held with union representatives to determine the appropriate number of shares to be distributed. The Company believes that, based on these discussions, no more than 950,000 additional shares will be distributed. Additionally, the ESIP provides that, beginning in 1997, employees may significantly increase their ownership, through grants or purchases, as set forth in the Plan. The earnings (loss) per share computations do not give any affect to the potential issuance of these shares. (3) As the effects of including the incremental shares associated with options and warrants and the assumed conversion of the 8% Preferred Stock are antidilutive, these amounts are not presented in the accompanying condensed statements of consolidated operations. EX-21 6 SUBSIDIARIES OF TWA EXHIBIT 21 SUBSIDIARIES OF TRANS WORLD AIRLINES, INC. ------------------------------------------ 1. Ambassador Fuel Corporation 2. Ambassador Health Systems, Inc. 3. Century Air Rail & Land Insurance Company 4. Getaway Management Services, Inc. 5. International Aviation Security, Inc. 6. International Aviation Security France 7. International Airport Services 8. International Aviation Security Gesellschaft 9. International Aviation Security Italia S.r.l. 10 International Aviation Security S.A. 11. International Aviations Security Ltd. 12. International Aviation Security (UK) 13. International Aviation Security N.V. 14. Mega Advertising, Inc. 15. Northwest 112th Street Corp. 16. Ozark Group, Inc. 17. TWA Getaway Vacations, Inc. 18. The Getaway Group (UK), Inc. 19. The TWA Ambassadors Club, Inc. 20. Transcontinental & Western Air, Inc. 21. Trans World Airlines Services, Inc. 22. Trans World Computer Services, Inc. 23. Trans World Express, Inc. 24. Trans World Pars, Inc./1/ 25. TWA America, Inc. 26. TWA Aviation, Inc. 27. TWA de Mexico S.A. de C.V. 28 TWA Employee Services, Inc. 29. TWA Group, Inc. 30. TWA International, Inc. 31. TWA Maintenance Services, Inc. 32. TWA Nippon, Inc. 33. TWA Standards & Controls, Inc. 34. TWA-US Inc. 35. TWA-NY/NJ Gate Company, Inc. 36. TWA-LAX Gate Company, Inc. 37. TWA-San Francisco Gate Company 38. TWA-Logan Gate Company, Inc. 39. TWA-D.C. Gate Company, Inc. 40. TWA-Omnibus Gate Company, Inc. 41. TWA-Hanger 12 Holding Company, Inc. 42. LAX Holding Company, Inc. 43. TWA Stock Holding Company, Inc. 44. TWA Gate Holdings, Inc. - - ----------------------------------------- 1 Holds 25% of Worldspan EX-23.1 7 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.1 AUDITORS' CONSENT The Board of Directors Trans World Airlines, Inc.: We consent to incorporation by reference in the registration statement (No. 333-04977) on Form S-3 of Trans World Airlines, Inc. of our report dated March 24, 1997, relating to the consolidated balance sheets of Trans World Airlines, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related statements of consolidated operations, cash flows and shareholders' equity (deficiency) and the related schedule for the year ended December 31, 1996, the four months ended December 31, 1995, the eight months ended August 31, 1995 and the year ended December 31, 1994, which report appears in the December 31, 1996 annual report on Form 10-K of Trans World Airlines, Inc. Our report referred to above, contains an explanatory paragraph that states that the Company's recurring losses from operations and its limited sources of additional liquidity raise substantial doubt about the Company's ability to continue as a going concern. In addition, our report refers to the application of fresh start reporting as of September 1, 1995. KPMG PEAT MARWICK LLP Kansas City, Missouri March 25, 1997 EX-24 8 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, John W. Bachmann, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ John W. Bachmann --------------------- John W. Bachmann POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, William F. Compton, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ William F. Compton ----------------------- William F. Compton POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, Eugene P. Conese, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 25th day of March, 1997. /s/ Eugene P. Conese ------------------------ Eugene P. Conese POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, Gerald L. Gitner, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ Gerald L. Gitner ----------------------- Gerald L. Gitner POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, William M. Hoffman, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ William M. Hoffman ---------------------- William M. Hoffman POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, Thomas H. Jacobsen, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of March, 1997. /s/ Thomas H. Jacobsen ---------------------- Thomas H. Jacobsen POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, Myron Kaplan, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ Myron Kaplan ----------------- Myron Kaplan POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, David M. Kennedy, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ David M. Kennedy -------------------- David M. Kennedy POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, Jewel Lafontant-Mankarious, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ Jewel Lafontant-Mankarious ------------------------------ Jewel Lafontant-Mankarious EXHIBIT 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, Thomas F. Meagher, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ Thomas F. Meagher ------------------------ Thomas F. Meagher POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, William O'Driscoll, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ William O'Driscoll --------------------------- William O'Driscoll POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, G. Joseph Reddington, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of March, 1997. /s/ G. Joseph Reddington ------------------------- G. Joseph Reddington POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, Lawrence K. Roos, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 25th day of March, 1997. /s/ Lawrence K. Roos ------------------------- Lawrence K. Roos POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, William W. Winpisinger, a Director of TRANS WORLD AIRLINES, INC., a Delaware corporation, do constitute and appoint Gerald L. Gitner, Richard P. Magurno and Michael J. Palumbo, and each of them, my true and lawful attorneys-in-fact, with full power of substitution and resubstitution, for me and in my name, on my behalf and in my stead, in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for TRANS WORLD AIRLINES, INC. for the fiscal year ended December 31, 1996, and to file such Annual Report on Form 10-K with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments and supplements to said Annual Report on Form 10-K, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 1997. /s/ William W. Winpisinger --------------------------- William W. Winpisinger EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. OPERATING RESULTS FOR THE REORGANIZED COMPANY FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996. 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 181,586 0 252,435 12,939 111,239 586,442 732,994 118,787 2,681,939 990,592 829,275 0 96 418 237,591 2,681,939 0 3,555,407 0 3,752,934 0 8,037 126,822 (274,577) 450 (275,027) 0 (9,788) 0 (284,815) (7.27) (7.27)
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